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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-K



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|x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2005



| ̈ | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------

For the transition period from              to
            .

Commission File No. 000  26505



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COMMUNITY BANCORP INC.

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 33-0859334                         
|(State or other jurisdictionof incorporation or organization) |  | (I.R.S. EmployerIdentification No.)

900 Canterbury Place, Suite 300

Escondido, CA 92025

(760) 432-1100

(Address, including zip code and telephone number, including area code, of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Act:

Common Stock, par value $0.625 per
share

(Title of class)



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Indicate by checkmark if registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes ̈No  x

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

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈

Indicate by check mark whether or not the Company is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.



|                         |  |                        |  |                      
|------------------------ |  | ---------------------- |  | ---------------------
|Large accelerated filer ̈ |  | Accelerated filer    x |  | Non-acclerated filer ̈

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act.    Yes ̈No  x

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2005 (the last business
day of the Registrants most recently completed second fiscal quarter) was approximately $135,378,000. As of February 28, 2006, the registrant had 5,992,569 shares of Common Stock outstanding.



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DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference from the Registrants Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the Registrants 2006
Annual Meeting of the Companys Shareholders. Such definitive proxy statement will be filed with the Commission no later than 120 days after the conclusion of the Registrants fiscal year ended December 31, 2005.

TABLE OF CONTENTS



|              |  |                                                                                                              |  |            
|------------- |  | ------------------------------------------------------------------------------------------------------------ |  | -----------
|              |  | PART I                                                                                                       |  |            
|ITEM 1.       |  | BUSINESS                                                                                                     |  | PAGE      3
|ITEM 1A.      |  | RISK FACTORS                                                                                                 |  | PAGE    25 
|ITEM 1B.      |  | UNRESOLVED STAFF COMMENTS                                                                                    |  | PAGE    32 
|ITEM 2.       |  | PROPERTIES                                                                                                   |  | PAGE    32 
|ITEM 3.       |  | LEGAL PROCEEDINGS                                                                                            |  | PAGE    33 
|ITEM 4.       |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          |  | PAGE    33 
|              |  |                                                                                                             
|              |  | PART II                                                                                                      |  |            
|ITEM 5.       |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |  | PAGE    33 
|ITEM 6.       |  | SELECTED FINANCIAL DATA                                                                                      |  | PAGE    35 
|ITEM 7.       |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |  | PAGE    36 
|ITEM 7A.      |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   |  | PAGE    62 
|ITEM 8.       |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                  |  | PAGE    65 
|ITEM 9.       |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                         |  | PAGE  104  
|ITEM 9A.      |  | CONTROLS AND PROCEDURES                                                                                      |  | PAGE  104  
|ITEM 9B.      |  | OTHER INFORMATION                                                                                            |  | PAGE  107  
|              |  |                                                                                                             
|              |  | PART III                                                                                                     |  |            
|ITEM 10.      |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                           |  | PAGE  107  
|ITEM 11.      |  | EXECUTIVE COMPENSATION                                                                                       |  | PAGE  107  
|ITEM 12.      |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS               |  | PAGE  108  
|ITEM 13.      |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                               |  | PAGE  108  
|ITEM 14.      |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                       |  | PAGE  108  
|              |  |                                                                                                             
|              |  | PART IV                                                                                                      |  |            
|ITEM 15.      |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                                      |  | PAGE  109  
|              | 
|SIGNATURES    |  | PAGE  111                                                                                                   
|EXHIBIT INDEX |  | PAGE  113                                                                                                   



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FORWARD-LOOKING INFORMATION

Certain statements contained herein that are not historical facts are forward looking statements based upon managements current expectations and
future beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. These 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, but are not limited to, the following risks: (1) general economic and business conditions in those areas in which we operate (2) changes in the demand for and market acceptance of our
products and services, (3) changes in general economic conditions including interest rates, presence of competitors and the impact of competitive pricing, (4) the continued availability of adequate funding sources, (5) various
regulatory, legal and litigation risks, (6) political and global changes arising from the war on terrorism, the conflict with Iraq and its aftermath, and (7) other factors referenced in this Report, including in Item 1A.  Risk
Factors. 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, as well as the Companys other reports on Form 10-K, 10-Q and 8-K
subsequently filed with the Securities and Exchange Commission from time to time.

PART I



|ITEM 1. | BUSINESS
|------- | --------

We are a Southern California-based
Company focused on community banking, providing commercial banking services including real estate, commercial and SBA loans to small and medium-sized businesses. Our core strategy is to build long-term customer relationships in our targeted
communities and service all aspects of the banking relationship to small and medium-sized businesses including individuals in San Diego and western Riverside Counties. According to U.S. Census data, San Diego and Riverside Counties were among the
top ten fastest growing counties in the United States measured by numerical population growth from April 1, 2000 to July 1, 2004.

We have eleven full service branches serving the cities of Bonsall, El Cajon, Encinitas, Escondido, Fallbrook, La Mesa, Murrieta, Rancho Bernardo, Santee, Temecula and Vista, with approval from the Office of the Comptroller of the Currency
(OCC) to open our twelfth branch in the city of Corona, expected in early 2006. Additionally, we have SBA loan production offices in the states of California, Arizona and Nevada. According to FDIC data at June 30, 2005, our branches
have a 4.74% combined deposit market share within the cities we serve, which would rank us first amongst community banks and fifth among all banks and thrifts.

We acquired Rancho Bernardo Community Bank, with assets of approximately $125.8 million, by merging it into Community National Bank on August 19, 2005. As a result, we consolidated the results of the combined
entity beginning August 20, 2005. On October 1, 2004, we acquired Cuyamaca Bank, N.A., a commercial bank with assets of approximately $115.4 million and consolidated the results of the combined entity beginning in the fourth quarter 2004.

At December 31, 2005, we had total assets of $908.6 million, net loans of $727.3 million, total deposits of $710.5 million and
stockholders equity of $96.3 million. Total assets have increased an average of 30% over the past five years. This growth rate has been driven by several factors including acquisitions, loan generation of



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commercial real estate and other loans and significant increases in core deposits to support the loan growth. Loan production totaled $494.9 million in 2005
contributing to the 42% growth in total assets in 2005. The Banks deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the maximum extent permitted by law.

The following are our core operating goals and strategies:



| |  |  | Continue focus on increased profitability. We intend to continue to improve earnings by expanding net interest income and controlling expenses. This has
resulted in record earnings for 2005 of $12.6 million compared to $8.4 million in 2004. Our return on average tangible equity (ROTE) and return on average assets (ROA) for 2005 were 25.63% and 1.61%, respectively, compared to
20.11% and 1.55%, respectively in 2004. ROTE is a non-GAAP financial measure. For a reconciliation of ROTE to the most directly comparable GAAP measure, return on average equity, see Item 6 Selected Financial Data. Our efficiency ratio
improved to 56.92% for 2005 compared to 60.08% in 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continue strong loan production.We intend to continue to grow our loan portfolio including construction, commercial loans, SBA loans, small aircraft loans, commercial
real estate and consumer loans. Although the Company seeks to avoid undue concentrations of loans to a single industry based upon a single class of collateral, real estate and real estate associated business areas are among the principal industries
in the Companys market area. See Item 1A.  Risk Factors. The Company evaluates each credit on an individual basis and determines collateral requirements accordingly. We have grown our loan portfolio from $305.7 million at
December 31, 2001 to $727.3 million at December 31, 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maintain strong credit quality. Our lending portfolio is overseen by senior management who have a combined average of 28.5 years experience in commercial and SBA
lending and have been with the Company an average of 9 years. We have strengthened the credit administration function to insure adequate personnel and systems are in place to monitor our loan portfolio and new credit quality as we continue to grow
our loan portfolio. We were able to retain the lending personnel during the Rancho Bernardo Community Bank acquisition which helped us to maintain the loans acquired in the merger and add to the overall depth of our lending staff. Our consistent
lending quality and underwriting expertise is the result of experienced lenders and sound underwriting practices.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Over the last five years the percentage of our net loan charge-offs to average loans outstanding, net of deferred fees and costs, were 0.11% with the percentage being 0.04% for
2005. Non-accrual loans, net of government guarantees, to total loans have averaged 0.26% of total gross loans for the last five years and were 0.28% at December 31, 2005.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase core deposits and manage our cost of funds.In 2004, we hired a Chief Administrative Officer to manage our branch network, administration operations,
merger/acquisition integration as well as bring new focus to both core deposit growth and deposit fee generation on the deposit side. As a result, we successfully expanded our operations with the Cuyamaca Bank and Rancho Bernardo Community Bank
integrations adding four new branch operations in 2004 and one new branch in 2005. Average transaction accounts, including interest bearing checking accounts, demand deposits, money market and savings accounts, increased 52.2% for the year to $344.0
million in 2005. Non-interest bearing deposits increased 48.9% to $165.0 million as of December 31, 2005 when compared to 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In an effort to increase our ability to attract low cost core deposits, we significantly enhanced our Homeowners Association Business Unit (HOA) in late 2005, by
attracting a talented team of HOA bankers. This division focuses on handling the needs of a specialized industry, by offering customized products and services which include lockbox payments and remittance processing. This division has the potential
to add significant low cost core deposits to the Companys balance sheet, further reducing our reliance on wholesale funding, and driving down our cost of funds.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | With the continued expansion of the retail banking operations, wholesale deposits as a percentage of total deposits have been declining. Wholesale deposits were $59.6 million as of
December 31, 2003, $58.8 million as of December 31, 2004 and $60.5 million as of December 31, 2005. As a percentage of total deposits, wholesale deposits declined from 15.2% as of December 31, 2003 to 10.7% as of
December 31, 2004 and to 8.5% as of December 31, 2005. During the rising rate environment of 2005, where we experienced eight rate increases by the Federal Reserve totaling 200 basis points, our cost of funds increased only 88 basis
points, which contributed to our improved net interest margin. However, unless we are able to grow core deposits commensurate with our rate of loan growth, we will need to rely on more expensive wholesale deposits or borrowings to support such
growth.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expansion through de novo branches, organic growth and acquisitions.We believe that the consolidation in banking, particularly in the San Diego County market, has
created an opportunity at the community banking level in the areas that we serve. Many bank customers feel displaced by large out-of-market acquirers and are attracted to local institutions that have local decision making capability, more responsive
customer service, and more familiarity with the needs in their markets. Utilizing our size and experience, we intend to continue expanding our franchise in the high growth areas of San Diego and western Riverside County, including the opening of a
full service branch in Corona in the first quarter of 2006. Furthermore, as opportunities arise, we will consider expansion into markets contiguous to our own through potential acquisitions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We continue to develop and introduce new services for our customers that keep us competitive with larger bank competitors, while maintaining the feel of a community-based bank
focused on customer needs. Attracting and maintaining business relationships is a major focus of the Bank.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Efficiently manage capital. We have efficiently managed capital at the Holding Company while maintaining a well-capitalized status on all regulatory capital ratios at
both the Bank and Holding Company level. We maintain our capital at appropriate levels to fund foreseeable growth. Our capital base at the Holding Company is made up of long-term debt in the form of Trust Preferred Securities and Common Stock.
During 2005, we issued $20.0 million in additional trust preferred securities primarily to fund the acquisition of Rancho Bernardo Community Bank. Our goal is to continue to maximize ROTE and minimize our overall cost of capital by maintaining an
efficient capital structure.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Market Area

Our branch banking market area encompasses Southern California, with a concentration in the high-growth areas of San Diego and western Riverside Counties, where we operate branches within the cities of Bonsall, El
Cajon, Encinitas, Escondido, Fallbrook, La Mesa, Murrieta, Rancho Bernardo, Santee, Temecula and Vista. In addition, we have received approval from the Office of the Comptroller of the Currency to open a Corona branch (currently a loan production
office).

We also operate a total of nine loan production offices including six in the California cities of Castro Valley, Corona, Fresno,
Huntington Beach, Los Angeles and Manhattan Beach, as well as two offices in Phoenix, Arizona, and one office in Reno, Nevada, where we primarily source SBA loans.



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Loan Portfolio

Types of Loans

We offer a diverse line of loan products, including commercial loans, SBA
loans, small aircraft loans, real estate and consumer loans. The following table sets forth information concerning the composition of our loan portfolio at the dates indicated:



|                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|----------------------------- |  | ---------------------- | ------- | - | ------- | ------ | - | ------ | - | ------- | ------- |  | ------ | ------ |  | - | ------- | - |  | ------ | - |  | ------- | ------- | - | ------ | ------ | - | ------- | - | ------- | - |  | ------ | -
|                              |  | At December 31,        |        
|                              |  | 2005                   |         |   | 2004    |        |   | 2003   |   |         | 2002    |  |        | 2001   | 
|                              |  | Amount                 |         |   | Percent |        |   | Amount |   |         | Percent |  |        | Amount |  |   | Percent |   |  | Amount |   |  | Percent |         |   | Amount |        |   | Percent |  
|                              |  | (dollars in thousands) |        
|Loan portfolio composition:   |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Commercial loans              |  | $                      | 53,552  |   |         | 7.23   | % |        | $ | 35,213  |         |  | 6.48   | %      |  | $ | 20,590  |   |  | 5.12   | % |  | $       | 16,408  |   |        | 4.75   | % |         | $ | 15,332  |   |  | 4.97   | %
|Aircraft loans                |  |                        | 28,617  |   |         | 3.87   | % |        |   | 28,819  |         |  | 5.30   | %      |  |   | 30,368  |   |  | 7.55   | % |  |         | 29,462  |   |        | 8.53   | % |         |   | 23,929  |   |  | 7.76   | %
|Real estate:                  |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Construction loans            |  |                        | 109,500 |   |         | 14.79  | % |        |   | 75,200  |         |  | 13.84  | %      |  |   | 66,957  |   |  | 16.66  | % |  |         | 67,445  |   |        | 19.53  | % |         |   | 60,264  |   |  | 19.53  | %
|Secured by:                   |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|One- to four-family HFI       |  |                        | 16,994  |   |         | 2.30   | % |        |   | 8,690   |         |  | 1.60   | %      |  |   | 9,671   |   |  | 2.41   | % |  |         | 13,634  |   |        | 3.95   | % |         |   | 7,634   |   |  | 2.47   | %
|One- to four-family HFS       |  |                        |        |   |         | 0.00   | % |        |   |        |         |  | 0.00   | %      |  |   |        |   |  | 0.00   | % |  |         | 3,219   |   |        | 0.93   | % |         |   | 3,724   |   |  | 1.21   | %
|Commercial HFI                |  |                        | 356,571 |   |         | 48.16  | % |        |   | 276,724 |         |  | 50.91  | %      |  |   | 201,219 |   |  | 50.06  | % |  |         | 158,189 |   |        | 45.82  | % |         |   | 154,257 |   |  | 49.99  | %
|Commercial HFS                |  |                        | 154,049 |   |         | 20.81  | % |        |   | 101,385 |         |  | 18.65  | %      |  |   | 69,148  |   |  | 17.20  | % |  |         | 49,619  |   |        | 14.37  | % |         |   | 35,138  |   |  | 11.39  | %
|Consumer:                     |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Home equity lines of credit   |  |                        | 10,459  |   |         | 1.41   | % |        |   | 8,027   |         |  | 1.48   | %      |  |   | 1,933   |   |  | 0.48   | % |  |         | 3,394   |   |        | 0.98   | % |         |   | 2,615   |   |  | 0.85   | %
|Other                         |  |                        | 10,620  |   |         | 1.43   | % |        |   | 9,473   |         |  | 1.74   | %      |  |   | 2,085   |   |  | 0.52   | % |  |         | 3,928   |   |        | 1.14   | % |         |   | 5,635   |   |  | 1.83   | %
|                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Total gross loans outstanding |  |                        | 740,362 |   |         | 100.00 | % |        |   | 543,531 |         |  | 100.00 | %      |  |   | 401,971 |   |  | 100.00 | % |  |         | 345,298 |   |        | 100.00 | % |         |   | 308,528 |   |  | 100.00 | %
|Deferred loan fees            |  |                        | (3,290  | ) |         |        |   |        |   | (4,011  | )       |  |        |        |  |   | (2,549  | ) |  |        |   |  |         | (1,882  | ) |        |        |   |         |   | (54     | ) |  |        |  
|Allowance for loan losses     |  |                        | (9,773  | ) |         |        |   |        |   | (7,508  | )       |  |        |        |  |   | (5,210  | ) |  |        |   |  |         | (3,945  | ) |        |        |   |         |   | (2,788  | ) |  |        |  
|                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  
|Net loans                     |  | $                      | 727,299 |   |         |        |   |        | $ | 532,012 |         |  |        |        |  | $ | 394,212 |   |  |        |   |  | $       | 339,471 |   |        |        |   |         | $ | 305,686 |   |  |        |  
|                              |  |                        |         |   |         |        |   |        |   |         |         |  |        |        |  |   |         |   |  |        |   |  |         |         |   |        |        |   |         |   |         |   |  |        |  

Commercial Lending

Our commercial business loans consist of lines of credit and short-term notes which provide the borrower funds for one year or less, term loans with terms
of up to five years, commercial construction loans with terms of eighteen months or less and mini perm loans for a term of up to ten years with a longer amortization up to thirty years. We will also enter into commercial loans in excess of $14.0
million, our current legal lending limit, but will participate out that portion in excess of our legal lending limit.

Small Aircraft
Lending

Our commercial loan portfolio also includes loans secured by new and used aircraft. Our aircraft loan customers are
generally professionals, business owners and other high net worth individuals. The original loan amounts range in size from $10,000 to $2.3 million; however, our average loan size is $68,000. These loans are offered at the option of the borrower at
15 year fixed rate terms or 20 year variable rate terms. We primarily focus on the credit worthiness of the borrower, review the wholesale value of the aircraft and conduct a title search on all aircraft loans. Additionally, appropriate ground, air
and title insurance must be obtained by the borrower. At December 31, 2005, we had $28.6 million of aircraft loans in our portfolio.

Commercial Real Estate Lending

We focus on originating loans secured by commercial real estate, such as retail
centers, small office, light industrial buildings and other mixed use commercial properties. We also extend loans secured by special purpose properties such as motels, restaurants and service stations the majority of which are funded through the SBA
7a program. Pursuant to our underwriting policies, commercial real estate loans, which are not SBA loans, may



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be made in amounts up to 75% of the appraised value of the property. These loans may be made with terms up to 10 years and are either adjustable or fixed
rate loans for a maximum term of up to 5 years. We generally require a minimum debt service ratio (the ratio of net earnings on a property to service the debt) of 1.25 to 1 or more. In addition to commercial real estate lending, and to a much lesser
extent, we originate loans secured by multi-family residential properties.

Loans secured by commercial real estate and multi-family
residential properties are generally larger and involve a greater degree of risk than one- to four-family residential loans. The liquidation value of commercial and multi-family properties may be adversely affected by risks generally incidental to
interests in real property, including changes or continued weakness in general or local economic conditions and/or specific industry segments; declines in real estate values; declines in occupancy rates; increases in interest rates, real estate and
personal property tax rates and other operating expenses including energy costs; the availability of refinancing; changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation, taxation
and other factors beyond the control of the borrower or the lender. Because of this, an important consideration is the borrowers experience in owning and managing similar properties and our lending experience with the borrower.

Construction Lending

We
originate construction loans on both one- to four- family residences and commercial real estate properties. We originate two types of residential construction loans, consumer and builder. We originate consumer owner-occupied construction loans to
build single family residences, as well as builder construction loans to companies engaged in the business of constructing homes for resale, although at this time we do not have any single-family tract development lending. These loans may be for
homes currently under contract for sale or homes built for speculative purposes to be marketed for sale during construction. For owner occupied single family residences, the borrower and the property must qualify for permanent financing.
Prequalification for owner occupied single family residences is required. For commercial property, the borrower must qualify for permanent financing and the debt service coverage generally must be 1.25 to 1 or more. Qualification for commercial
properties can be determined by the loan officer as part of the credit presentation. Absent such prequalification, a construction loan will not be approved. We originate land acquisition and development loans with the source of repayment being
either the sale of finished lots or the sale of homes to be constructed on the finished lots. Construction loans are generally offered with terms up to eighteen months.

Construction loans are generally made in amounts up to 75% of the value of the security property for non-owner occupied single family residences and commercial properties and up to 80% for owner-occupied single family
residences. During construction, loan proceeds are disbursed in draws as construction progresses based upon inspections of work in place by independent construction inspectors. At December 31, 2005, we had construction loans, including land
acquisition and development loans, totaling $109.5 million.

Construction loans are generally considered to involve a higher degree of
credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the secured propertys value upon completion of construction as
compared to the estimated costs of construction, including interest. Also, we assume certain risks associated with the borrowers ability to complete construction in a timely and workmanlike manner. If the estimate of value proves to be
inaccurate, or if construction is not performed timely or accurately, we may be confronted with a project which, when completed, has a value which is insufficient to assure full repayment.

Consumer Lending

Our
portfolio of consumer loans primarily consists of adjustable-rate home equity lines of credit and installment loans secured by new or used automobiles and loans secured by deposit accounts. Unsecured consumer loans are made with a maximum term of
three years and a maximum loan amount of $5,000. At December 31, 2005, installment and unsecured consumer loans totaled $10.6 million.



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As of December 31, 2005, home equity loans totaled $10.5 million. Our home equity loans are
adjustable-rate and re-price with changes in the prime rate as reported in the Wall Street Journal. Home equity lines of credit are offered in amounts up to 75% of the appraised value and with terms up to ten years.

Our one- to four- family residential loan portfolio at December 31, 2005, was $17.0 million. As of December 31, 2005, the average loan size for
one- to four- family residential loans was $414,000, the average remaining maturity was 2 years with an average interest rate of 7.84%.

The following table sets forth our loan production by category including purchases, sales and principal repayments of loans for the periods indicated:



|                                                       |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|------------------------------------------------------ |  | ------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                       |  | At or For the Years EndedDecember 31,
|                                                       |  | 2005                                  |         |   | 2004 |   |         | 2003 |  | 2002 |         | 2001
|                                                       |  | (dollars in thousands)               
|Beginning balance                                      |  | $                                     | 532,012 |   |      | $ | 394,212 |      |  | $    | 339,471 |      | $ | 305,686 |  | $ | 245,437
|Loans originated:                                      |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Commercial loans                                       |  |                                       | 43,179  |   |      |   | 25,973  |      |  |      | 13,485  |      |   | 10,091  |  |   | 11,975 
|Aircraft                                               |  |                                       | 11,442  |   |      |   | 9,060   |      |  |      | 11,845  |      |   | 14,665  |  |   | 9,418  
|Real estate:                                           |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Construction loans                                     |  |                                       | 118,231 |   |      |   | 117,783 |      |  |      | 119,423 |      |   | 100,841 |  |   | 94,418 
|One- to four-family                                    |  |                                       | 3,606   |   |      |   | 1,761   |      |  |      | 2,353   |      |   | 50,730  |  |   | 56,607 
|Commercial                                             |  |                                       | 305,984 |   |      |   | 262,705 |      |  |      | 172,414 |      |   | 129,754 |  |   | 90,617 
|Consumer                                               |  |                                       | 10,572  |   |      |   | 3,297   |      |  |      | 1,267   |      |   | 3,061   |  |   | 4,072  
|                                                       |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Total loans originated                                 |  |                                       | 493,014 |   |      |   | 420,579 |      |  |      | 320,787 |      |   | 309,142 |  |   | 267,107
|                                                       |  |                                       |         |   |     
|Loans sold                                             |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Real estate:                                           |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Construction                                           |  |                                       |        |   |      |   |        |      |  |      | 1,725   |      |   | 464     |  |   | 3,093  
|One- to four-family                                    |  |                                       | 535     |   |      |   | 2,863   |      |  |      | 6,645   |      |   | 44,689  |  |   | 35,284 
|Commercial                                             |  |                                       | 86,620  |   |      |   | 81,735  |      |  |      | 66,010  |      |   | 64,773  |  |   | 28,520 
|                                                       |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Total loans sold                                       |  |                                       | 87,155  |   |      |   | 84,598  |      |  |      | 74,380  |      |   | 109,926 |  |   | 66,897 
|                                                       |  |                                       |         |   |     
|Loans acquired in merger: (1)(2)                       |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Commercial loans                                       |  |                                       | 13,053  |   |      |   | 12,763  |      |  |      |         |      |   |         |  |   |        
|Aircraft                                               |  |                                       |        |   |      |   | 415     |      |  |      |         |      |   |         |  |   |        
|Real estate:                                           |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Construction loans                                     |  |                                       | 39,415  |   |      |   | 12,177  |      |  |      |         |      |   |         |  |   |        
|One- to four-family                                    |  |                                       | 3,741   |   |      |   | 4,381   |      |  |      |         |      |   |         |  |   |        
|Commercial                                             |  |                                       | 18,659  |   |      |   | 46,493  |      |  |      |         |      |   |         |  |   |        
|Consumer                                               |  |                                       | 5,728   |   |      |   | 14,126  |      |  |      |         |      |   |         |  |   |        
|                                                       |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Total gross loans acquired                             |  |                                       | 80,596  |   |      |   | 90,355  |      |  |      |         |      |   |         |  |   |        
|Deferred loan origination fees                         |  |                                       | (288    | ) |      |   | (230    | )    |  |      |         |      |   |         |  |   |        
|Discount on unguaranteed portion of SBA loans retained |  |                                       | (58     | ) |      |   | (127    | )    |  |      |         |      |   |         |  |   |        
|Allowance for loan loss                                |  |                                       | (1,269  | ) |      |   | (1,156  | )    |  |      |         |      |   |         |  |   |        
|                                                       |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Net loans acquired                                     |  |                                       | 78,981  |   |      |   | 88,842  |      |  |      |         |      |   |         |  |   |        
|                                                       |  |                                       |         |   |     
|Less:                                                  |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Principal repayments                                   |  |                                       | 288,721 |   |      |   | 285,717 |      |  |      | 189,734 |      |   | 162,445 |  |   | 139,021
|Other net changes (3)                                  |  |                                       | 832     |   |      |   | 1,306   |      |  |      | 1,932   |      |   | 2,986   |  |   | 940    
|                                                       |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        
|Total loans                                            |  | $                                     | 727,299 |   |      | $ | 532,012 |      |  | $    | 394,212 |      | $ | 339,471 |  | $ | 305,686
|                                                       |  |                                       |         |   |      |   |         |      |  |      |         |      |   |         |  |   |        



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---

|(1) | Loans acquired in merger at 2005 represent Rancho Bernardo Community Bank loans acquired at August 19, 2005.
|--- | ------------------------------------------------------------------------------------------------------------

|(2) | Loans acquired in merger at 2004 represent Cuyamaca Bank, N.A. loans acquired at October 1, 2004.
|--- | -------------------------------------------------------------------------------------------------

|(3) | Other net changes include changes in allowance for loan losses and deferred loan fees.
|--- | --------------------------------------------------------------------------------------

Loan Servicing

Loans are serviced by us with the exception of long-term permanent loans
secured by single family residences, which are serviced by a third-party who specializes in residential mortgage services. The loan officer is responsible for the day to day relationship with the customer, unless the loan becomes delinquent, at
which time the responsibilities are reassigned to portfolio administration. As of December 31, 2005, our servicing portfolio was $936.7 million of which $196.4 million were loans serviced for others. Of the $196.4 million serviced for others,
$179.0 million were SBA 7a loans.

Our loan servicing operations are intended to provide prompt customer service, accurate and timely
information for account follow-up, reporting and management review. Following the funding of an approved loan, all pertinent loan data is entered into our data processing system which provides monthly billing statements, tracks payment performance,
and affects agreed upon interest rate adjustments on loans. Regular loan service functions include payment processing and collection notices, as well as tracking the performance of additional borrower obligations with respect to the maintenance of
casualty insurance coverage, payment of property taxes and senior liens. When payments are not received by their contractual due date, collection efforts begin on the fifteenth day of delinquency with a telephone contact. If the borrower is
non-responsive or the loan officer feels more stringent action may be required, the Credit Administrator and/or the Chief Credit Officer are consulted. Notices of default are generally filed when the loan has become 30-90 days past due.

Underwriting Process

Our
lending activities are guided by the basic lending policies established by our Board of Directors. Each loan must meet minimum underwriting criteria established in our lending policies and must fit within our strategies for yield and portfolio
enhancement.

For all newly originated loans, upon receipt of a completed loan application from a prospective borrower, a credit report is
ordered and, if necessary, additional financial information is requested. An independent appraisal is required on every property securing a loan in excess of $250,000. In addition, a loan officer conducts a review of these appraisals for accuracy,
reasonableness and conformance to our lending policy on all applications. All revisions to our approved appraiser list must be approved by the President.

Credit approval authority is segregated into three distinct levels, namely the Directors Loan Committee, Officers Loan Committee and the individual lending limits of loan officers. The limits for the
various levels are determined by the Board of Directors and/or the President and reviewed periodically. Our Directors Loan Committee consists of our President and at least three of our outside directors. The committee meets at least once a
month or more frequently as needed. Our Officers Loan Committee consists of our President, our Executive Vice President/Chief Credit Officer, our Executive Vice President/SBA, our Senior Vice President/Credit Administration, our Vice
President/SBA Manager and our Senior Vice President/Corporate Lending. Our committee is chaired by our Chief Credit Officer and meets twice a week or more frequently as needed.

Our Board has established loan authority guidelines, which in general state that all borrowing relationships where the aggregate amount of credit is over
$2.5 million or more must be submitted to our Officers Loan Committee for approval. Our Officers Loan Committee has authority to approve loans up to $6.0 million. Our



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Directors Loan Committee approves all loans over $6.0 million, reviews all secured loans originated of $500,000 or more and all other loans of $100,000
or more, as well as classification of assets, delinquencies and the current status of the loan portfolio. See Concentrations of Credit

If the loan is approved, our loan commitment specifies the terms and conditions of the proposed loan including the amount, interest rate, the amortization term, a brief description of the required collateral, and the required insurance
coverage. Generally, the borrower must provide proof of fire, flood (if applicable) and casualty insurance on the property serving as collateral. Casualty insurance must be maintained during the full term of the loan and title insurance is generally
required on all real estate secured loans.

Outside of our eleven branches, we maintain loan production offices in California, Arizona, and
Nevada. Our loan production offices are typically staffed with a loan officer who prepares the loan applications and compiles the necessary information regarding the applicant. The completed loan file is then sent to our corporate headquarters
office where the credit decision is made. Our loan production offices not associated with the retail branches predominantly originate loans guaranteed by the SBA. Our retail branches may include both SBA loan officers as well as non-SBA commercial
loan officers.

SBA Lending Programs

Our SBA lending programs are designed by the federal government to assist the small business community in obtaining financing from financial institutions that are given government guarantees as an incentive to make
the loan. We are a Preferred Lender with the SBA. As a Preferred Lender, we can approve a loan within the authority given us by the SBA without prior approval from the SBA. Preferred Lenders approve, package, fund
and service SBA loans within a range of authority that is not available to other SBA lenders without the Preferred Lender designation. We have been a Preferred Lender since 1992 and have this authority throughout the states
of California, Arizona, Oregon and Nevada.

Our SBA loans fall into two categories, loans originated under the SBAs 7a Program
(7a Loans) and loans originated under the SBAs 504 Program (504 Loans). During the year ended December 31, 2005, 504 loans constituted 63% of SBA loans originated with the remainder originated in the 7a program. Of
all SBA loans originated, approximately 99.7% are collateralized by commercial real estate, while the balance are commercial business loans generally for the purpose of funding working capital, equipment purchases and accounts receivable.

Under the SBAs 7a Program, loans are guaranteed up to 85% by the SBA. SBA 7a loans in excess of $150,000 are guaranteed up to 75% by
the SBA. Generally, this guarantee may become invalid only if the loan does not meet the SBA documentation and eligibility guidelines.

In
general our policy permits SBA 7a loans in amounts currently authorized by the SBA. Loans collateralized by real estate have terms of up to 25 years, while loans collateralized by equipment and working capital have terms of up to 10 years and 7
years, respectively. We require a 10% down payment on most 7a loans, with a 15% to 20% down payment on loans collateralized by special use properties.

Under the SBAs 504 Program, we require a 10% down payment. We then enter into a 50% first trust deed secured loan to the borrower and an interim 40% second trust deed secured loan. The first trust deed secured
loan has a term of up to 25 years. The second trust deed secured loan is for a term of 120 days. Within the interim period of entering into the loan, the second trust deed loans are refinanced by SBA certified development companies and used
as collateral for SBA guaranteed debentures. For 504 construction loans, the interim period does not commence until the notice of completion is filed. The first trust deed secured loans may be pre-sold by the Bank without recourse, prior to
releasing the funds to the purchaser. We retain no servicing on 504 Loans after they are sold.



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We periodically sell the guaranteed and un-guaranteed portions of SBA 7a loans we originate. We retain
the servicing on such loans. This strategy allows us to manage our liquidity levels and to ensure that funding is always available to meet the local community loan demand. Upon sale in the secondary market, the purchaser of the guaranteed portion of
7a loans pays a premium to us which, generally, is between 6% and 10% of the guaranteed amount. We also receive a servicing fee equal to 1% of the amount sold. In certain instances we will retain a servicing fee in excess of the 1% required by the
SBA on guaranteed portions sold at amounts greater than par in order to lower the cash premium paid at the time of sale. We consider servicing fees in excess of 1% to be separately created financial instruments which we classify as interest-only
strips and record at their fair value at the time of sale on the balance sheet. In the event that a 7a loan goes into default within 270 days of its sale, or prepays within 90 days, we are required to repurchase the loan and refund the premium to
the purchaser. During the three year period ended December 31, 2005, we have not repurchased any loans that defaulted within the first 270 days, and have had only two loans prepay within the first 90 days. A reserve has not been deemed
necessary as the likelihood of a refund is considered remote.

We strive to provide greater stability to our earnings through the sale of
SBA loans on a quarter-by-quarter basis. We cannot provide assurance as to what the levels of earnings from such sales will be in the future. SBA loans not sold in the secondary market will be retained to enhance interest income.

SBA lending is a program administered and created by the federal government. As such, legislative and regulatory developments can affect the availability
and funding of the program. This dependence on legislative funding and regulatory restrictions from time to time causes limitations and uncertainties with regard to the continued funding of such loans, which could potentially have an adverse
financial impact on our business. Since our SBA Division constitutes a significant portion of our lending business the dependence on this government program and its periodic uncertainty creates greater risk than other areas of our lending business.
See Factors That May Affect Future Results of Operations  Legislative and Regulatory Developments.

Loan Maturities

The following table sets forth the contractual maturities of our gross loans at December 31, 2005:



|                                                        |  |                        |         |                           |   |                            |  |                  |        |            |   |         |  |   |        
|------------------------------------------------------- |  | ---------------------- | ------- | ------------------------- | - | -------------------------- |  | ---------------- | ------ | ---------- | - | ------- |  | - | -------
|                                                        |  | One yearor less        |         | More than1 year to3 years |   | More than3 years to5 years |  | More than5 years |        | TotalLoans
|                                                        |  | (dollars in thousands)
|Loan portfolio composition:                             |  |                        |         |                           |   |                            |  |                  |        |            |   |         |  |   |        
|Commercial loans                                        |  | $                      | 31,550  |                           | $ | 5,651                      |  | $                | 10,527 |            | $ | 5,824   |  | $ | 53,552 
|Aircraft loans                                          |  |                        | 1,531   |                           |   | 39                         |  |                  | 247    |            |   | 26,800  |  |   | 28,617 
|Real estate:                                            |  |                        |         |                           |   |                            |  |                  |        |            |   |         |  |   |        
|Construction loans                                      |  |                        | 105,932 |                           |   | 469                        |  |                  |       |            |   | 3,099   |  |   | 109,500
|Secured by one- to four-family residential properties   |  |                        | 10,282  |                           |   | 4,865                      |  |                  | 412    |            |   | 1,436   |  |   | 16,995 
|Secured by commercial properties                        |  |                        | 123,179 |                           |   | 26,461                     |  |                  | 35,974 |            |   | 325,006 |  |   | 510,620
|Consumer:                                               |  |                        |         |                           |   |                            |  |                  |        |            |   |         |  |   |        
|Home equity lines of credit                             |  |                        | 45      |                           |   |                           |  |                  | 332    |            |   | 10,082  |  |   | 10,459 
|Other                                                   |  |                        | 2,369   |                           |   | 438                        |  |                  | 721    |            |   | 7,091   |  |   | 10,619 
|                                                        |  |                        |         |                           |   |                            |  |                  |        |            |   |         |  |   |        
|Total gross loans held for investment and held for sale |  | $                      | 274,888 |                           | $ | 37,923                     |  | $                | 48,213 |            | $ | 379,338 |  | $ | 740,362
|                                                        |  |                        |         |                           |   |                            |  |                  |        |            |   |         |  |   |        



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The following table sets forth, as of December 31, 2005, the amount of gross loans outstanding that
are contractually due after December 31, 2006 and whether such loans have fixed or adjustable rates:



|                                                      |  |                             |        |            |   |         |  |   |        
|----------------------------------------------------- |  | --------------------------- | ------ | ---------- | - | ------- |  | - | -------
|                                                      |  | Due after December 31, 2006
|                                                      |  | Fixed                       |        | Adjustable |   | Total  
|                                                      |  | (dollars in thousands)     
|Loan portfolio composition:                           |  |                             |        |            |   |         |  |   |        
|Commercial loans                                      |  | $                           | 8,562  |            | $ | 13,440  |  | $ | 22,002 
|Aircraft loans                                        |  |                             | 5,665  |            |   | 21,422  |  |   | 27,087 
|Real estate:                                          |  |                             |        |            |   |         |  |   |        
|Construction loans                                    |  |                             | 2,747  |            |   | 821     |  |   | 3,568  
|Secured by one- to four-family residential properties |  |                             | 1,628  |            |   | 5,084   |  |   | 6,712  
|Secured by commercial properties                      |  |                             | 41,799 |            |   | 345,641 |  |   | 387,440
|Consumer:                                             |  |                             |        |            |   |         |  |   |        
|Home equity lines of credit                           |  |                             |        |            |   | 10,414  |  |   | 10,414 
|Other                                                 |  |                             | 8,244  |            |   | 7       |  |   | 8,251  
|                                                      |  |                             |        |            |   |         |  |   |        
|Gross loans outstanding                               |  | $                           | 68,645 |            | $ | 396,829 |  | $ | 465,474
|                                                      |  |                             |        |            |   |         |  |   |        

Concentrations of Credit

Under federal law, our ability to make aggregate loans-to-one-borrower is limited to 15% of unimpaired capital and surplus which as of December 31,
2005 was $14.0 million, plus an additional 10% of unimpaired capital and surplus if a loan is secured by readily-marketable collateral which is defined to include only certain financial instruments and gold bullion.

The Companys lending activities are concentrated primarily in the western Riverside and San Diego Counties of Southern California. Our primary
investment is in loans, 86.1% of which were secured by real estate at December 31, 2005. Although we monitor our real estate loan portfolio on a regular basis to avoid undue concentrations to a single borrower or type of real estate collateral,
real estate in general is considered a concentration of investment. We seek to mitigate this risk by requiring each borrower to have a certain amount of equity in the real estate at the time of grant or loan funding, depending on the type of real
estate and the credit quality of the borrower. Trends in the market are monitored closely by management on a regular basis. See Item 1A.  Risk Factors.

Although the Company seeks to avoid undue concentrations of loans to a single industry based upon a single class of collateral, real estate and real estate associated business areas are among the principal industries
in the Companys market area. The Company evaluates each credit on an individual basis and determines collateral requirements accordingly. When real estate is taken as collateral, advances are generally limited to a certain percentage of the
appraised value of the collateral at the time the loan is made depending on the type of loan, the underlying property and other factors.

Credit risk represents the possibility that a customer or counter-party may not perform in accordance with contractual terms. We incur credit risk whenever we extend credit to, or enter into other transactions with our customers. Loan
review and other loan monitoring practices provide a means for our management to ascertain whether proper credit, underwriting and loan documentation policies, procedures and practices are being followed by our loan officers and applied uniformly.
Implementation and daily administration of loan review rests with our Chief Credit Officer and our President who approve loan officer requests for changes in risk ratings. Loan officers are responsible for continually grading their loans so that
individual credits properly reflect the risk inherent therein. On a quarterly basis, our Board of Directors provide for a third-party loan review of loans that meet certain criteria originated since the previous review. While we continue to review
these and other



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related functional areas, there can be no assurance that the steps we have taken to date will be sufficient to enable us to identify, measure, monitor and
control all credit risk.

Although there are some borrowers that carry large loan balances with the Bank, we do not believe that the Bank
is dependent on a select few customers or a single customer for its loans. The majority of our loans are obtained from individuals and small to medium-sized businesses. These transactions result in relatively small average loan balances, but make us
less subject to the adverse effect on liquidity that can result from the loss of a substantial borrower. At December 31, 2005, no one borrower accounted for more than 10% of our total loan portfolio.

Summary of Loan Loss Experience

In order to
recognize on a timely basis, to the extent practicable, a borrowers inability or failure to repay their loan, we have established an allowance for loan losses through periodic charges to income. We have set forth a formal policy which takes
into consideration the need for an overall allowance for loan losses as well as specific allowances that are tied to individual loans.

The
following table sets forth information regarding the Banks allowance for loan losses at the dates and for the periods indicated:



|                                                   |  |                                               |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|-------------------------------------------------- |  | --------------------------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                   |  | At or for the twelve monthsended December 31, |      
|                                                   |  | 2005                                          |       |   | 2004 |   |       | 2003 |  |   | 2002  |   |  | 2001 |      
|                                                   |  | (dollars in thousands)                        |      
|Balance at beginning of year                       |  | $                                             | 7,508 |   |      | $ | 5,210 |      |  | $ | 3,945 |   |  | $    | 2,788 |   |  | $ | 1,988 |  
|Reserve acquired in merger                         |  |                                               | 1,269 |   |      |   | 1,156 |      |  |   |      |   |  |      |      |   |  |   |      |  
|Chargeoffs:                                        |  |                                               |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Real estate loans:                                 |  |                                               |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial                                         |  |                                               |      |   |      |   |      |      |  |   | 129   |   |  |      | 518   |   |  |   | 301   |  
|Commercial                                         |  |                                               | 2     |   |      |   | 33    |      |  |   | 458   |   |  |      |      |   |  |   |      |  
|Aircraft                                           |  |                                               | 488   |   |      |   | 15    |      |  |   | 48    |   |  |      |      |   |  |   | 374   |  
|Consumer                                           |  |                                               | 14    |   |      |   | 18    |      |  |   | 45    |   |  |      | 13    |   |  |   | 12    |  
|                                                   |  |                                               |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total chargeoffs                                   |  |                                               | 504   |   |      |   | 66    |      |  |   | 680   |   |  |      | 531   |   |  |   | 687   |  
|Recoveries:                                        |  |                                               |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Real estate loans:                                 |  |                                               |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|One- to four-family                                |  |                                               |      |   |      |   |      |      |  |   |      |   |  |      |      |   |  |   | 6     |  
|Commercial                                         |  |                                               | 3     |   |      |   |      |      |  |   | 25    |   |  |      | 5     |   |  |   |      |  
|Commercial                                         |  |                                               | 1     |   |      |   | 7     |      |  |   | 300   |   |  |      |      |   |  |   |      |  
|Aircraft                                           |  |                                               | 252   |   |      |   |      |      |  |   |      |   |  |      | 11    |   |  |   | 54    |  
|Consumer                                           |  |                                               | 13    |   |      |   | 25    |      |  |   | 10    |   |  |      |      |   |  |   | 4     |  
|                                                   |  |                                               |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total recoveries                                   |  |                                               | 269   |   |      |   | 32    |      |  |   | 335   |   |  |      | 16    |   |  |   | 64    |  
|                                                   |  |                                               |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net chargeoffs                                     |  |                                               | 235   |   |      |   | 34    |      |  |   | 345   |   |  |      | 515   |   |  |   | 623   |  
|Reserve for losses on commitments to extend credit |  |                                               |      |   |      |   |      |      |  |   | (29   | ) |  |      | 111   |   |  |   | (47   | )
|Provision for loan losses                          |  |                                               | 1,231 |   |      |   | 1,176 |      |  |   | 1,639 |   |  |      | 1,561 |   |  |   | 1,470 |  
|                                                   |  |                                               |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Balance at end of year                             |  | $                                             | 9,773 |   |      | $ | 7,508 |      |  | $ | 5,210 |   |  | $    | 3,945 |   |  | $ | 2,788 |  
|                                                   |  |                                               |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net chargeoffs to average loans                    |  |                                               | 0.04  | % |      |   | 0.01  | %    |  |   | 0.09  | % |  |      | 0.16  | % |  |   | 0.23  | %
|                                                   |  |                                               |       |   |     
|Reserve for losses on commitments to extend credit |  | $                                             | 295   |   |      | $ | 203   |      |  | $ | 203   |   |  | $    | 174   |   |  | $ | 285   |  

In originating loans, we recognize that losses will be experienced and that the risk of loss will
vary determined by, among other things, the type of loan being made, credit worthiness of the borrower over the term



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of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The allowance is increased by
provisions charged against earnings and reduced by net loan charge offs. Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible. Recoveries are recorded only
when cash payments are received.

In order to determine the appropriate allowance for loan losses, our management and Directors Loan
Committee meet quarterly to review the loan portfolio. To the extent that any of these conditions are evidenced by identifiable problem credit or portfolio segment as of the evaluation date, the estimate of such condition may be reflected as a
specific allowance applicable to such credit or portfolio segment. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon the most recent
information available. Estimates of identifiable losses are reviewed continually and, generally, a provision for losses is charged against operations on a monthly basis as necessary to maintain the allowance at an appropriate level. Management
presents an analysis of the allowance for loan losses to our Board of Directors on a quarterly basis.

The following table sets forth the
Companys percent of allowance for loan losses to total allowance for loan losses and the percent of loans to total gross loans in each of the categories listed at the dates indicated, dollar amounts are presented in thousands:



|                                           |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                    |   |  |       |  
|------------------------------------------ |  | -------------------------------------- | ----- | --------------------------------- | ----- | - | -------------------------------------------------- | ----- | - | ------ | - | --------------------------------- |  | ----- | -------------------------------------------------- |  | ----- | ------ |  | --------------------------------- | ----- |  | -------------------------------------------------- | - |  | ----- | -
|                                           |  | At or For the Years Ended December 31, |      
|                                           |  | 2005                                   |       |                                   | 2004  |   |                                                    | 2003  |  
|                                           |  | Amount                                 |       | Percent ofAllowanceto TotalAmount |       |   | Percent ofLoans inEach Categoryto TotalGross Loans |       |   | Amount |   | Percent ofAllowanceto TotalAmount |  |       | Percent ofLoans inEach Categoryto TotalGross Loans |  |       | Amount |  | Percent ofAllowanceto TotalAmount |       |  | Percent ofLoans inEach Categoryto TotalGross Loans |  
|Commercial loans                           |  | $                                      | 1,839 |                                   | 18.8  | % |                                                    | 7.2   | % |        | $ | 898                               |  | 12.0  | %                                                  |  | 6.5   | %      |  | $                                 | 824   |  | 15.8                                               | % |  | 5.1   | %
|Aircraft loans                             |  |                                        | 479   |                                   | 4.9   | % |                                                    | 3.9   | % |        |   | 426                               |  | 5.7   | %                                                  |  | 5.3   | %      |  |                                   | 544   |  | 10.4                                               | % |  | 7.6   | %
|Real estate:                               |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                    |   |  |       |  
|Construction loans                         |  |                                        | 1,697 |                                   | 17.4  | % |                                                    | 14.8  | % |        |   | 1,599                             |  | 21.3  | %                                                  |  | 13.8  | %      |  |                                   | 536   |  | 10.3                                               | % |  | 16.6  | %
|Secured by:                                |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                    |   |  |       |  
|One- to four-family residential properties |  |                                        | 437   |                                   | 4.5   | % |                                                    | 2.3   | % |        |   | 256                               |  | 3.4   | %                                                  |  | 1.6   | %      |  |                                   | 73    |  | 1.4                                                | % |  | 2.4   | %
|Commercial properties                      |  |                                        | 4,547 |                                   | 46.5  | % |                                                    | 69.0  | % |        |   | 3,766                             |  | 50.2  | %                                                  |  | 69.6  | %      |  |                                   | 3,089 |  | 59.3                                               | % |  | 67.3  | %
|Consumer:                                  |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                    |   |  |       |  
|Home equity lines of credit                |  |                                        | 137   |                                   | 1.4   | % |                                                    | 1.4   | % |        |   | 181                               |  | 2.4   | %                                                  |  | 1.5   | %      |  |                                   | 14    |  | 0.3                                                | % |  | 0.5   | %
|Other                                      |  |                                        | 637   |                                   | 6.5   | % |                                                    | 1.4   | % |        |   | 382                               |  | 5.1   | %                                                  |  | 1.7   | %      |  |                                   | 130   |  | 2.5                                                | % |  | 0.5   | %
|                                           |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                    |   |  |       |  
|Total allowance                            |  | $                                      | 9,773 |                                   | 100.0 | % |                                                    | 100.0 | % |        | $ | 7,508                             |  | 100.0 | %                                                  |  | 100.0 | %      |  | $                                 | 5,210 |  | 100.0                                              | % |  | 100.0 | %
|                                           |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                    |   |  |       |  



|                                           |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |  
|------------------------------------------ |  | -------------------------------------- | ----- | --------------------------------- | ----- | - | -------------------------------------------------- | ----- | - | ------ | - | --------------------------------- |  | ----- | -------------------------------------------------- |  | ----- | -
|                                           |  | At or For the Years Ended December 31, |      
|                                           |  | 2002                                   |       |                                   | 2001  |  
|                                           |  | Amount                                 |       | Percent ofAllowanceto TotalAmount |       |   | Percent ofLoans inEach Categoryto TotalGross Loans |       |   | Amount |   | Percent ofAllowanceto TotalAmount |  |       | Percent ofLoans inEach Categoryto TotalGross Loans | 
|Commercial loans                           |  | $                                      | 178   |                                   | 4.5   | % |                                                    | 4.8   | % |        | $ | 103                               |  | 3.7   | %                                                  |  | 5.0   | %
|Aircraft loans                             |  |                                        | 235   |                                   | 6.0   | % |                                                    | 8.5   | % |        |   | 46                                |  | 1.7   | %                                                  |  | 7.8   | %
|Real estate:                               |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |  
|Construction loans                         |  |                                        | 936   |                                   | 23.7  | % |                                                    | 19.5  | % |        |   | 561                               |  | 20.1  | %                                                  |  | 19.5  | %
|Secured by:                                |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |  
|One- to four-family residential properties |  |                                        | 178   |                                   | 4.5   | % |                                                    | 4.9   | % |        |   | 95                                |  | 3.4   | %                                                  |  | 3.7   | %
|Commercial properties                      |  |                                        | 2,189 |                                   | 55.5  | % |                                                    | 60.2  | % |        |   | 1,787                             |  | 64.1  | %                                                  |  | 61.4  | %
|Consumer:                                  |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |  
|Home equity lines of credit                |  |                                        | 63    |                                   | 1.6   | % |                                                    | 1.0   | % |        |   | 67                                |  | 2.4   | %                                                  |  | 0.8   | %
|Other                                      |  |                                        | 166   |                                   | 4.2   | % |                                                    | 1.1   | % |        |   | 129                               |  | 4.6   | %                                                  |  | 1.8   | %
|                                           |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |  
|Total allowance                            |  | $                                      | 3,945 |                                   | 100.0 | % |                                                    | 100.0 | % |        | $ | 2,788                             |  | 100.0 | %                                                  |  | 100.0 | %
|                                           |  |                                        |       |                                   |       |   |                                                    |       |   |        |   |                                   |  |       |                                                    |  |       |  



14



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The following table sets forth the Companys percent of allowance for loan losses to total allowance
for loan losses and the percent of loans to total gross loans held for investment in each of the categories listed at the dates indicated, dollar amounts are presented in thousands:



|                                           |  |                                        |       |                                                           |       |   |        |      |                                                           |  |       |        |  |                                                            |       |  |        |   |                                                           |   |       |        |       |                                                           |  |   |       |  |       |  
|------------------------------------------ |  | -------------------------------------- | ----- | --------------------------------------------------------- | ----- | - | ------ | ---- | --------------------------------------------------------- |  | ----- | ------ |  | ---------------------------------------------------------- | ----- |  | ------ | - | --------------------------------------------------------- | - | ----- | ------ | ----- | --------------------------------------------------------- |  | - | ----- |  | ----- | -
|                                           |  | At or For the Years Ended December 31, |      
|                                           |  | 2005                                   |       |                                                           | 2004  |   |        | 2003 |                                                           |  | 2002  |        |  | 2001                                                       |      
|                                           |  | Amount                                 |       | Percent ofLoans inEach Categoryto LoansHeld forInvestment |       |   | Amount |      | Percent ofLoans inEach Categoryto LoansHeld forInvestment |  |       | Amount |  | Percent ofLoans inEach Category
to LoansHeld forInvestment |       |  | Amount |   | Percent ofLoans inEach Categoryto LoansHeld forInvestment |   |       | Amount |       | Percent ofLoans inEach Categoryto LoansHeld forInvestment | 
|Commercial loans                           |  | $                                      | 1,839 |                                                           | 9.1   | % |        | $    | 898                                                       |  | 8.0   | %      |  | $                                                          | 824   |  | 6.2    | % |                                                           | $ | 178   |        | 5.6   | %                                                         |  | $ | 103   |  | 5.7   | %
|Aircraft loans                             |  |                                        | 479   |                                                           | 4.9   | % |        |      | 426                                                       |  | 6.5   | %      |  |                                                            | 544   |  | 9.1    | % |                                                           |   | 235   |        | 10.1  | %                                                         |  |   | 46    |  | 8.9   | %
|Real estate:                               |  |                                        |       |                                                           |       |   |        |      |                                                           |  |       |        |  |                                                            |       |  |        |   |                                                           |   |       |        |       |                                                           |  |   |       |  |       |  
|Construction loans                         |  |                                        | 1,697 |                                                           | 18.7  | % |        |      | 1,599                                                     |  | 17.0  | %      |  |                                                            | 536   |  | 20.1   | % |                                                           |   | 936   |        | 23.1  | %                                                         |  |   | 561   |  | 22.3  | %
|Secured by:                                |  |                                        |       |                                                           |       |   |        |      |                                                           |  |       |        |  |                                                            |       |  |        |   |                                                           |   |       |        |       |                                                           |  |   |       |  |       |  
|One- to four-family residential properties |  |                                        | 437   |                                                           | 2.9   | % |        |      | 256                                                       |  | 2.0   | %      |  |                                                            | 73    |  | 2.9    | % |                                                           |   | 178   |        | 4.7   | %                                                         |  |   | 95    |  | 2.8   | %
|Commercial properties                      |  |                                        | 4,547 |                                                           | 60.8  | % |        |      | 3,766                                                     |  | 62.6  | %      |  |                                                            | 3,089 |  | 60.5   | % |                                                           |   | 2,189 |        | 54.1  | %                                                         |  |   | 1,787 |  | 57.2  | %
|Consumer:                                  |  |                                        |       |                                                           |       |   |        |      |                                                           |  |       |        |  |                                                            |       |  |        |   |                                                           |   |       |        |       |                                                           |  |   |       |  |       |  
|Home equity lines of credit                |  |                                        | 137   |                                                           | 1.8   | % |        |      | 181                                                       |  | 1.8   | %      |  |                                                            | 14    |  | 0.6    | % |                                                           |   | 63    |        | 1.1   | %                                                         |  |   | 67    |  | 1.0   | %
|Other                                      |  |                                        | 637   |                                                           | 1.8   | % |        |      | 382                                                       |  | 2.1   | %      |  |                                                            | 130   |  | 0.6    | % |                                                           |   | 166   |        | 1.3   | %                                                         |  |   | 129   |  | 2.1   | %
|                                           |  |                                        |       |                                                           |       |   |        |      |                                                           |  |       |        |  |                                                            |       |  |        |   |                                                           |   |       |        |       |                                                           |  |   |       |  |       |  
|Total allowance                            |  | $                                      | 9,773 |                                                           | 100.0 | % |        | $    | 7,508                                                     |  | 100.0 | %      |  | $                                                          | 5,210 |  | 100.0  | % |                                                           | $ | 3,945 |        | 100.0 | %                                                         |  | $ | 2,788 |  | 100.0 | %
|                                           |  |                                        |       |                                                           |       |   |        |      |                                                           |  |       |        |  |                                                            |       |  |        |   |                                                           |   |       |        |       |                                                           |  |   |       |  |       |  

Investment Portfolio

The following table sets forth the carrying values and estimated fair values of our held to maturity and available for sale investment portfolios at the dates indicated.



|                                            |  |                        |        |                     |   |               |  |                     |        |               |   |                     |  |   |        |  |   |       
|------------------------------------------- |  | ---------------------- | ------ | ------------------- | - | ------------- |  | ------------------- | ------ | ------------- | - | ------------------- |  | - | ------ |  | - | ------
|                                            |  | At December 31,       
|                                            |  | 2005                   |        | 2004                |   | 2003         
|                                            |  | AmortizedCost          |        | EstimatedFair value |   | AmortizedCost |  | EstimatedFair value |        | AmortizedCost |   | EstimatedFair value
|                                            |  | (dollars in thousands)
|Held to Maturity                            |  |                        |        |                     |   |               |  |                     |        |               |   |                     |  |   |        |  |   |       
|U.S. Government agency and other securities |  | $                      |       |                     | $ |              |  | $                   |       |               | $ |                    |  | $ | 1,501  |  | $ | 1,523 
|Agency mortgage-backed securities           |  | $                      | 2,049  |                     | $ | 1,896         |  | $                   | 3,281  |               | $ | 3,328               |  | $ | 5,213  |  | $ | 5,305 
|SBA pass through securities                 |  |                        | 4,704  |                     |   | 4,703         |  |                     | 917    |               |   | 923                 |  |   | 973    |  |   | 979   
|                                            |  |                        |        |                     |   |               |  |                     |        |               |   |                     |  |   |        |  |   |       
|Total held to maturity securities           |  | $                      | 6,753  |                     | $ | 6,599         |  | $                   | 4,198  |               | $ | 4,251               |  | $ | 7,687  |  | $ | 7,807 
|                                            |  |                        |        |                     |   |               |  |                     |        |               |   |                     |  |   |        |  |   |       
|Available for sale                          |  |                        |        |                     |   |               |  |                     |        |               |   |                     |  |   |        |  |   |       
|Agency mortgage-backed securities           |  | $                      | 50,327 |                     | $ | 49,660        |  | $                   | 26,701 |               | $ | 26,562              |  | $ | 16,049 |  | $ | 15,921
|                                            |  |                        |        |                     |   |               |  |                     |        |               |   |                     |  |   |        |  |   |       

Our investment policy, as established by the Board of Directors, generally limits investments to
government and federal agency-backed securities and other non-government guaranteed securities, including corporate debt obligations, which are investment grade. Additionally, our policies provide the authority to invest in mortgage-backed
securities guaranteed by the U.S. government and agencies thereof. Our objective is to attempt to provide for and maintain liquidity and generate a favorable return on investments without incurring undue interest rate and/or credit risk. All
investment purchases which individually exceed $5.0 million, or that are outside the policy guidelines, are to be approved by our Board of Directors or committee thereof. Purchases and sales under this



15



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limitation and within the guidelines of the policies may be done at the discretion of our President, our Chief Financial Officer or our Controller. At
December 31, 2005, we had $49.7 million in U.S. Treasury and agency securities available for sale, $6.8 million in U.S. Treasury and agency securities held for investment and federal funds sold of $20.6 million.

The contractual maturities of securities held to maturity at December 31, 2005 were as follows:



|                                              |  |                        |       |                     |   |                               |  |      |  
|--------------------------------------------- |  | ---------------------- | ----- | ------------------- | - | ----------------------------- |  | ---- | -
|                                              |  | AmortizedCost          |       | Estimated FairValue |   | WeightedAverage InterestYield | 
|                                              |  | (dollars in thousands) |      
|Mortgage-backed securities                    |  |                        |       |                     |   |                               |  |      |  
|Due greater than one year through five years  |  | $                      | 140   |                     | $ | 140                           |  | 5.14 | %
|Due greater than five years through ten years |  |                        | 4,875 |                     |   | 4,731                         |  | 4.33 | %
|Due greater than ten years                    |  |                        | 1,088 |                     |   | 1,079                         |  | 4.34 | %
|                                              |  |                        |       |                     |   |                               |  |      |  
|Subtotal mortgage-backed securities           |  |                        | 6,103 |                     |   | 5,950                         |  | 4.35 | %
|SBA pass through securities                   |  |                        |       |                     |   |                               |  |      |  
|Due greater than ten years                    |  |                        | 650   |                     |   | 650                           |  | 5.27 | %
|                                              |  |                        |       |                     |   |                               |  |      |  
|Total                                         |  | $                      | 6,753 |                     | $ | 6,600                         |  | 4.44 | %
|                                              |  |                        |       |                     |   |                               |  |      |  

Affordable Housing Investments

We have invested in limited partnerships formed to develop and operate affordable housing units for lower income tenants throughout the state of
California. The costs associated with these investments are being amortized on a level-yield method over the life of the related tax credits. The partnerships must meet the regulatory requirements for a minimum 15-year compliance period to fully
utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credits may be denied for any period in which the projects are not in compliance and a portion of the credits previously taken is subject to recapture
with interest. The remaining federal tax credits to be utilized over multiple-year periods are $5.0 million as of December 31, 2005. The Companys usage of tax credits approximated $355,000 and $430,000 during the years ended
December 31, 2005 and 2004, respectively; and investment amortization amounted to $307,000 and $215,000 for the years ended December 31, 2005 and 2004, respectively. As of December 31, 2005 and December 31, 2004, the investment
in these partnerships totaled $2.4 million and $2.6 million, respectively. The Company had a commitment to fund an additional $3.0 million to these partnerships as of December 31, 2005.

Sources of Funds

Deposits, loan payments, proceeds
from the sale of loans, cash flows generated from operations and Federal Home Loan Bank (FHLB) borrowings are the primary sources of our funds for use in lending, investing and for other general purposes.

Deposits

We offer a variety of deposit accounts with
a range of interest rates and terms. Our deposits consist of interest and non-interest bearing checking accounts, money market accounts, savings accounts and certificates of deposit. As of December 31, 2005, core deposits, defined as
transaction accounts plus retail certificates of deposit under $100,000, constituted 70.5% of total deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates
and competition. Our deposits are attracted primarily from individuals and small and medium-sized businesses. We rely primarily on customer service, aggressive marketing and cross-selling to customers and prospects to attract and retain deposits,
however market interest rates, products, and rates offered by competing financial institutions significantly affect our ability to grow and retain deposits.



16



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The following table sets forth the distribution of our average deposit accounts for the periods indicated
and the weighted average yields for each category of deposits presented:



|                                  |  |                                 |         |                                |        |   |              |      |   |                |   |                                |  |        |              |  |      |                |  |                                |         |  |              |   |  |      |  
|--------------------------------- |  | ------------------------------- | ------- | ------------------------------ | ------ | - | ------------ | ---- | - | -------------- | - | ------------------------------ |  | ------ | ------------ |  | ---- | -------------- |  | ------------------------------ | ------- |  | ------------ | - |  | ---- | -
|                                  |  | For the Year Ended December 31, |        
|                                  |  | 2005                            |         |                                | 2004   |   |              | 2003 |  
|                                  |  | AverageBalance                  |         | Percentof TotalAverageDeposits |        |   | AverageYield |      |   | AverageBalance |   | Percentof TotalAverageDeposits |  |        | AverageYield |  |      | AverageBalance |  | Percentof TotalAverageDeposits |         |  | AverageYield |  
|                                  |  | (dollars in thousands)          |        
|MMDA and NOW accounts             |  | $                               | 183,600 |                                | 28.53  | % |              | 0.95 | % |                | $ | 122,086                        |  | 26.38  | %            |  | 0.53 | %              |  | $                              | 90,213  |  | 23.95        | % |  | 0.76 | %
|Savings accounts                  |  |                                 | 22,450  |                                | 3.49   | % |              | 0.17 | % |                |   | 16,428                         |  | 3.55   | %            |  | 0.18 | %              |  |                                | 14,243  |  | 3.78         | % |  | 0.42 | %
|Non-interest-bearing accounts     |  |                                 | 137,950 |                                | 21.43  | % |              | 0.00 | % |                |   | 87,548                         |  | 18.91  | %            |  | 0.00 | %              |  |                                | 61,745  |  | 16.39        | % |  | 0.00 | %
|Time deposits less than $100,000  |  |                                 | 92,287  |                                | 14.34  | % |              | 2.47 | % |                |   | 72,219                         |  | 15.60  | %            |  | 1.53 | %              |  |                                | 76,111  |  | 20.20        | % |  | 2.15 | %
|Time deposits of $100,000 or more |  |                                 | 207,339 |                                | 32.21  | % |              | 2.96 | % |                |   | 164,591                        |  | 35.56  | %            |  | 1.70 | %              |  |                                | 134,408 |  | 35.68        | % |  | 2.02 | %
|                                  |  |                                 |         |                                |        |   |              |      |   |                |   |                                |  |        |              |  |      |                |  |                                |         |  |              |   |  |      |  
|Total average deposits            |  | $                               | 643,626 |                                | 100.00 | % |              | 1.58 | % |                | $ | 462,872                        |  | 100.00 | %            |  | 0.99 | %              |  | $                              | 376,720 |  | 100.00       | % |  | 1.35 | %
|                                  |  |                                 |         |                                |        |   |              |      |   |                |   |                                |  |        |              |  |      |                |  |                                |         |  |              |   |  |      |  

During the year ended December 31, 2005, including the deposits from the Rancho Bernardo
acquisition, average MMDA and NOW account deposits increased by $61.5 million, or 50.4%; average savings account deposits increased $6.0 million or 36.7%; non-interest bearing deposits increased $50.4 million or 57.6%; time deposits less than
$100,000 increased $20.1 million or 27.8%; and time deposits of $100,000 or more increased $42.7 million or 26.0% when compared to the year ended December 31, 2004.

At December 31, 2005, we had $209.7 million in time deposits in amounts of $100,000 or more, consisting of 809 accounts, maturing as follows:



|                                         |  |                        |         |                     |      |  
|---------------------------------------- |  | ---------------------- | ------- | ------------------- | ---- | -
|                                         |  | December 31,2005       |         | WeightedAverageRate |     
|                                         |  | (dollars in thousands) |        
|Three months or less                     |  | $                      | 70,625  |                     | 3.52 | %
|Greater than three months to six months  |  |                        | 67,379  |                     | 3.42 | %
|Greater than six months to twelve months |  |                        | 51,090  |                     | 3.44 | %
|Greater than twelve months               |  |                        | 20,643  |                     | 4.59 | %
|                                         |  |                        |         |                     |      |  
|Total                                    |  | $                      | 209,737 |                     | 3.57 | %
|                                         |  |                        |         |                     |      |  

Although there are some customers that carry large deposits with the Bank, we do not believe that
the Bank is dependent on a select few customers or a single customer for its deposits. The majority of our deposits are obtained from individuals and small to medium-sized businesses. These transactions result in relatively small average deposit
balances, but make us less subject to the adverse effect on liquidity that can result from the loss of a substantial depositor. At December 31, 2005, no one depositor accounted for more than 5% of our total deposits.

Short-Term Borrowings

Short-term borrowings totaled
$52.3 million as of December 31, 2005 compared to $1.0 million as of December 31, 2004 primarily due to increased loan demand in 2005 in excess of our deposit growth. Our short-term borrowings primarily consist of federal home loan bank
funds borrowed overnight to meet periodic increases in loan demand and deposit withdrawals and maturities.



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Long-Term Borrowings

Long-term borrowings, consisting primarily of trust preferred securities, totaled $37.2 million as of December 31, 2005 compared to $17.6 million as of December 31, 2004. The net change in long-term debt is
a result of the issuance of $20.0 million in trust preferred securities in the third quarter of 2005. See Item 8  Financial Statements and Supplementary Data  Footnote 10  Other Borrowed Funds for terms.

Employees

As of December 31, 2005, we had a
total of 227 full-time employees and 47 part-time employees reflecting a full-time equivalent of 246 employees. We believe that our employee relations are satisfactory.

Competition

The banking and financial services business in California generally, and in our primary
market area specifically, is highly competitive with a number of large out-of-state and regional banks with offices covering wide geographic areas, in addition to many smaller local community based banks. The increasingly competitive environment is
a result primarily of changes in regulation, changes in technology, product delivery systems and the accelerating pace of consolidation among financial service providers.

We compete for loans, deposits and customers for financial services 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 non-bank 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 array of financial
services. In order to compete with the other financial services providers, we principally rely upon our independent status to provide personalized service to customers, local decision making, participation in local promotional activities, and seek
to develop personal relationships established by officers, directors and employees with our customers, and continue to provide specialized services tailored to meet our customers needs.

A growing number of banks and financial services companies are offering customers the ability to conduct transactions with them over the Internet. We
began offering Internet banking services to our customers in 1999.

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 Board. The Federal Reserve Board 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 Board 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.

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



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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 California legislature and before various bank regulatory and other professional agencies.

Supervision and Regulation

Community Bancorp and the Bank are extensively regulated under both federal and state
law. Set forth below is a summary description of certain laws, which relate to the regulation of Community Bancorp and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and
regulations.

Community Bancorp

Community Bancorp is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the Bank Holding Company Act), and is registered as such with, and subject to the
supervision of, the Federal Reserve Board. Community Bancorp is required to file with the Federal Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding
Company Act. The Federal Reserve Board may conduct examinations of bank holding companies and their subsidiaries.

Under the Federal
Reserve Boards regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe and unsound manner. In addition, it is the Federal
Reserve Boards policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding companys failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Boards regulations or both.

Community Bancorp is required to obtain the approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, Community Bancorp would own or control more than 5% of the voting shares of such bank. Prior approval of the Federal Reserve Board
is also required for the merger or consolidation of Community Bancorp and another bank holding company.

Community Bancorp is prohibited by
the Bank Holding Company Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and
from engaging, directly or indirectly, in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, Community Bancorp may, subject to the prior approval of the Federal Reserve Board,
engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Federal Reserve Board may require that Community Bancorp terminate an activity or terminate control of or liquidate or divest subsidiaries or
affiliates when the Federal Reserve Board determines that the activity or the control or the subsidiary or affiliates constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, Community Bancorp must file written
notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities.



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We and the Bank 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 the Bank 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.

Our common stock is registered with the Securities and Exchange Commission (the SEC) under the Securities Exchange Act of 1934, as amended. As such, we are subject to the information, proxy solicitation,
insider trading, corporate governance, and other requirements and restrictions of such Act.

The Bank

The Bank, as a national banking association, is subject to primary supervision, examination and regulation by the Office of the Comptroller of the
Currency (Comptroller). If, as a result of an examination of a bank, the Comptroller should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the
Banks operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the Comptroller. Such remedies include the power to enjoin unsafe or unsound
practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the
Bank, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate a banks deposit insurance in the absence of action by the Comptroller and
upon a finding that a bank is in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that its conduct poses a risk to the deposit insurance fund or make prejudice the interest of its depositors. The Bank has never been
subject to any such actions by the Comptroller or the FDIC.

The deposits of the Bank are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Bank pays a semiannual statutory assessment. The Bank is also subject to certain regulations of the Federal Reserve Board and applicable provisions of California law, insofar as they do not conflict
with or are not preempted by federal banking law. Various other requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes and regulations relate
to many aspects of the Banks operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, capital requirements and
disclosure obligations to depositors and borrowers. Further, the Bank is required to maintain certain levels of capital.

Capital
Standards

The Federal Reserve Board and the Comptroller have adopted risk-based minimum capital guidelines intended to provide a
measure of capital that reflects the degree of risk associated with a banking organizations operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which
are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets
with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.

A banking organizations risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which includes off balance sheet items, against both
total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock, retained earnings, non-cumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and



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lease losses, cumulative preferred stock, long-term preferred stock, eligible term subordinated debt and certain other instruments with some characteristics
of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets
of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.

In addition to the risk-based guidelines, federal banking
regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to
5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of Community Bancorp to grow and could
restrict the amount of profits, if any, available for the payment of dividends.

For information concerning the capital ratios of Community
Bancorp and the Bank, see, Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations.

Under applicable regulatory guidelines, the Bank was considered Well Capitalized as of December 31, 2005.

Under
applicable regulatory guidelines, Community Bancorp Inc.s trust preferred securities issued by our subsidiary capital trusts qualify as Tier 1 capital up to a maximum limit of 25% of Tier 1 capital. Any additional portion of the trust
preferred securities would qualify as Tier II capital. As of December 31, 2005, those subsidiary trusts have $35.0 million in trust preferred securities outstanding, of which $34.7 million qualify as Tier 1 capital.

Prompt Corrective Action

Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed
minimum capital ratios described above. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the
appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment.

In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement
actions may include;



| |  |  | the imposition of a conservator or receiver or the issuance of a cease-and-desist order that can be judicially enforced;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | the termination of insurance of deposits (in the case of a depository institution);
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the imposition of civil money penalties;
| | - |  | ----------------------------------------



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| |  |  | the issuance of directives to increase capital;
| | - |  | -----------------------------------------------



| |  |  | the issuance of formal and informal agreements;
| | - |  | -----------------------------------------------



| |  |  | the issuance of removal and prohibition orders against institution-affiliated parties; and,
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not
granted.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, a holding companys inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action against the holding company.

Banks are subject to certain Federal
Reserve Board 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.

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. Various measures are currently pending before Congress to extend portions of 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.

Sarbanes-Oxley Act of 2002

On
July 30, 2002, the Sarbanes-Oxley Act of 2002 (SOX), was signed into law to address corporate governance and accounting oversight matters of companies whose securities are registered under the Securities Exchange Act and, therefore,
applies to the Company. SOX established a new accounting oversight board that enforces 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 the accuracy of periodic reports filed with the SEC; (ii) imposes new 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.



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Bank Secrecy Act

In 1970, Congress passed the Currency and Foreign Transactions Reporting Act, otherwise known as the Bank Secrecy Act (the BSA), which
established requirements for recordkeeping and reporting by banks and other financial institutions. The BSA was designed to help identify the source, volume and movement of currency and other monetary instruments into and out of the United States in
order to help detect and prevent money laundering connected with drug trafficking, terrorism and other criminal activities. The primary tool used to implement BSA requirements is the filing of Suspicious Activity Reports. Today, the BSA requires
that all banking institutions develop and provide for the continued administration of a program reasonably designed to assure and monitor compliance with certain recordkeeping and reporting requirements regarding both domestic and international
currency transactions. These programs must, at a minimum, provide for a system of internal controls to assure ongoing compliance, provide for independent testing of such systems and compliance, designate individuals responsible for such compliance
and provide appropriate personnel training.

FDIC Deposit Insurance

The Banks deposits are currently insured to a maximum of $100,000 per depositor through the Bank Insurance Fund administered by the FDIC. The Bank
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.

The FDIC is authorized to terminate a depository institutions deposit insurance upon a
finding by the FDIC that the institutions financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the
institutions regulatory agency.

The President signed the budget reconciliation package (S 1932) that contains the comprehensive
Federal Deposit Insurance Reform Act of 2005. This legislation, among other things, (i) merges the Bank Insurance Fund (BIF) and the Savings Associations Insurance Fund (SAIF) into the Deposit Insurance Fund (DIF); (ii) establishes a
process for indexing coverage levels to account for inflation; (iii) sets a cap on the DIF; (iv) sets up a system of dividends; (v) gives certain banks credit for past over-payments to the fund; (vi) gives the FDIC added
flexibility should the fund ever face financial difficulty; and (vii) increases deposit insurance coverage to $250,000 for certain retirement accounts. The legislation will become effective six months after the FDIC completes their regulations
covering the above items.

Transactions with Affiliates

Transactions between a bank and its affiliates are quantitatively and qualitatively restricted under the Federal Reserve Act. The Federal
Reserve Board issued Regulation W on October 31, 2002, which comprehensively implements Sections 23A and 23B of the Federal Reserve Act. Sections 23A and 23B and Regulation W restrict loans by a depository institution to its affiliates, asset
purchases by a depository institution from its affiliates, and other transactions between a depository institution and its affiliates. Regulation W unifies in one public document the Federal Reserve Boards interpretations of Section 23A
and 23B. Regulation W had an effective date of April 1, 2003.

Community Reinvestment Act (CRA)

The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and CRA activities. The
CRA generally requires the federal banking agencies to evaluate the



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record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to
substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities.

When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve will review the
assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. A banks compliance with its CRA obligations is based on a performance-based evaluation system which bases
CRA ratings on an institutions lending service and investment performance, resulting in a rating by the appropriate bank regulatory agency of outstanding, satisfactory, needs to improve or substantial
noncompliance. At its last examination by the Comptroller, the Bank received a CRA rating of Satisfactory.

Safety
and Soundness Standards

The Federal Deposit Insurance Corporation Improvement Act (FDICIA) imposes certain specific
restrictions on transactions and requires federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things,
FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. The federal banking agencies may require an institution to submit to an
acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institutions noncompliance with one or more standards.

Privacy

Federal banking
rules limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated 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 non-public information to non-affiliated 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 non-affiliated third parties.
| | - |  | ----------------------------------------------------------------------------------------------

These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. We have
implemented our privacy policies in accordance with the law.

In recent years, a number of states have implemented their own versions of
privacy laws. For example, in 2003, California adopted standards that are more restrictive than federal law, allowing bank customers the opportunity to bar financial companies from sharing information with their affiliates.

Impact of Change in Accounting Standards

The Company
currently and historically has accounted for its stock based compensation under Accounting Principles Board Opinion No. 25 (APB No. 25). The Company is not required to record compensation expense for equity-based awards under
APB No. 25, The Financial Accounting Standards Board issued Statement



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Financial Accounting Standards (SFAS) No. 123(R), Accounting for Stock-Based Compensation in December 2004 which requires the Company
to begin recording compensation expense for such awards based upon the fair value of such awards for all periods beginning after January 1, 2006.

Although the Company has historically provided in the notes to its financial statements pro forma earnings information showing what the Companys results would have been had the Company been recording
compensation expense for such awards, the amount of such expense was not reflected in its financial results. Consequently, when the Company begins recording equity-based award compensation expense in 2006, the period over period comparisons will be
affected by the inclusion of such expense in 2006 and the absence of such expense from 2005 and prior periods. Initial estimates for 2006 put the impact to earnings at approximately $227,000 pre-tax.

Where You Can Find More Information

Interested
readers can access the Companys annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 through the Investor Relations section of the Companys website at www.comnb.com. These reports can be accessed free of charge from the Companys website as soon as reasonably practicable after the Company electronically
files such materials with, or furnishes them to, the Securities and Exchange Commission (SEC). The SEC maintains an Internet site, www.sec.gov, in which all forms filed electronically may be accessed. 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.

Financial Information about Segments

Information regarding the Companys segments in which the
Company operates is contained in Note 23, Segment Information of our Consolidated Financial Statements for the years ended December 31, 2005, 2004 and 2003, which note is incorporated herein by this reference and is included as part
of Item 8. Financial Statements and Supplementary Data to this Form 10-K.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

An investment in our common stock
is subject to risks inherent to our business. The material risks and uncertainties that management believes may affect our business are described below. Before making an investment decision, you should carefully consider the risks and uncertainties
described below together with all of the other information included or incorporated by reference in this Annual Report. The risks and uncertainties described below are not the only ones facing our business. Additional risks and uncertainties that
management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This Annual Report is qualified in its entirety by these risk factors.

If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this
were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.

Risks
Associated with our Business.

We are highly dependent on real estate and a downturn in the real estate market could hurt our
business.

A significant portion of our loan portfolio is dependent on real estate. At December 31, 2005, real estate served as the
principal source of collateral with respect to approximately 86.1% of our loan portfolio. A decline in current economic conditions or rising interest rates could have an adverse effect on the demand for new loans,



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the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of real estate owned by us,
as well as our financial condition and results of operations in general and the market value of our common stock.

Acts of nature,
including earthquakes, floods and fires, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.

We have a concentration in commercial real estate loans.

We have a high concentration in commercial real estate or CRE loans. Approximately 59.9% of our lending portfolio can be classified as CRE lending. CRE loans generally involve a higher degree of credit risk than
residential mortgage lending due, among other things, to the large amounts loaned to individual borrowers. Losses incurred on loans to a small number of borrowers could have a material adverse impact on our income and financial condition. In
addition, unlike residential mortgage loans, commercial real estate loans generally depend on the cash flow from the property to service the debt. Cash flow may be significantly affected by general economic conditions.

Banking regulators have recently issued proposed guidance regarding institutions that have particularly high concentrations of CRE within their lending
portfolios. This guidance suggests that institutions that exceed certain levels of CRE lending may be required, in the future, to maintain higher capital ratios than institutions with lower concentrations in CRE lending if they do not have
appropriate risk management policies and practices in place. We are currently above the proposed CRE concentration level.If and when this proposed guidance becomes final, we may be subject to enhanced regulatory scrutiny and subject to
higher capital requirements.

Our earnings are highly dependent on our continued ability to originate, sell and service SBA loans.

Our earnings are highly dependent on our ability to generate new SBA loans. Increases in interest rates and other economic conditions
could result in decreased SBA loan demand as well as lower gain on sale.

Legislative and regulatory developments related to SBA lending
may adversely affect our revenue.

SBA lending is a federal government created and administered program. As such, legislative and
regulatory developments can affect the availability and funding of the program. This dependence on legislative funding and regulatory restrictions from time to time causes limitations and uncertainties with regard to the continued funding of SBA
loans, with a resulting potential adverse financial impact on our business.

For example, the SBA 7a program was halted briefly in January
2004, and when the program returned to operation, the maximum loan size had been decreased from $1.3 million to $750,000 per loan. Furthermore, the loans can no longer be secured by a second trust deed as previously allowed under the rules.
Currently, there are no planned or pending changes to the program known.

In 2003 we began to concentrate on the efficient origination of
our SBA 504 lending. In 2005, the SBA 504 product accounted for 62.7% of our SBA loan production, or $101.4 million, which is a significant increase over prior years. We believe we can now shift a significant portion of the demand for the larger
real estate secured loans from the 7a program to the SBA 504 loan product, which has been unaffected by the Governments limitations on 7a loans. As a result, if we generate fewer 7a loans and have less gain on sale revenue in future periods
due to governmental restrictions on 7a lending, we expect the increased income from our expanded SBA 504 portfolio will help lessen the impact of the restricted 7a program.

Our real estate lending exposes us to the risk of environmental liabilities.

In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these
properties. We may be held liable to a governmental entity or to



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third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or
former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental
liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

Our
business is subject to interest rate risk and changes in interest rates may adversely affect our performance and financial condition.

Our earnings are impacted by changing interest rates. Changes in interest rates impact the demand for new loans, the credit profile of our borrowers, the rates received on loans and securities and rates paid on deposits and borrowings. The
difference between the rates received on loans and securities and the rates paid on deposits and borrowings is known as interest rate spread. Given our current volume and mix of interest-bearing liabilities and interest-earning assets, we would
expect our interest rate spread to increase if interest rates rise and, conversely, to decline if interest rates fall. Increasing levels of competition in the banking and financial services business may decrease our net interest margin by forcing us
to offer lower lending interest rates and pay higher deposit interest rates. Although we believe our current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates and increasing competition may have an adverse
effect on our business, financial condition and results of operations.

A sustained decrease in market interest rates could adversely
affect our earnings. When interest rates decline, borrowers tend to refinance higher-rate, fixed-rate loans at lower rates, prepaying their existing loans. Under those circumstances, we would not be able to reinvest those prepayments in assets
earning interest rates as high as the rates on the prepaid loans. In addition, our commercial real estate and commercial loans, which carry interest rates that, in general, adjust in accordance with changes in the prime rate, will adjust to lower
rates. We are also significantly affected by the level of loan demand available in our market. The inability to make sufficient loans directly affects the interest income we earn. Lower loan demand will generally result in lower interest income
realized as we place funds in lower yielding investments.

Failure to successfully execute our strategy could adversely affect our
performance.

Our financial performance and profitability depends on our ability to execute our corporate growth strategy. Continued
growth, however, may present operating and other problems that could adversely affect our business, financial condition and results of operations. Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain
the level of profitability that we have recently experienced.

Factors that may adversely affect our ability to attain our long-term
financial performance goals include those stated elsewhere in this section, as well as:



| |  |  | Inability to control non-interest expense, including, but not limited to, rising employee and healthcare costs;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Inability to increase non-interest income; and
| | - |  | ----------------------------------------------



| |  |  | Continuing ability to expand, through de novo branching or finding acquisition targets at valuation levels we find attractive.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

Our primary market area is an increasingly competitive and overcrowded banking market. Our ability to achieve the growth outlined in our corporate
strategic goals may be dependent in part on an ability to grow through the successful addition of new branches or the identification and acquisition of potential targets at acceptable pricing levels either inside or outside of our primary
market. If we are unable to attract significant



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new business through strategic branching, or acquire new business through our acquisition of other banks, our growth in loans and deposits and,
therefore, our earnings, may be adversely affected.

Incorporating banks we recently merged with into our systems and corporate culture
may be difficult and more costly than we have estimated.

In October 2004 we acquired Cuyamaca Bank, N.A. and in August 2005 we acquired
Rancho Bernardo Community Bank. Details of these transactions are presented in Note 2  Merger Related Activity in the notes to consolidated financial statements included in Item 8 Financial Statements and Supplementary Data,
which is located elsewhere in this report. Following these mergers, we are now in operation in the additional cities of El Cajon, Encinitas, La Mesa, Rancho Bernardo and Santee. The mergers provide us with the opportunity to streamline our
back-office operations and improve the efficiency of our risk management processes. We are currently in the midst of integrating these banks into our systems to create a fully-integrated institution. Even though we have allocated significant
resources to the planning and execution of this integration, there can be no assurance that unforeseen issues will not adversely affect us. Failure to successfully complete this integration could result in the failure to achieve anticipated
operating efficiencies and loss of customers.

Potential acquisitions may disrupt our business and dilute stockholder value.

We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with
other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at
any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our stocks tangible book value and net income per common share may occur in connection with any future transaction.
Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and
results of operations.

We may seek merger or acquisition partners that are culturally similar and have experienced management and possess
either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. We do not currently have any specific plans, arrangements or understandings regarding such
expansion. We cannot say with any certainty that we will be able to consummate, or if consummated, successfully integrate, future acquisitions or that we will not incur disruptions or unexpected expenses in integrating such acquisitions. In
attempting to make such acquisitions, we anticipate competing with other financial institutions, many of which have greater financial and operational resources. Acquiring other banks, businesses, or branches involves various risks commonly
associated with acquisitions, including, among other things:



| |  |  | Potential exposure to unknown or contingent liabilities of the target company.
| | - |  | ------------------------------------------------------------------------------



| |  |  | Exposure to potential asset quality issues of the target company.
| | - |  | -----------------------------------------------------------------



| |  |  | Difficulty and expense of integrating the operations and personnel of the target company.
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Potential disruption to our business.
| | - |  | -------------------------------------



| |  |  | Potential diversion of managements time and attention.
| | - |  | -------------------------------------------------------



| |  |  | The possible loss of key employees and customers of the target company.
| | - |  | -----------------------------------------------------------------------



| |  |  | Difficulty in estimating the value of the target company.
| | - |  | ---------------------------------------------------------



| |  |  | Potential changes in banking or tax laws or regulations that may affect the target company.
| | - |  | -------------------------------------------------------------------------------------------



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Economic conditions in areas San Diego and Western Riverside Counties could adversely affect our
operations and/or cause us to sustain losses.

Our retail and commercial banking operations are concentrated primarily in San Diego and
western Riverside Counties. As a result of this geographic concentration, our results of operations depend largely upon economic conditions in this area. A significant source of risk arises from the possibility that losses will be sustained if a
significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. This risk increases when the economy is weak. We have adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit
portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations in general and the market value of our stock.

We face strong competition from financial service companies and other companies that offer banking services that could hurt our business.

The financial services business in our market areas is highly competitive. It is becoming increasingly competitive due to changes in
regulation, technological advances, and the accelerating pace of consolidation among financial services providers. We face competition both in attracting quality assets and deposits and in making loans. We compete for loans principally through the
interest rates and loan fees we charge and the efficiency and quality of services we provide. Increasing levels of competition in the banking and financial services business may reduce our market share, decrease loan demand, cause the prices we
charge for our services to fall, or decrease our net interest margin by forcing us to offer lower lending interest rates and pay higher deposit interest rates. Therefore, our results may differ in future periods depending upon the nature or level of
competition.

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks
through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or
transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as disintermediation, could result in the loss of fee income, as well as the loss of customer deposits and the related
income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

We may not be able to attract and retain skilled people.

Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most of our activities can be intense and we may not be able to hire people or to retain them.
The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified
replacement personnel.

Our internal operations are subject to a number of risks.

We are subject to certain operations risks, including, but not limited to, data processing system failures and errors, customer or employee fraud and
catastrophic failures resulting from terrorist acts or natural disasters. We maintain a system of internal controls to mitigate against such occurrences and maintain insurance coverage for such risks that are insurable, but should such an event
occur that is not prevented or detected by our internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on our business, financial condition or results of operations.



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Information Systems. We rely heavily on communications and information systems to conduct our
business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures
designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they
will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose
us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

Technological Advances. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of
technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and
services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a
material adverse impact on our business and, in turn, our financial condition and results of operations.

Severe Weather, Natural
Disasters, Acts of War or Terrorism and Other External Events. Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could
affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional
expenses. For example, Southern California is subject to earthquakes and fires. Operations in our market could be disrupted by both the evacuation of large portions of the population as well as damage and or lack of access to our banking and
operation facilities. While we have not experienced such an occurrence to date, other severe weather or natural disasters, acts of war or terrorism or other adverse external events may occur in the future. Although management has established
disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

We depend on cash dividends from our subsidiary bank to meet our cash obligations.

As a holding company, dividends from our subsidiary bank provide a substantial portion of our cash flow used to service the interest payments on our trust
preferred securities and our other obligations, including cash dividends. See Item 5  Market for Common Equity and Related Stockholder Matters. Various statutory provisions restrict the amount of dividends our subsidiary bank can
pay to us without regulatory approval.

Risks Associated with our Industry.

We are subject to government regulation that could limit or restrict our activities, which in turn could adversely impact our operations.

The financial services industry is regulated extensively. Federal and State regulation is designed primarily to protect the deposit
insurance funds and consumers, and not to benefit our shareholders. These regulations can sometimes impose significant limitations on our operations.

New laws and regulations or changes in existing laws and regulations or repeal of existing laws and regulations may adversely impact our business. For example, operating expenses were impacted by the $319,000 cost of
compliance with the Sarbanes-Oxley Section 404 provisions in the year ended December 31, 2005.



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Further, federal monetary policy, particularly as implemented through the Federal Reserve System,
significantly affects economic conditions for us.

New legislative and regulatory proposals may affect our operations and growth.

Proposals to change the laws and regulations governing the operations and taxation of, and federal insurance premiums paid by, banks
and other financial institutions and companies that control such institutions are frequently raised in the U.S. Congress, state legislatures and before bank regulatory authorities. The likelihood of any major changes in the future and the
impact such changes might have on us or our subsidiaries are impossible to determine. Similarly, proposals to change the accounting treatment applicable to banks and other depository institutions are frequently raised by the SEC, the federal banking
agencies, the IRS and other appropriate authorities. The likelihood and impact of any additional future changes in law or regulation and the impact such changes might have on us or our subsidiaries are impossible to determine at this time.

Risks Associated with our Stock.

Our Stock Trades Less Frequently Than Others.

Although our common stock is listed for trading on the
Nasdaq National Market, the trading volume in our common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in
the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading
volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.

Our Stock Price Is Affected by a Variety of Factors.

Stock price volatility may make it more difficult for you to resell
your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors discussed in this section, including, among other things:



| |  |  | Actual or anticipated variations in quarterly results of operations.
| | - |  | --------------------------------------------------------------------



| |  |  | Recommendations by securities analysts.
| | - |  | ---------------------------------------



| |  |  | Operating and stock price performance of other companies that investors deem comparable to our company.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | News reports relating to trends, concerns and other issues in the financial services industry.
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Perceptions in the marketplace regarding our company and/or its competitors.
| | - |  | ----------------------------------------------------------------------------

Our Common Stock Is Not An Insured Deposit.

Our common stock is not a bank deposit and, therefore,
is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this Risk Factors section and elsewhere
in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.

Our Certificate of Incorporation and By-Laws, As Well As Certain Banking Laws, May Have an Anti-Takeover Effect.

Provisions of our certificates of incorporation, bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult
for a third party to acquire us, even if doing so would be



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perceived to be beneficial to our shareholders. The combination of these provisions may hinder a non-negotiated merger or other business combination, which,
in turn, could adversely affect the market price of our common stock.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

None



|ITEM 2. | PROPERTIES
|------- | ----------

We occupy a permanent 32,924 square
foot headquarters facility located at 900 Canterbury Place, Escondido, California. Included in the 32,924 square feet is the Escondido branch, which occupies approximately 7,914 square feet. We have subleased approximately 2,448 square feet of this
facility to third party tenants; however as of the end of January 2006, we will occupy 100% of the building.

In addition to the Escondido
branch, we operate ten other full-service branches, eight of which are leased properties and two which we own. The owned branches are as follows: the El Cajon branch which was acquired as part of the Cuyamaca Bank acquisition, is approximately 5,200
square feet and is located at 368 Broadway, El Cajon, California. The fair value of the land, building and improvements at the acquisition date was $1.7 million. The Fallbrook branch is approximately 4,000 square feet and is located at 130 West
Fallbrook Street, Fallbrook, California. The purchase price for this branch was approximately $550,000 for the land, building and improvements. Leased branches are as follows: The Bonsall branch is located at 5256 South Mission Road, Suite 1001,
Bonsall, California. The office contains approximately 2,652 square feet and is leased pursuant to a lease expiring on December 31, 2006. The Encinitas branch is located at 372 North El Camino Real, Encinitas, California. The office contains
approximately 1,390 square feet and is leased pursuant to a lease expiring on June 30, 2006. The La Mesa branch is located at 8002 La Mesa Boulevard, La Mesa, California. The office contains approximately 4,737 square feet and is leased
pursuant to a lease expiring September 30, 2008. The Murrieta branch is located at 41301 Kalmia Avenue, Murrieta, California. The office contains approximately 5,080 square feet and is leased pursuant to a lease expiring on September 30,
2014. The Rancho Bernardo branch is located at 16495 Bernardo Center Drive, San Diego, California. The office contains approximately 6,444 square feet and is leased pursuant to a lease expiring June 30, 2010. The Santee branch is located at
9955 Mission Gorge Road, Santee, California. The office contains approximately 9,055 square feet and is leased pursuant to a lease expiring December 31, 2011. The Temecula branch is located at 27541 Ynez Road, Temecula, California. The office
contains approximately 6,338 square feet and is leased pursuant to a lease expiring March 31, 2012. The Vista branch is located at 1690 S. Melrose Drive, Vista, California. The office contains approximately 5,700 square feet and is leased
pursuant to a lease expiring on June 3, 2008. As part of the approval from the OCC to open our twelfth branch, we will be relocating our Corona loan production office to a full-service branch in the first quarter of 2006.

Aside from branches and its headquarters, the bank also leases the following facilities: The Cuyamaca Data Center, acquired as part of the Cuyamaca Bank
acquisition, is located at 7753 Mission Gorge Road, Santee California. The office contains 1,440 square feet and is leased pursuant to a lease expiring December 31, 2006. The Fallbrook Annex is located at 130 W. Fallbrook Street, Fallbrook,
California. The office contains approximately 1,300 square feet and is leased pursuant to a lease expiring March 31, 2007. The Rancho Bernardo Data Center, acquired as part of the Rancho Bernardo Community Bank acquisition, is located at 16479
Bernardo Center Drive, San Diego, California. The office contains approximately 1,472 square feet and is leased pursuant to a lease expiring May 31, 2006.

We also operate nine loan production offices of which seven are leased properties at 1875 Century Park East, 6thFloor, Suite 76, Los Angeles, California; 17011 Beach Blvd., Suite 900, Huntington Beach, California; 680 W. Shaw Avenue, Fresno, California; 4747 Caughlin Parkway, Suite 12, Reno, Nevada; 9633 South
48thStreet, Suite 195, Phoenix, Arizona.; 1500 Rosecrans Avenue, Suite 500, Manhattan Beach, California; and 1101



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California Avenue, Suite 22, Corona, California. The remaining two loan production offices located in Castro Valley, California and our second Phoenix,
Arizona office are operated out of the loan production officers residence.

The branch offices and the additional loan offices are
considered adequate for our current needs. Our rental expense for 2005 was $1.7 million. See Note 16, Rental Commitments of our Consolidated Financial Statements included in Item 8  Financial Statements and Supplementary
Data of this Report for certain additional information concerning our lease commitments.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

We are, from time to time,
subject to various pending and threatened legal actions which arise out of the normal course of business. We are not a party to any pending legal or administrative proceedings (other than ordinary routine litigation incidental to our business) and
no such proceedings are known to be contemplated.

There are no material proceedings adverse to the Company to which any director,
executive officer, affiliate of the Company or 5% shareholder of the Company, or any associate of any such director, officer, affiliate or 5% shareholder of the Company is a party, and none of the above persons has a material interest adverse to the
Company.



|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 2005.

PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

The Companys Common Stock trades on the NASDAQ National Market under the symbol CMBC. As of February 28, 2006, there were 624
stockholders of record of our common stock, and approximately 1,900 beneficial stockholders, including the stockholders of record. At such date, our directors and executive officers owned approximately 14.55% of our outstanding shares. There are no
other classes of common equity outstanding. The following table presents the high and low per share closing prices of our common stock and the dividends per share that we have paid for the periods indicated.



|               |  |      |       |      |   |           |  |     |      |      |   |           |  |   |       |  |   |     
|-------------- |  | ---- | ----- | ---- | - | --------- |  | --- | ---- | ---- | - | --------- |  | - | ----- |  | - | ----
|               |  | 2005 |       | 2004
|               |  | Low  |       | High |   | Dividends |  | Low |      | High |   | Dividends
|First Quarter  |  | $    | 31.04 |      | $ | 31.90     |  | $   | 0.10 |      | $ | 22.03     |  | $ | 22.70 |  | $ | 0.05
|Second Quarter |  | $    | 29.85 |      | $ | 30.50     |  | $   | 0.10 |      | $ | 23.56     |  | $ | 23.72 |  | $ | 0.05
|Third Quarter  |  | $    | 31.76 |      | $ | 32.19     |  | $   | 0.10 |      | $ | 25.75     |  | $ | 26.74 |  | $ | 0.05
|Fourth Quarter |  | $    | 35.22 |      | $ | 35.50     |  | $   | 0.10 |      | $ | 29.55     |  | $ | 30.00 |  | $ | 0.05

Dividend Policy

We are a legal entity separate and distinct from the Bank. Our stockholders are entitled to receive dividends when and as declared by our Board of Directors, out of funds legally available therefore, subject to the
restrictions set forth in the Delaware General Corporation Law (the Corporation Law). The Corporation Law provides that a corporation may dividend out of any surplus, and, if it has no surplus, out of any net profits for the fiscal year
in which the dividend was declared or for the preceding fiscal year (provided that the payment will not reduce capital below the amount of capital represented by all classes of shares having a preference upon the



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distribution of assets). Additionally, the agreements relating to our trust preferred securities prevent us from paying cash dividends in the event we elect
to defer interest payments on the trust preferred securities pursuant to such agreements.

The availability of operating funds for the
Company, and our ability to pay a cash dividend and service our obligation under our trust preferred securities, depends largely on the Banks ability to pay a cash dividend to the Company. The payment of cash dividends by the Bank is subject
to restrictions set forth in the National Bank Act. In general, dividends may not be paid from any of the Banks capital. Dividends must be paid out of available net profits, after deduction of all current operating expenses, actual losses,
accrued dividends on preferred stock, if any, and all federal and state taxes. Additionally a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus fund equals its common capital, or, if its surplus
fund does not equal its common capital, until at least one-tenth of such banks net profits, for the preceding two and one half years in the case of quarterly or semi-annual dividends, or the preceding two and one half-years in the case of an
annual dividend, are transferred to its surplus fund each time dividends are declared. The approval of the Comptroller is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits
for that year combined with its retained net profits of the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. Furthermore, the Comptroller also has authority to prohibit the payment of
dividends by a national bank when it determines such payment to be an unsafe and unsound banking practice.

Additionally, bank regulatory
agencies have authority to prohibit banks from engaging in activities that, in their respective opinions, constitute unsafe and unsound practices in conducting its business. It is possible, depending upon the financial condition of the bank in
question and other factors, that the bank regulatory agencies could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice. Further, the bank regulatory agencies have established
guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank may pay.

On February 26,
2004, the Company announced the initiation of a policy of paying quarterly cash dividends. The Company paid $0.05 per share for each quarter in 2004 and $0.10 per share for each quarter in 2005. From 1998 until the first quarter of 2004, the Company
had paid no cash dividends. Whether or not any cash dividends will be paid in the future will be determined by our Board of Directors after consideration of various factors.Community Bancorps and the Banks profitability and
regulatory capital ratios, in addition to other financial conditions, will be key factors considered by our Board of Directors in making such determinations regarding the payment of dividends. In connection with the $35.0 million in outstanding
trust preferred securities, we have the right to defer the payment of interest on these securities. If we were to exercise such deferral right, we are restricted during such deferral period from paying any dividends on our common stock.



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

Selected Consolidated Financial Data
 Community Bancorp Inc.

The selected financial information in the table below as of and for the years ended December 31,
2005, 2004, 2003, 2002 and 2001 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.



|                                                             |  |                                               |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------------------------ |  | --------------------------------------------- | ------- | - | ------- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                             |  | At or for the Years Ended December 31,        |        
|                                                             |  | 2005(1)                                       |         |   | 2004(1) |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                             |  | (dollars in thousands, except per share data) |        
|Consolidated Statements of Earnings Data:                    |  |                                               |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                                              |  | $                                             | 53,856  |   |         | $ | 32,631  |      |  | $ | 26,786  |   |  | $    | 24,815  |   |  | $ | 25,205  |  
|Interest expense                                             |  |                                               | 12,815  |   |         |   | 5,664   |      |  |   | 6,170   |   |  |      | 8,695   |   |  |   | 12,481  |  
|                                                             |  |                                               |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income                                          |  |                                               | 41,041  |   |         |   | 26,967  |      |  |   | 20,616  |   |  |      | 16,120  |   |  |   | 12,724  |  
|Provision for loan losses                                    |  |                                               | 1,231   |   |         |   | 1,176   |      |  |   | 1,639   |   |  |      | 1,561   |   |  |   | 1,470   |  
|                                                             |  |                                               |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income after provision for loan losses          |  |                                               | 39,810  |   |         |   | 25,791  |      |  |   | 18,977  |   |  |      | 14,559  |   |  |   | 11,254  |  
|Other operating income                                       |  |                                               | 10,023  |   |         |   | 9,660   |      |  |   | 7,691   |   |  |      | 6,501   |   |  |   | 2,946   |  
|Other operating expense                                      |  |                                               | 28,978  |   |         |   | 22,089  |      |  |   | 17,177  |   |  |      | 15,921  |   |  |   | 12,315  |  
|                                                             |  |                                               |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Income before income tax provision                           |  |                                               | 20,855  |   |         |   | 13,362  |      |  |   | 9,491   |   |  |      | 5,139   |   |  |   | 1,885   |  
|Income tax provision                                         |  |                                               | 8,259   |   |         |   | 4,996   |      |  |   | 3,595   |   |  |      | 2,133   |   |  |   | 783     |  
|                                                             |  |                                               |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                                   |  | $                                             | 12,596  |   |         | $ | 8,366   |      |  | $ | 5,896   |   |  | $    | 3,006   |   |  | $ | 1,102   |  
|                                                             |  |                                               |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income per share  basic                                 |  | $                                             | 2.29    |   |         | $ | 1.83    |      |  | $ | 1.51    |   |  | $    | 0.86    |   |  | $ | 0.36    |  
|Net income per share  diluted                               |  | $                                             | 2.17    |   |         | $ | 1.71    |      |  | $ | 1.42    |   |  | $    | 0.84    |   |  | $ | 0.35    |  
|Consolidated Balance Sheet Data:                             |  |                                               |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash and cash equivalents                                    |  | $                                             | 17,107  |   |         | $ | 14,842  |      |  | $ | 17,940  |   |  | $    | 11,814  |   |  | $ | 10,856  |  
|Federal funds sold                                           |  | $                                             | 20,645  |   |         | $ | 9,565   |      |  | $ | 17,925  |   |  | $    | 9,690   |   |  | $ | 28,090  |  
|Investments and other securities                             |  | $                                             | 61,279  |   |         | $ | 34,148  |      |  | $ | 25,607  |   |  | $    | 38,930  |   |  | $ | 11,691  |  
|Loans, net of fees, costs, discounts, and reserves           |  | $                                             | 727,299 |   |         | $ | 532,012 |      |  | $ | 394,211 |   |  | $    | 339,471 |   |  | $ | 305,686 |  
|Total assets                                                 |  | $                                             | 908,550 |   |         | $ | 641,606 |      |  | $ | 476,698 |   |  | $    | 415,698 |   |  | $ | 370,223 |  
|Total deposits                                               |  | $                                             | 710,473 |   |         | $ | 549,766 |      |  | $ | 393,126 |   |  | $    | 363,952 |   |  | $ | 333,334 |  
|Long term debt                                               |  | $                                             | 37,203  |   |         | $ | 17,640  |      |  | $ | 14,697  |   |  | $    | 10,004  |   |  | $ | 10,000  |  
|Total stockholders equity                                   |  | $                                             | 96,258  |   |         | $ | 63,118  |      |  | $ | 37,081  |   |  | $    | 20,573  |   |  | $ | 16,501  |  
|Other Financial Data:                                        |  |                                               |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Dividends per common share                                   |  | $                                             | 0.40    |   |         | $ | 0.20    |      |  | $ |        |   |  | $    |        |   |  | $ |        |  
|Tangible book value per share (adjusted for stock dividends) |  | $                                             | 8.56    |   |         | $ | 8.85    |      |  | $ | 8.50    |   |  | $    | 5.81    |   |  | $ | 4.75    |  
|Stockholders equity to assets                               |  |                                               | 10.59   | % |         |   | 9.84    | %    |  |   | 7.78    | % |  |      | 4.95    | % |  |   | 4.46    | %
|Return on average assets                                     |  |                                               | 1.61    | % |         |   | 1.55    | %    |  |   | 1.34    | % |  |      | 0.77    | % |  |   | 0.34    | %
|Return on average equity                                     |  |                                               | 16.37   | % |         |   | 18.84   | %    |  |   | 21.34   | % |  |      | 16.00   | % |  |   | 7.79    | %
|Return on average tangible equity (2)                        |  |                                               | 25.63   | % |         |   | 20.11   | %    |  |   | 21.34   | % |  |      | 16.00   | % |  |   | 7.79    | %
|Net interest margin                                          |  |                                               | 5.80    | % |         |   | 5.40    | %    |  |   | 5.00    | % |  |      | 4.40    | % |  |   | 4.18    | %
|Efficiency ratio                                             |  |                                               | 56.92   | % |         |   | 60.08   | %    |  |   | 60.81   | % |  |      | 70.25   | % |  |   | 78.59   | %
|Credit Quality Data:                                         |  |                                               |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Non-accrual loans to total gross loans                       |  |                                               | 0.49    | % |         |   | 0.74    | %    |  |   | 0.24    | % |  |      | 0.65    | % |  |   | 1.03    | %
|Non-performing assets to total assets                        |  |                                               | 0.41    | % |         |   | 0.63    | %    |  |   | 0.30    | % |  |      | 0.54    | % |  |   | 1.38    | %
|Loan loss allowances to total gross loans                    |  |                                               | 1.32    | % |         |   | 1.38    | %    |  |   | 1.30    | % |  |      | 1.14    | % |  |   | 0.90    | %
|Loan loss allowances to loans held for investment            |  |                                               | 1.68    | % |         |   | 1.71    | %    |  |   | 1.58    | % |  |      | 1.36    | % |  |   | 1.03    | %
|Loan loss allowances to non-accrual loans                    |  |                                               | 267.97  | % |         |   | 186.44  | %    |  |   | 542.14  | % |  |      | 175.02  | % |  |   | 88.00   | %
|Net loan losses to average loans                             |  |                                               | 0.04    | % |         |   | 0.01    | %    |  |   | 0.09    | % |  |      | 0.16    | % |  |   | 0.23    | %
|Credit Quality Data (net of govt guarantees):               |  |                                               |         |   |         |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Non-accrual loans to total gross loans                       |  |                                               | 0.28    | % |         |   | 0.39    | %    |  |   | 0.07    | % |  |      | 0.19    | % |  |   | 0.37    | %
|Non-performing assets to total assets                        |  |                                               | 0.24    | % |         |   | 0.33    | %    |  |   | 0.15    | % |  |      | 0.16    | % |  |   | 0.82    | %
|Loan loss allowance to total gross loans                     |  |                                               | 1.32    | % |         |   | 1.38    | %    |  |   | 1.30    | % |  |      | 1.26    | % |  |   | 1.07    | %
|Loan loss allowance to non-accrual loans                     |  |                                               | 467.16  | % |         |   | 351.99  | %    |  |   | 1922.51 | % |  |      | 606.00  | % |  |   | 245.00  | %

---

|(1) | Due to the Cuyamaca and Rancho Bernardo mergers in 2004 and 2005, figures are not comparable.
|--- | ---------------------------------------------------------------------------------------------

|(2) | Return on average tangible equity is calculated as net income divided by average stockholders equity less average goodwill. Return on average tangible equity is a non-GAAP
financial measure.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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As required by Regulation G, a reconciliation of return on average tangible equity to the most directly
comparable measure under GAAP, which is return on average equity, is provided below for the years ended December 31, 2005, 2004 and 2003:



|                        |  |                                        |        |        |       |   |      |   |        |  |       |      |  |        |        |  |       |  
|----------------------- |  | -------------------------------------- | ------ | ------ | ----- | - | ---- | - | ------ |  | ----- | ---- |  | ------ | ------ |  | ----- | -
|                        |  | At or for the Years Ended December 31, |       
|                        |  | (dollars in thousands)                 |       
|                        |  | 2005                                   |        | Return |       |   | 2004 |   | Return |  |       | 2003 |  | Return |       
|Net income              |  | $                                      | 12,596 |        |       |   |      | $ | 8,366  |  |       |      |  | $      | 5,896  |  |       |  
|                        |  |                                        |        |        |       |  
|Average Equity          |  |                                        | 76,954 |        | 16.37 | % |      |   | 44,411 |  | 18.84 | %    |  |        | 27,634 |  | 21.34 | %
|Less: Average Goodwill  |  |                                        | 27,813 |        |       |   |      |   | 2,805  |  |       |      |  |        | 0      |  |       |  
|                        |  |                                        |        |        |       |   |      |   |        |  |       |      |  |        |        |  |       |  
|Average Tangible Equity |  | $                                      | 49,141 |        | 25.63 | % |      | $ | 41,606 |  | 20.11 | %    |  | $      | 27,634 |  | 21.34 | %
|                        |  |                                        |        |        |       |   |      |   |        |  |       |      |  |        |        |  |       |  



|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 audited consolidated financial statements and footnotes thereto,
included in Item 8  Financial Statements and Supplementary Data of this Report, as well as the information in Forward-Looking Information and Item 1A  Risk Factors. Unless the context requires
otherwise, the terms Company, us, we, and our refers to Community Bancorp Inc. on a consolidated basis.

Executive Overview:

We are a Southern California-based bank holding company for Community National Bank. We provide
traditional commercial banking services to small and medium-sized businesses and individuals in the communities primarily along the Interstate 15 corridor in San Diego County and western Riverside County. According to U.S. Census data, San Diego and
Riverside Counties were among the top ten fastest growing counties in the United States measured by numerical population growth from April 1, 2000 to July 1, 2004.

Key Factors in Evaluating Financial Condition and Operating Performance

As a publicly traded
community bank holding company, we focus on several key factors including:



| |  |  | Return to our stockholders
| | - |  | --------------------------



| |  |  | Return on average assets
| | - |  | ------------------------



| |  |  | Development of core revenue streams, including net interest income and other operating income
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Asset quality
| | - |  | -------------



| |  |  | Asset growth
| | - |  | ------------



| |  |  | Operating efficiency
| | - |  | --------------------

The comparability of our financial
information is affected by our two acquisitions. Operating results include the operations of acquired entities from the dates of acquisition. We acquired Cuyamaca Bank, N.A. on October 1, 2004 and Rancho Bernardo Community Bank on
August 19, 2005. For a further discussion on these acquisitions, see Note 2, Merger-related Activity of our Consolidated Financial Statements included in Item 8  Financial Statements and Supplementary Data of this
Report.

Return to Our Stockholders.Our return to our stockholders is measured in the form of return on average tangible
equity (ROTE), which is total equity less goodwill, and the potential valuation of the stock price relative to our returns and earnings per share (EPS). Return on average tangible equity is a non-GAAP financial measure within
the meaning of Regulation G promulgated by the SEC. Management believes that the



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presentation of return on average tangible equity provides useful information to investors regarding financial performance because this measure excludes
goodwill created from the Cuyamaca and Rancho Bernardo mergers. Our ROTE for the year ended December 31, 2005 was 25.63% compared to 20.11% and 21.34% for the years ended December 31, 2004 and 2003, respectively. The increase in ROTE is
due to the increase in net income combined with the decrease in average tangible equity outstanding as a result of the mergers with Cuyamaca Bank in the fourth quarter of 2004 and Rancho Bernardo Community Bank in the third quarter of 2005. Our net
income for the year ended December 31, 2005 increased 50.6% to $12.6 million compared to $8.4 million and $5.9 million for the years ended December 31, 2004 and 2003, respectively. Net income improved due to a 39.4% increase in net
interest income and other operating income, partially offset by a 31.2% increase in operating expenses. Earnings per basic share increased to $2.29 for the year ended December 31, 2005 compared to $1.83 and $1.51 for the years ended
December 31, 2004 and 2003, respectively. Earnings per diluted share increased to $2.17 for the year ended December 31, 2005 compared to $1.71 and $1.42 for the years ended December 31, 2004 and 2003, respectively. The increase in EPS
was due to the increase in net income, partially offset by the increase in average shares outstanding as a result of the two mergers.

We
also initiated a $0.05 per share quarterly cash dividend during the first quarter of 2004. We paid $0.05 per share for each quarter in 2004. In January 2005, we declared a $0.10 per share cash dividend, which was paid each quarter to stockholders of
record.

Return on Average Assets. Our return on average assets (ROA) is a measure we use to compare our
performance with other banks and bank holding companies. Our ROA for the year ended December 31, 2005 was 1.61% compared to 1.55% and 1.34% for the years ended December 31, 2004 and 2003, respectively. The increase in ROA is due to the
increase in net income relative to our increase in average assets.

Development of Core Revenue Streams. Over the past
several years, we have focused on not only improving net income, but improving the consistency of our revenue streams in order to create more predictable future earnings when combined with the effect of the two acquisitions and reduce the effect of
changes in our operating environment on our net income. Specifically, we have focused on net interest income through a variety of processes, including increases in average interest earning assets as a result of loan generation, retention and an
improved net interest margin by focusing on core deposit growth. As a result, our net interest income before provision for loan losses increased 52.2% to $41.0 million for the year ended December 31, 2005 compared to $27.0 million and $20.6
million for the years ended December 31, 2004 and 2003, respectively. Our net interest margin has also improved to 5.80% for the year ended December 31, 2005 compared to 5.40% and 5.00% for the years ended December 31, 2004 and 2003,
respectively.

We have also modestly improved our other operating income. Other operating income for the year ended December 31, 2005
was $10.0 million compared to $9.7 million and $7.7 million for the years ended December 31, 2004 and 2003, respectively. The increase was due to an increase in loans sales in 2005 to $86.6 million compared to $84.6 million in 2004. As a
result, the gain on sale increased to $7.0 million for the year ended December 31, 2005 as compared to $6.7 million for 2004. As a percentage of total revenue (net interest income before provision plus non-interest income), our gain on sale of
loans decreased to 13.6% compared to 18.2% in 2004.

While we consider gain on sale of loans a part of our core revenue stream, it is
subject to changes in the environment in which we operate, including the effects of government regulation. Specifically, changes in the funding of the SBA 7a program on an annual basis can lead to temporary halts in the program itself and
fundamental changes in the structure of the program. These changes have had minimal impact on our origination of SBA 7a loans. See Item 1A  Risk Factors.

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 a percentage of total loans and total assets, and is a key element in estimating our future performance. As a percentage of gross loans, non-performing loans decreased to 0.49% as of
December 31, 2005 compared to 0.74% as of December 31, 2004. As of December 31, 2005, we had twenty-two loans to nine borrowers on non-accrual status compared to



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seven loans to seven borrowers at December 31, 2004. Non-performing assets decreased to $3.7 million as of December 31, 2005 compared to $4.0
million as of December 31, 2004. Net of government guarantees, non-performing assets as a percent of total assets were 0.24% as of December 31, 2005 compared to 0.33% as of December 31, 2004. Management maintains certain loans that
have been brought current by the borrower (less than 30 days delinquent) on non-accrual status until such time management has determined that the loans are likely to remain current in future periods. Net loan charge offs to average net loans totaled
0.04% for the year ended December 31, 2005 compared to 0.01% for the year ended December 31, 2004.

Asset Growth.
As revenues from both net interest income and other operating income are a function of asset size, the continued growth in assets has a direct impact in increasing net income and therefore ROTE and ROA. 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 41.6% to $908.6 million as of December 31, 2005 compared to $641.6 million as of
December 31, 2004. Total deposits increased 29.2% to $710.5 million as of December 31, 2005 compared to $549.8 million as of December 31, 2004. Total retail banking deposits increased 31.9% to $645.2 million as of December 31,
2005 compared to $489.2 million as of December 31, 2004. If we exclude the effect of the acquisitions, assets grew internally approximately 26.8% since December 31, 2004. Excluding acquisitions and wholesale deposits, retail deposits
increased 11.5% since December 31, 2004 and gross loans increased 25.7% over the same period. Maintaining retail deposit growth commensurate with our asset growth rate would avoid our needing to rely on more expensive funding sources.

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 before provision for loan losses plus other operating income, excluding gains or losses on repossessed assets) improved to 56.92% for the year ended
December 31, 2005 compared to 60.08% and 60.81% for the years ended December 31, 2004 and 2003, respectively. The decrease (improvement) in the efficiency ratio is due to the increase in revenues exceeding the increase in operating
expenses. Net interest income before provision plus other operating income increased 39.4% to $51.0 million for the year ended December 31, 2005, while operating expenses increased 31.2% to $29.0 million for the same period as the result of the
acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank and normal increases in operating expenses.

Critical Accounting Policies and Estimates

The Companys discussion and analysis of its results of operations, financial condition and liquidity are based upon our
consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable. Material estimates that are
particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of the servicing assets and interest-only strips, the valuation of repossessed assets and the valuation of
goodwill and other intangible assets. Actual results could differ from those estimates. On an on-going basis, we review these estimates to reflect any change in our business or as new information becomes available.

Allowance for loan losses. We have established a methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an overall allowance for loan losses as well as specific allowances that are tied to individual loans. Our methodology for assessing the appropriateness of the allowance
consists of several key elements, which include the formula allowance and a specific allowance for identified problem loans.

In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The allowance is increased by provisions charged against earnings and reduced by net



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loan charge offs. Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be
uncollectible. Recoveries are generally recorded only when cash payments are received.

The allowance for loan losses is
maintained to cover estimated loan losses in the loan portfolio. The responsibility for the review of our assets and the determination of the adequacy of the general valuation allowance lies with management and our Directors Loan Committee.
They assign the loss reserve ratio for each type of asset and review the adequacy of the allowance at least quarterly based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees,
concentration in loan types and other relevant factors.

Specific valuation allowances are established to absorb losses on
loans for which full collectibility may not be reasonably assured as prescribed in SFAS No. 114 (as amended by SFAS No. 118). The amount of the specific allowance is based on the estimated value of the collateral securing the loans and
other analyses pertinent to each situation. Loans are identified for specific allowances from information provided by several sources, including asset classification, third party reviews, delinquency reports, periodic updates to financial
statements, public records and industry reports. All loan types are subject to specific allowances once identified as an impaired or non-performing loan. Loans not subject to specific allowances are placed into pools by one of the following
collateral types: commercial real estate, one- to four-family real estate, aircraft, consumer home equity, consumer other, construction and other commercial loans. All non-specific reserves are allocated to one of these categories. Estimates of
identifiable losses are reviewed continually and, generally, a provision for losses is charged against operations on a monthly basis as necessary to maintain the allowance at an appropriate level. Management presents an analysis of the allowance for
loan losses to our Board of Directors on a quarterly basis.

In order to determine the appropriate allowance for loan
losses, our management and Directors Loan Committee meet quarterly to review the portfolio. To the extent that any of these conditions are evidenced by identifiable problem credit or portfolio segment as of the evaluation date, the estimate of
such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss
estimates based upon the most recent information that has become available.

We perform a migration analysis on a quarterly
basis using an eight quarter history of charge offs to average loans by collateral type. Our management and Directors Loan Committee have also established reserve levels for each category based upon loan type, as certain loan types may not
have incurred losses or have had minimal losses in the eight quarter migration analysis. Our management and Directors Loan Committee will consider trends in delinquencies and potential charge offs by loan type, market for the underlying real
estate or other collateral, trends in industry types, economic changes and other risks. In general, there are no reserves established for the government guaranteed portion of loans outstanding.

Servicing assets, servicing liabilities and interest-only strips. Determining the fair value of our servicing assets, servicing
liabilities and interest-only strips requires us to anticipate future prepayment speeds. Our loan servicing portfolio is subject to prepayment risks, which subjects our servicing assets, servicing liabilities and interest-only strips to impairment
risk. The fair value is estimated using a discounted cash flow model. The discounted cash flow model calculates the present value of the estimated future net cash flows of the servicing portfolio based on various assumptions, such as servicing
costs, expected prepayment speeds and discount rates. This model is highly sensitive to changes in assumptions. Changes in anticipated prepayment speeds, in particular, result in substantial fluctuations in the estimated fair value. If actual
prepayment experience differs from the anticipated rates used in our model, this difference may result in a material change in fair value. While our model estimates a value, a specific value used is based on a variety of factors, such as documented
observable data and anticipated changes in market conditions. All assumptions are based on standards used by market participants in valuing these assets and liabilities.

Goodwill and Other Intangibles.Net assets of companies acquired in purchase transactions are recorded at fair value at the date of
acquisition. The historical cost basis of individual assets and liabilities



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are adjusted to reflect their fair value. Identified intangibles are amortized on an accelerated or straight-line basis over the period benefited. Goodwill
is not amortized but is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment. Other intangible assets subject to amortization are evaluated for impairment in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss will be recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible is
considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.

Distribution of Average
Assets, Liabilities and Stockholders Equity; Interest Rates and Interest Differentials

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.



|                                               |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|---------------------------------------------- |  | ---------------------------------- | ------- | ------------------- | ---- | -------------------- |  | ---- | -------------- |  | ------------------- | ------- | -------------------- | - | ------ | -------------- | ---- | ------------------- |  | -------------------- | ------- |  | - | ------ |  | ---- | -
|                                               |  | December 31,                       |        
|                                               |  | 2005                               |         |                     | 2004 |                      |  | 2003 |               
|                                               |  | AverageBalance                     |         | InterestEarned/Paid |      | AverageRate/Yield(2) |  |      | AverageBalance |  | InterestEarned/Paid |         | AverageRate/Yield(2) |   |        | AverageBalance |      | InterestEarned/Paid |  | AverageRate/Yield(2) |        
|                                               |  | (unaudited) (dollars in thousands) |        
|Average assets:                                |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Securities and time deposits at other banks    |  | $                                  | 48,851  |                     | $    | 2,002                |  | 4.10 | %              |  | $                   | 25,687  |                      | $ | 1,008  |                | 3.92 | %                   |  | $                    | 29,749  |  | $ | 1,063  |  | 3.57 | %
|Fed funds sold                                 |  |                                    | 8,673   |                     |      | 263                  |  | 3.03 | %              |  |                     | 16,713  |                      |   | 240    |                | 1.44 | %                   |  |                      | 13,749  |  |   | 143    |  | 1.04 | %
|Loans:                                         |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Commercial                                     |  |                                    | 47,130  |                     |      | 3,380                |  | 7.17 | %              |  |                     | 24,557  |                      |   | 1,549  |                | 6.31 | %                   |  |                      | 19,708  |  |   | 1,198  |  | 6.08 | %
|Real Estate                                    |  |                                    | 554,412 |                     |      | 44,644               |  | 8.05 | %              |  |                     | 396,386 |                      |   | 27,194 |                | 6.86 | %                   |  |                      | 314,613 |  |   | 21,794 |  | 6.93 | %
|Aircraft                                       |  |                                    | 30,328  |                     |      | 2,043                |  | 6.74 | %              |  |                     | 29,649  |                      |   | 2,071  |                | 6.99 | %                   |  |                      | 29,581  |  |   | 2,182  |  | 7.38 | %
|Consumer                                       |  |                                    | 18,674  |                     |      | 1,524                |  | 8.16 | %              |  |                     | 5,755   |                      |   | 569    |                | 9.89 | %                   |  |                      | 5,154   |  |   | 406    |  | 7.88 | %
|                                               |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Total loans                                    |  |                                    | 650,544 |                     |      | 51,591               |  | 7.93 | %              |  |                     | 456,347 |                      |   | 31,383 |                | 6.88 | %                   |  |                      | 369,056 |  |   | 25,580 |  | 6.93 | %
|                                               |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Total earning assets                           |  |                                    | 708,068 |                     |      | 53,856               |  | 7.61 | %              |  |                     | 498,747 |                      |   | 32,631 |                | 6.54 | %                   |  |                      | 412,554 |  |   | 26,786 |  | 6.49 | %
|Non earning assets                             |  |                                    | 74,844  |                     |      |                      |  |      |                |  |                     | 40,582  |                      |   |        |                |      |                     |  |                      | 28,564  |  |   |        |  |      |  
|                                               |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Total average assets                           |  | $                                  | 782,912 |                     |      |                      |  |      |                |  | $                   | 539,329 |                      |   |        |                |      |                     |  | $                    | 441,118 |  |   |        |  |      |  
|                                               |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Average liabilities and shareholders equity:  |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Interest bearing deposits:                     |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Savings and interest bearing accounts          |  | $                                  | 206,050 |                     |      | 1,782                |  | 0.86 | %              |  | $                   | 138,514 |                      |   | 681    |                | 0.49 | %                   |  | $                    | 104,457 |  |   | 746    |  | 0.71 | %
|Time deposits                                  |  |                                    | 299,626 |                     |      | 8,414                |  | 2.81 | %              |  |                     | 236,810 |                      |   | 3,905  |                | 1.65 | %                   |  |                      | 210,518 |  |   | 4,354  |  | 2.07 | %
|                                               |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Total interest bearing deposits                |  |                                    | 505,676 |                     |      | 10,196               |  | 2.02 | %              |  |                     | 375,324 |                      |   | 4,586  |                | 1.22 | %                   |  |                      | 314,975 |  |   | 5,100  |  | 1.62 | %
|Short-term borrowing                           |  |                                    | 26,326  |                     |      | 891                  |  | 3.38 | %              |  |                     | 9,400   |                      |   | 116    |                | 1.23 | %                   |  |                      | 19,550  |  |   | 313    |  | 1.60 | %
|Long-term debt (1)                             |  |                                    | 25,474  |                     |      | 1,728                |  | 6.78 | %              |  |                     | 15,420  |                      |   | 962    |                | 6.24 | %                   |  |                      | 11,279  |  |   | 757    |  | 6.71 | %
|                                               |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Total interest bearing liabilities             |  |                                    | 557,476 |                     |      | 12,815               |  | 2.30 | %              |  |                     | 400,144 |                      |   | 5,664  |                | 1.42 | %                   |  |                      | 345,804 |  |   | 6,170  |  | 1.78 | %
|Demand deposits                                |  |                                    | 137,951 |                     |      |                      |  |      |                |  |                     | 87,548  |                      |   |        |                |      |                     |  |                      | 61,745  |  |   |        |  |      |  
|Accrued expenses and other liabilities         |  |                                    | 10,531  |                     |      |                      |  |      |                |  |                     | 7,226   |                      |   |        |                |      |                     |  |                      | 5,935   |  |   |        |  |      |  
|Net shareholders equity                       |  |                                    | 76,954  |                     |      |                      |  |      |                |  |                     | 44,411  |                      |   |        |                |      |                     |  |                      | 27,634  |  |   |        |  |      |  
|                                               |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Total average liabilities shareholders equity |  | $                                  | 782,912 |                     | $    | 41,041               |  |      |                |  | $                   | 539,329 |                      | $ | 26,967 |                |      |                     |  | $                    | 441,118 |  | $ | 20,616 |  |      |  
|                                               |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Net interest spread                            |  |                                    |         |                     |      |                      |  | 5.31 | %              |  |                     |         |                      |   |        |                | 5.12 | %                   |  |                      |         |  |   |        |  | 4.71 | %
|                                               |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  
|Net interest margin                            |  |                                    |         |                     |      |                      |  | 5.80 | %              |  |                     |         |                      |   |        |                | 5.40 | %                   |  |                      |         |  |   |        |  | 5.00 | %
|                                               |  |                                    |         |                     |      |                      |  |      |                |  |                     |         |                      |   |        |                |      |                     |  |                      |         |  |   |        |  |      |  

---

|(1) | Long-term debt shown net of the effect of the interest rate swap.
|--- | -----------------------------------------------------------------

|(2) | Calculated as Interest Earned/Paid divided by Average Balance for the year presented.
|--- | -------------------------------------------------------------------------------------



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##### Table of Contents

The table below sets forth certain information regarding changes in our interest income and interest
expense for the periods indicated. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to: (i) changes in volume (change in average volume multiplied by old rate);
(ii) changes in rate (change in rate multiplied by old average volume); (iii) changes due to both rate and volume (change in rate multiplied by the change in average volume) are allocated to rate.



|                                            |  |                        |        |   |               |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|------------------------------------------- |  | ---------------------- | ------ | - | ------------- | - | ----- | ----- |  | - | ------ | - |  | ---- | ----- | - | ----- | - | ------ | - |  | - | ----- | -
|                                            |  | 2005 vs. 2004          |        |   | 2004 vs. 2003 |  
|                                            |  | (dollars in thousands) |       
|For the Years Ended December 31,            |  | Volume                 |        |   | Rate          |   |       | Total |  |   | Volume |   |  | Rate |       |   | Total |  
|Interest earning assets:                    |  |                        |        |   |               |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Securities and time deposits at other banks |  | $                      | 948    |   |               | $ | 46    |       |  | $ | 994    |   |  | $    | (159  | ) |       | $ | 104    |   |  | $ | (55   | )
|Federal funds sold                          |  |                        | (243   | ) |               |   | 266   |       |  |   | 23     |   |  |      | 43    |   |       |   | 54     |   |  |   | 97    |  
|Loans:                                      |  |                        |        |   |               |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Commercial                                  |  |                        | 1,620  |   |               |   | 211   |       |  |   | 1,831  |   |  |      | 306   |   |       |   | 45     |   |  |   | 351   |  
|Real Estate                                 |  |                        | 12,734 |   |               |   | 4,717 |       |  |   | 17,451 |   |  |      | 5,619 |   |       |   | (219   | ) |  |   | 5,400 |  
|Aircraft                                    |  |                        | 48     |   |               |   | (77   | )     |  |   | (29    | ) |  |      | 5     |   |       |   | (116   | ) |  |   | (111  | )
|Consumer                                    |  |                        | 1,055  |   |               |   | (101  | )     |  |   | 954    |   |  |      | 60    |   |       |   | 103    |   |  |   | 163   |  
|                                            |  |                        |        |   |               |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Total loans                                 |  |                        | 15,457 |   |               |   | 4,750 |       |  |   | 20,207 |   |  |      | 5,990 |   |       |   | (187   | ) |  |   | 5,803 |  
|                                            |  |                        |        |   |               |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Total earning assets                        |  |                        | 16,162 |   |               |   | 5,062 |       |  |   | 21,224 |   |  |      | 5,874 |   |       |   | (29    | ) |  |   | 5,845 |  
|                                            |  |                        |        |   |               |  
|Interest bearing liabilities:               |  |                        |        |   |               |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Interest bearing deposits:                  |  |                        |        |   |               |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Savings and interest bearing accounts       |  |                        | 588    |   |               |   | 513   |       |  |   | 1,101  |   |  |      | 167   |   |       |   | (232   | ) |  |   | (65   | )
|Time deposits                               |  |                        | 1,763  |   |               |   | 2,747 |       |  |   | 4,510  |   |  |      | 434   |   |       |   | (883   | ) |  |   | (449  | )
|                                            |  |                        |        |   |               |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Total interest bearing deposits             |  |                        | 2,351  |   |               |   | 3,260 |       |  |   | 5,611  |   |  |      | 601   |   |       |   | (1,115 | ) |  |   | (514  | )
|Short term borrowing                        |  |                        | 574    |   |               |   | 201   |       |  |   | 775    |   |  |      | (125  | ) |       |   | (72    | ) |  |   | (197  | )
|Long term debt                              |  |                        | 683    |   |               |   | 83    |       |  |   | 766    |   |  |      | 258   |   |       |   | (53    | ) |  |   | 205   |  
|                                            |  |                        |        |   |               |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Total interest bearing liabilities          |  |                        | 3,608  |   |               |   | 3,544 |       |  |   | 7,152  |   |  |      | 734   |   |       |   | (1,240 | ) |  |   | (506  | )
|                                            |  |                        |        |   |               |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  
|Change in net interest income               |  | $                      | 12,554 |   |               | $ | 1,518 |       |  | $ | 14,072 |   |  | $    | 5,140 |   |       | $ | 1,211  |   |  | $ | 6,351 |  
|                                            |  |                        |        |   |               |   |       |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |       |  

RESULTS OF OPERATIONS

For the Year Ended December 31, 2005 and 2004



|                                                    |  |                |        |      |   |       
|--------------------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                                    |  | December 31,  
|                                                    |  | 2005           |        | 2004
|                                                    |  | (in thousands)
|Interest income                                     |  | $              | 53,856 |      | $ | 32,631
|Interest expense                                    |  |                | 12,815 |      |   | 5,664 
|                                                    |  |                |        |      |   |       
|Net interest income                                 |  |                | 41,041 |      |   | 26,967
|Provision for loan losses                           |  |                | 1,231  |      |   | 1,176 
|                                                    |  |                |        |      |   |       
|Net interest income after provision for loan losses |  |                | 39,810 |      |   | 25,791
|Other operating income                              |  |                | 10,023 |      |   | 9,660 
|Other operating expenses                            |  |                | 28,978 |      |   | 22,089
|                                                    |  |                |        |      |   |       
|Income before income tax provision                  |  |                | 20,855 |      |   | 13,362
|Income tax provision                                |  |                | 8,259  |      |   | 4,996 
|                                                    |  |                |        |      |   |       
|Net income                                          |  | $              | 12,596 |      | $ | 8,366 
|                                                    |  |                |        |      |   |       
|Earnings per share:                                 |  |                |        |      |   |       
|Basic                                               |  | $              | 2.29   |      | $ | 1.83  
|                                                    |  |                |        |      |   |       
|Fully diluted                                       |  | $              | 2.17   |      | $ | 1.71  
|                                                    |  |                |        |      |   |       



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##### Table of Contents

Net Income

Net income increased to $12.6 million for the year ended December 31, 2005 compared to $8.4 for the year ended December 31, 2004. Basic earnings per share were $2.29 and $1.83 for the years ended December 31, 2005 and 2004,
respectively. Diluted earnings per share were $2.17 and $1.71 for the years ended December 31, 2005 and 2004, respectively. ROTE was 25.63% for the year ended December 31, 2005 compared to 20.11% for the year ended December 31, 2004.
ROTE is a non-GAAP financial measure. For a reconciliation of ROTE to the most directly comparable GAAP measure, return on average equity, see Item 6  Selected Financial Data. The ROA for the years ended December 31, 2005 and
2004 was 1.61% and 1.55%, respectively.

The increase in net income and profitability for the year ended December 31, 2005 was mainly
due to the increase in net interest income, partially offset by an increase in other operating expense, as a result of the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank and increased compensation for loan production. Net interest
income increased due to a $209.3 million increase in average interest earning assets and a 40 basis point expanding net interest margin. For a further discussion of the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank, see Note 2,
Merger-related Activity included in Item 8  Financial Statements and Supplementary Data of this Report.

Net Interest
Income

Net interest income is the most significant component of our consolidated income from operations. Net interest income is the
difference (the interest rate spread) between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume of, and interest
rate earned on, interest earning assets and the volume of, and interest rate paid on, interest bearing liabilities. Net interest income for the year ended December 31, 2005 increased to $41.0 million, compared to $27.0 million for the year
ended December 31, 2004. Net interest income is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume of
and interest rate earned on interest earning assets and the volume of and interest rate paid on interest bearing liabilities. Our loan portfolio experienced a 105 basis point increase in average yield primarily due to the impact of increases in the
prime rate to 7.25% at December 31, 2005 from 5.25% at December 31, 2004 as well as the acquisition of Cuyamaca Bank and Rancho Bernardo Community Bank.

Net Interest Income before Provision for Estimated Loan Losses

Net interest income before provision for estimated loan
losses for the year ended December 31, 2005 was $41.0 million compared to $27.0 million for the year ended December 31, 2004. The increase in 2005 was primarily due to the increase in the average interest earning assets to $708.1 million,
combined with an increase in the net interest margin of 5.80% for the year ended December 31, 2005 compared to $498.7 million with a net interest margin of 5.40% for the year ended December 31, 2004. The increase in average interest
earning assets is due to the internal growth and the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank. The increase in net interest margin is the result of the lower increase in cost of liabilities in 2005 as compared to the increase
in yield on interest earning assets. The yield on interest earning assets increased 107 basis points to 7.61% for the year ended December 31, 2005, compared to 6.54% for the year ended December 31, 2004. The cost of interest bearing
liabilities increased 88 basis points to 2.30% for the year ended December 31, 2005 compared to 1.42% for the year ended December 31, 2004. For a discussion of the re-pricing of our assets and liabilities, see Item 7A Quantitative
and Qualitative Disclosure about Market Risk.

Interest Income

Interest income for the year ended December 31, 2005 increased to $53.9 million, compared to $32.6 million for the year ended December 31, 2004. The increase was primarily due to the 42.0% increase in the
average balance of interest earning assets, combined with the increase in the yield on those assets. Due to the



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internal growth and the acquisition of Cuyamaca Bank and Rancho Bernardo Community Bank, average interest earning assets increased to $708.1 million for the
year ended December 31, 2005 compared to $498.7 million for the year ended December 31, 2004. The yield on interest earning assets increased to 7.61% for the year ended December 31, 2005 compared to 6.54% for the year ended
December 31, 2004. The largest single component of interest earning assets was real estate loans receivable, which had an average balance of $554.4 million with a yield of 8.05% for the year ended December 31, 2005, compared to $396.4
million with a yield of 6.86% for the year ended December 31, 2004. The $158.0 million increase in the average balance of real estate loans receivable was attributable to the strategic plan of the expansion of the Company combined with the
acquisition of Cuyamaca Bank during the fourth quarter of 2004 and Rancho Bernardo Community Bank in the third quarter of 2005. For further discussion, see Item 7A Quantitative and Qualitative Disclosures about Market Risk.

Interest Expense

Interest expense for the year
ended December 31, 2005 increased to $12.8 million compared to $5.7 million for the year ended December 31, 2004. The increase was due to the $157.3 million increase in average interest bearing liabilities, combined with the 88 basis point
increase in the cost of those liabilities. Due to internal growth and the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank, average interest-bearing liabilities increased to $557.5 million with a cost of 2.30% for the year ended
December 31, 2005 from $400.1 million with a cost of 1.42% for the year ended December 31, 2004. The increase in the average rate for 2005 when compared with 2004 is due to the larger increase in time deposits relative to the increase in
average savings and interest bearing accounts, an increase in the cost of these deposits due to current market conditions and the effect of the interest rate swap hedge of $10.0 million in long-term debt. Average time deposits, the largest component
of interest bearing liabilities, increased to $299.6 million with a cost of 2.81% for the year ended December 31, 2005 from $236.8 million with a cost of 1.65% for the year ended December 31, 2004. The cost of average time deposits for
2005 increased when compared with 2004 not only due to an increase in market interest rates but also the subsequent re-pricing of CDs during this period.

Other average borrowings (consisting of FHLB borrowings) increased to $51.8 million with a cost of 5.06% for the year ended December 31, 2005 compared to $24.8 million with a cost of 4.34% for the year ended
December 31, 2004 primarily due to the increased loan demand in 2005 compared to 2004 in excess of our deposit growth. In 2000, we issued a $10.0 million fixed rate long-term debt Trust Preferred Security. In December 2002, the Company entered
into an interest rate swap agreement with a third party related to the $10.0 million Trust Preferred Security, which in effect changed the interest rate from an 11.0% fixed rate coupon to a six month floating rate that resets semi-annually at 5.455%
over the six month LIBOR. As a result of the increase in LIBOR partially offset by the addition of $20.0 million in trust preferred issued at a 5.85% fixed rate, the cost of other borrowings consisting primarily of Trust Preferred Securities,
increased to 6.78% for the year ended December 31, 2005 compared to 6.24% for the year ended December 31, 2004.

In addition to
the increase in cost of interest bearing deposits and other borrowings, the increase in non-interest bearing demand deposits has contributed significantly to the lowered cost of funds. Average demand deposits increased 57.6% to an average $138.0
million for the year ended December 31, 2005 from $87.5 million for the year ended December 31, 2004. The cost of deposits, including demand deposits and interest bearing deposits, increased to 1.58% for the year ended December 31,
2005 compared to 0.99% for the year ended December 31, 2004. Average transaction accounts (including interest bearing checking, demand deposits, money market accounts and savings accounts), increased 52.2% to $344.0 million for the year ended
December 31, 2005 compared to $226.1 million for the year ended December 31, 2004. The increase in average transaction accounts in 2005 compared to 2004 is primarily due to the acquisition of Cuyamaca Bank during the fourth quarter of 2004
and Rancho Bernardo Community Bank in the third quarter of 2005. The cost of funds, including interest bearing liabilities and demand deposits, increased 68 basis points to 1.84% for the year ended December 31, 2005 compared to 1.16% for the
year ended December 31, 2004.



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##### Table of Contents

Provision for Estimated Loan Losses

The provision for estimated loan losses remained constant at $1.2 million for the year ended December 31, 2005 and December 31, 2004. For further information, see Item 1  Business  Summary
of Loan Loss Experience and Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition  loans both in this Form 10-K.

Other Operating Income

Other operating income
represents non-interest types of revenue and is comprised of net gain on sale of loans, loan servicing fees, customer service charges and other fee income. Other operating income was $10.0 million for the year ended December 31, 2005 compared
to $9.7 million for the year ended December 31, 2004. The increase in other operating income for the year ended December 31, 2005 was primarily due to a $285,000 increase in gain on sale of loans and $256,000 increase in customer service
fees.

Other Operating Expenses

Other
operating expenses are non-interest types of expenses and are incurred in our normal course of business. Salaries and employee benefits, occupancy, professional services, depreciation and amortization, data processing, office and other expenses are
the major categories of our operating expenses. Operating expenses increased to $29.0 million for the year ended December 31, 2005 compared to $22.1 million for the year ended December 31, 2004. The increase in operating expense was due to
significant growth and expansion, including the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank, with the combined addition of five retail banking offices, and the addition of a de novo branch in Murrieta, California, including
increases in incentive compensation as a result of higher loan production.

As a percentage of average assets other operating expenses
decreased to 3.7% for the year ended December 31, 2005 compared to 4.1% for the year ended December 31, 2004. The efficiency ratio, measured as the percentage of operating expenses to net interest income before provision for loan losses
plus other operating income, excluding gains or losses on repossessed assets, improved to 56.92% for the year ended December 31, 2005 compared to 60.08% for the year ended December 31, 2004.

Salaries and employee benefits increased 43.7% to $16.4 million for the year ended December 31, 2005 compared to $11.4 million for the year ended
December 31, 2004. The increase in salaries and employee benefits can be attributed to the addition of six branches, including five acquired in the Cuyamaca Bank and Rancho Bernardo Community Bank mergers, normal cost increases for salaries and
benefits including increased incentive based compensation due to increased loan production and profitability. As of December 31, 2005, we had 246 full-time equivalent employees, compared to 203 as of December 31, 2004. Incentive based
compensation (based on loan production, deposit generation and profitability), not including tax related expense, totaled $4.6 million at December 31, 2005 compared to $3.5 million at December 31, 2004.

Occupancy expense increased to $2.3 million for the year ended December 31, 2005 compared to $1.8 million for the year ended December 31, 2004.
The increase in occupancy expense was due to the two acquisitions which added five retail banking offices, the addition of a de novo branch in Murrieta, California, as well as normal consumer product index (CPI) increases in rent.

Professional services, including legal, accounting, regulatory and consulting, decreased to $2.0 million in 2005 from $3.0 million for the year ended
December 31, 2004. The decrease in professional services was due to the prior year start up costs for complying with Section 404 of the Sarbanes-Oxley Act which totaled $1.5 million in 2004.

Depreciation and amortization expense increased to $1.3 million for the year ended December 31, 2005 compared to $821,000 for the year ended
December 31, 2004. The increase in depreciation and amortization



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##### Table of Contents

expense was due to the increase in the amount of net premises and equipment, which increased from $6.7 million to $7.0 million as a result of the two
acquisitions and the increase in depreciation of premises and equipment from normal additions.

Data processing expense increased to
$934,000 for the year ended December 31, 2005 compared to $765,000 for the year ended December 31, 2004. Data processing expense increased due to the increase in both deposits and loans as a result of the two acquisitions, as well as
normal cost increases.

Office expenses increased to $910,000 for the year ended December 31, 2005 compared to $710,000 for the year
ended December 31, 2004. Office expenses increased due to the overall expansion of our business as noted above combined with the integration of Cuyamaca Bank and Rancho Bernardo Community Bank into our operations.

Increases in other operating expenses are due to the expansion of our operations, including the two acquisitions and the addition of a de novo branch in
Murrieta, California. Other expenses increased to $5.1 million for the year ended December 31, 2005 compared to $3.5 million for the year ended December 31, 2004. Other operating expenses include the increase for the amortization of the
core deposit intangibles of $385,000.

Provision for Income Taxes

The effective income tax rate was 39.6% for the year ended December 31, 2005 compared to 37.4% for the year ended December 31, 2004. The effective tax rate increase was relative to the increase in pretax
income, which moved the Company into a higher tax bracket, combined with a decrease in income tax credits. The Companys usage of tax credits approximated $355,000 and $430,000 during the years ended December 31, 2005 and 2004,
respectively. See Financial Condition  Investments section of this discussion for further information. Provisions for income taxes totaled $8.3 million for the year ended December 31, 2005 compared to $5.0 million for the year
ended December 31, 2004. See Footnote 13, Income Taxes included in Item 8  Financial Statements and Supplementary Data of this report.

Divisions of the Company

In order to better present and monitor our performance, we have separated
the Bank into two distinct divisions, Banking and SBA 7a. The separation of income and expenses, as well as assets and liabilities allows us and investors to better understand our performance.

Banking Division

Performance
in the Banking Division is measured in terms of profitability, asset growth, asset quality, deposit growth, market share and other standards. For the year ended December 31, 2005, the Banking Division had a pre-tax profit of $14.8 million, with
net interest income of $38.2 million, other operating income of $3.6 million, and other operating expenses of $25.5 million. The improved profitability is a result of an increase in net interest income largely due to the increase in total interest
earning assets. Total assets of the Banking Division increased to $817.9 million at December 31, 2005 due to strong loan growth and the expansion of our operations, including the acquisition of Rancho Bernardo Community Bank with one additional
banking office.



45



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##### Table of Contents

The following table shows the total assets and results of operations for the Banking Division as of and
for the years indicated.



|                                                     |  |      |         |      |   |        
|---------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                     |  | 2005 |         | 2004
|Interest income                                      |  | $    | 45,796  |      | $ | 27,344 
|Interest expense                                     |  |      | 7,596   |      |   | 2,704  
|                                                     |  |      |         |      |   |        
|Net interest income before provision for loan losses |  |      | 38,200  |      |   | 24,640 
|Provision (recovery) for loan losses                 |  |      | 1,450   |      |   | 776    
|Other operating income                               |  |      | 3,599   |      |   | 3,348  
|Other operating expense                              |  |      | 25,527  |      |   | 18,482 
|                                                     |  |      |         |      |   |        
|Income before income tax provision                   |  |      | 14,822  |      |   | 8,730  
|Income tax provision                                 |  |      | 5,737   |      |   | 3,074  
|                                                     |  |      |         |      |   |        
|Net income                                           |  | $    | 9,085   |      | $ | 5,656  
|                                                     |  |      |         |      |   |        
|Assets employed at year end                          |  | $    | 817,855 |      | $ | 536,152
|                                                     |  |      |         |      |   |        

SBA 7a Division

The SBA 7a Division performance is measured in terms of profitability, asset quality, asset size, loan production and servicing revenue. SBA 7a loans have
provided a recurring revenue stream from three sources  interest earned on retained loans, gain on sale of loans sold and servicing of loans sold to others. For the year ended December 31, 2005, the SBA 7a Division had a pre-tax profit of
$6.0 million, with net interest income of $2.8 million, other operating income of $6.4 million, and other operating expenses of $3.5 million. Net income improved due to an increase in the amount of 7a loans sold combined with improved net interest
income due to the retention of loans, partially offset by a higher cost of operations. The SBA 7a Division experienced a recovery of provision for loan losses of $219,000 due to a 16.7% decrease in gross loans, net of government guarantees, from
$65.2 million at December 31, 2004 to $54.3 million at December 31, 2005. Total assets of the SBA 7a Division were $90.7 million at December 31, 2005 as a result of slight decrease in loan production from $65.9 million 2004 to $60.3
million in 2005 combined with an increase in loans sales from $49.0 million 2004 to $59.7 million in 2005.

The following chart illustrates
the earnings, asset and loan production growth of the SBA 7a Division as of and for the years indicated.



|                                                     |  |      |        |   |      |   |        
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | -------
|                                                     |  | 2005 |        |   | 2004
|Interest income                                      |  | $    | 8,060  |   |      | $ | 5,287  
|Interest expense                                     |  |      | 5,219  |   |      |   | 2,960  
|                                                     |  |      |        |   |      |   |        
|Net interest income before provision for loan losses |  |      | 2,841  |   |      |   | 2,327  
|Provision (recovery) for loan losses                 |  |      | (219   | ) |      |   | 400    
|Other operating income                               |  |      | 6,424  |   |      |   | 6,312  
|Other operating expense                              |  |      | 3,451  |   |      |   | 3,607  
|                                                     |  |      |        |   |      |   |        
|Income before income tax provision                   |  |      | 6,033  |   |      |   | 4,632  
|Income tax provision                                 |  |      | 2,522  |   |      |   | 1,922  
|                                                     |  |      |        |   |      |   |        
|Net income                                           |  | $    | 3,511  |   |      | $ | 2,710  
|                                                     |  |      |        |   |      |   |        
|Assets employed at year end                          |  | $    | 90,695 |   |      | $ | 105,454
|                                                     |  |      |        |   |      |   |        



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Years Ended December 31, 2004 and 2003



|                                                    |  |                |        |      |   |       
|--------------------------------------------------- |  | -------------- | ------ | ---- | - | ------
|                                                    |  | December 31,  
|                                                    |  | 2004           |        | 2003
|                                                    |  | (in thousands)
|Interest income                                     |  | $              | 32,631 |      | $ | 26,786
|Interest expense                                    |  |                | 5,664  |      |   | 6,170 
|                                                    |  |                |        |      |   |       
|Net interest income                                 |  |                | 26,967 |      |   | 20,616
|Provision for loan losses                           |  |                | 1,176  |      |   | 1,639 
|                                                    |  |                |        |      |   |       
|Net interest income after provision for loan losses |  |                | 25,791 |      |   | 18,977
|Other operating income                              |  |                | 9,660  |      |   | 7,691 
|Other operating expense                             |  |                | 22,089 |      |   | 17,177
|                                                    |  |                |        |      |   |       
|Income before income tax provision                  |  |                | 13,362 |      |   | 9,491 
|Income tax provision                                |  |                | 4,996  |      |   | 3,595 
|                                                    |  |                |        |      |   |       
|Net income                                          |  | $              | 8,366  |      | $ | 5,896 
|                                                    |  |                |        |      |   |       
|Earnings per share:                                 |  |                |        |      |   |       
|Basic                                               |  | $              | 1.83   |      | $ | 1.51  
|                                                    |  |                |        |      |   |       
|Fully Diluted                                       |  | $              | 1.71   |      | $ | 1.42  
|                                                    |  |                |        |      |   |       

Net Income

Net income increased to $8.4 million for the year ended December 31, 2004 compared to $5.9 million for the year ended December 31, 2003. Net income increased as a result of the increase in net interest
income, non-interest income and decrease in provision for loan losses, partially offset by the increase in other operating expenses.

Net
interest income increased due to an increase in average interest earning assets and an expanding net interest margin. Non-interest income increased primarily due to an increase in the net gain on sale of loans. Other operating expenses increased as
a result of our expansion and increased loan production.

Net Interest Income

Net interest income is the most significant component of our consolidated income from operations. Although the prime rate increased to 5.25% from 4.00% in
2004, our loan portfolio experienced a 5 basis point decrease in average yield due to the impact of floors used in the past several years. As of December 31, 2003, 55.3% of our variable rate portfolio was at its floor and required a 129 basis
point increase in prime before this group of loans would experience an increase in average yield. As of December 31, 2004, only 32.3% of our variable rate portfolio was at its floor and would require a 20 basis point increase in prime before
this group of loans would experience an increase in average yield.

Net Interest Income before Provision for Estimated Loan Losses

Net interest income before provision for estimated loan losses for the year ended December 31, 2004 was $27.0 million compared to $20.6 million for
the year ended December 31, 2003. The increase in 2004 was primarily due to the increase in the average interest earning assets, combined with an increase in the net interest margin. Average interest earning assets were $498.7 million with a
net interest margin of 5.40% for the year ended December 31, 2004 compared to $412.6 million with a net interest margin of 5.00% for the year ended December 31, 2003. The increase in net interest margin is the result of the decline in cost
of liabilities in 2004 and an increase in yield on interest earning assets. The yield on interest earning assets increased 5 basis points to



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6.54% for the year ended December 31, 2004, compared to 6.49% for the year ended December 31, 2003. The cost of interest bearing liabilities
declined 36 basis points to 1.42% for the year ended December 31, 2004 compared to 1.78% for the year ended December 31, 2003. For a discussion of the re-pricing of our assets and liabilities, see Item 7A  Quantitative and
Qualitative Disclosure about Market Risk.

Interest Income

Interest income for the year ended December 31, 2004 increased to $32.6 million, compared to $26.8 million for the year ended December 31, 2003. The increase was primarily due to an increase in the average
balance of interest earning assets and an increase in the yield on those assets. Average interest earning assets increased to $498.7 million for the year ended December 31, 2004 compared to $412.6 million for the year ended December 31,
2003. The yield on interest earning assets increased to 6.54% for the year ended December 31, 2004 compared to 6.49% for the year ended December 31, 2003. The largest single component of interest earning assets was real estate loans
receivable, which had an average balance of $396.4 million with a yield of 6.86% for the year ended December 31, 2004, compared to $314.6 million with a yield of 6.93% for the year ended December 31, 2003. The increase in the average
balance of real estate loans receivable was attributable to the expansion of the Company as part of the Companys strategic plan combined with the acquisition of Cuyamaca Bank during the fourth quarter of 2004. For a further discussion, see
Item 7A  Quantitative and Qualitative Disclosures about Market Risk.

Interest Expense

Interest expense for the year ended December 31, 2004 decreased to $5.7 million compared to $6.2 million for the year ended December 31, 2003.
The decrease was due to the 36 basis point decrease in cost of liabilities, partially offset by an increase in average interest bearing liabilities. Average interest-bearing liabilities increased to $400.1 million with a cost of 1.42% for the year
ended December 31, 2004 from $345.8 million with a cost of 1.78% for the year ended December 31, 2003. The decrease in the average rate for 2004 when compared with 2003 is due to the increase in average savings and interest bearing
accounts relative to the increase in time deposits, a decrease in the cost of these deposits due to current market conditions and the effect of the interest rate swap hedging $10.0 million in long-term debt. Average time deposits increased to $236.8
million with a cost of 1.65% for the year ended December 31, 2004 from $210.5 million with a cost of 2.07% for the year ended December 31, 2003. The cost of average time deposits for 2004 declined when compared with 2003 due to the decline
in market interest rates and the subsequent re-pricing of CDs during this period.

Other average borrowings decreased to $24.8 million with
a cost of 4.34% for the year ended December 31, 2004 compared to $30.8 million with a cost of 3.47% for the year ended December 31, 2003. We issued $10.0 million in fixed rate long-term debt Trust Preferred Securities in 2000. In December
2002, the Company entered into an interest rate swap agreement with a third party, which in effect changed the interest rate from an 11.0% fixed rate coupon to a six month floating rate that resets semi-annually at 5.455% over the six month LIBOR.
As a result of the interest rate swap, the cost of the Trust Preferred Securities declined to 6.24% for the year ended December 31, 2004 compared to 6.71% for the year ended December 31, 2003.

In addition to the decrease in cost of interest bearing deposits and other borrowings, the increase in non-interest bearing demand deposits has
contributed significantly to the lowered cost of funds. Demand deposits increased 41.8% to an average $87.5 million for the year ended December 31, 2004 from $61.7 million for the year ended December 31, 2003. The cost of deposits,
including demand deposits and interest bearing deposits, decreased to 0.99% for the year ended December 31, 2004 compared to 1.35% for the year ended December 31, 2003. Average transaction accounts (including interest bearing checking,
demand deposits, money market accounts and savings accounts), increased 36.0% to $226.1 million for the year ended December 31, 2004 compared to $166.2 million for the year ended December 31, 2003. The cost of funds, including interest
bearing liabilities and demand deposits, was reduced 35 basis points to 1.16% for the year ended December 31, 2004 compared to 1.51% for the year ended December 31, 2003. The increase in average transaction accounts (interest



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bearing checking, demand deposits, money market and savings accounts) in 2004 compared to 2003 is partially the result of the acquisition of Cuyamaca Bank
during the fourth quarter of 2004.

Provision for Estimated Loan Losses

The provision for estimated loan losses decreased to $1.2 million for the year ended December 31, 2004 compared to $1.6 million for the year ended
December 31, 2003. For further information, see Item 1  Business  Summary of Loan Loss Experience and Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations 
Financial Condition  Loans both in this Form 10-K.

Other Operating Income

Other operating income represents non-interest types of revenue and is comprised of net gain on sale of loans, loan servicing fees, customer service
charges and other fee income. Other operating income was $9.7 million for the year ended December 31, 2004 compared to $7.7 million for the year ended December 31, 2003. The increase in other operating income for the year ended
December 31, 2004 was due to an increase in gains on sale of loans, loan servicing fees, customer service charges and other fee income. During the year ended December 31, 2004, net gain on sale of loans increased to $6.7 million compared
to $5.2 million for the year ended December 31, 2003 due to an increase in loans sold.

Loan servicing income totaled $829,000 for the
year ended December 31, 2004 compared to $666,000 for the year ended December 31, 2003 due to an increase in the amount of loans serviced for others as a result of the increase in loans sold.

Customer service charges increased to $831,000 for the year ended December 31, 2004 compared to $735,000 for the year ended December 31, 2003
due to an increase in transaction accounts noted above.

Other fee income totaled $1.5 million for the year ended December 31, 2004
compared to $1.1 million for the year ended December 31, 2003. Other fee income is composed of fees from the brokering of mortgage and SBA related loans, deposit related fees not included in customer service charges, loan fees from construction
related lending, gains and losses on investments and interest only strips, and various other fees collected in the due course of business.

Other
Operating Expenses

Other operating expenses are non-interest types of expenses and are incurred in our normal course of business.
Salaries and employee benefits, occupancy, professional services, depreciation, data processing, office and other expenses are the major categories of other operating expenses. Other operating expenses increased to $22.1 million for the year ended
December 31, 2004 compared to $17.2 million for the year ended December 31, 2003. Other operating expenses were adversely impacted by the cost of compliance with SOX, which totaled $1.5 million in 2004 compared to none in 2003.

As a percentage of average assets other operating expenses increased to 4.1% for the year ended December 31, 2004 compared to 3.9% for the year
ended December 31, 2003. The efficiency ratio, measured as the percentage of operating expenses to net interest income before provision for loan losses plus non-interest income, excluding gains or losses on repossessed assets, improved to
60.08% for the year ended December 31, 2004 compared to 60.81% for the year ended December 31, 2003.

Salaries and employee
benefits increased 18.9% to $11.4 million for the year ended December 31, 2004 compared to $9.6 million for the year ended December 31, 2003. The increase in salaries and employee benefits can be attributed to cost increases for salaries
and benefits plus increased incentive based compensation due to increased loan production and profitability combined with the acquisition of Cuyamaca Bank during the fourth quarter of 2004.



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Occupancy expense increased to $1.8 million compared to $1.3 million in 2003. The increase in occupancy
expense from 2003 to 2004 was the result of rent increases, the acquisition of Cuyamaca Bank and the addition of a new de novo branch in Murrieta, CA.

Professional services, including legal, accounting, regulatory and consulting, increased to $3.0 million in 2004 from $1.1 million for the year ended December 31, 2003. The increase in professional services
expense was the result of complying with SOX which totaled $1.5 million in 2004 combined with the cost of consultants utilized to improve efficiency in the SBA department.

Depreciation and amortization expense increased to $821,000 for the year ended December 31, 2004 compared to $799,000 million for the year ended
December 31, 2003.

Data processing expense remained stable at $765,000 for the year ended December 31, 2004 compared to $762,000
for the year ended December 31, 2003.

Office expenses increased to $710,000 for the year ended December 31, 2004 compared to
$663,000 for the year ended December 31, 2003. Office expenses increased due to the overall expansion of our business as noted above combined with the cost of incorporating Cuyamaca Bank into our operations.

Increases in other operating expenses are due to the normal expansion of our operations. Other expenses increased to $3.5 million for the year ended
December 31, 2004 compared to $3.0 million for the year ended December 31, 2003.

Provision for Income Taxes

The effective income tax rate was 37.4% for the year ended December 31, 2004 compared to 37.9% for the year ended December 31, 2003. The
effective tax rate declined in 2004 when compared to 2003 due to investments which generate income tax credits. See Financial Condition  Investments section of this discussion for further information. Provisions for income taxes
totaled $5.0 million for the year ended December 31, 2004 compared to $3.6 million for the year ended December 31, 2003. See Item 8  Financial Statements and Supplementary Data  Footnote 12 for further information.

Divisions of the Company

Banking Division

Performance in the Banking Division is measured in terms of profitability, asset growth, asset
quality, deposit growth, market share and other standards. For the year ended December 31, 2004, the Banking Division had a pre-tax profit of $8.7 million, with net interest income of $5.4 million, other operating income of $3.3 million, and
other operating expenses of $18.5 million. The improved profitability is a result of an increase in net interest income largely due to the decline in interest expense and increase in total interest earning assets. The reduction in interest expense
is due to the increase in transaction accounts and reduced cost of Certificates of Deposit (CDs). Total assets of the Banking Division increased to $536.1 million at December 31, 2004 due to the strong loan growth.



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The following table shows the total assets and results of operations for the Banking Division as of and
for the years indicated.



|                                                     |  |      |         |      |   |        
|---------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                     |  | 2004 |         | 2003
|Interest income                                      |  | $    | 27,344  |      | $ | 22,868 
|Interest expense                                     |  |      | 2,704   |      |   | 3,999  
|                                                     |  |      |         |      |   |        
|Net interest income before provision for loan losses |  |      | 24,640  |      |   | 18,869 
|Provision (recovery) for loan losses                 |  |      | 776     |      |   | 1,185  
|Other operating income                               |  |      | 3,348   |      |   | 2,709  
|Other operating expense                              |  |      | 18,482  |      |   | 14,174 
|                                                     |  |      |         |      |   |        
|Income before income tax provision                   |  |      | 8,730   |      |   | 6,219  
|Income tax provision                                 |  |      | 3,074   |      |   | 2,253  
|                                                     |  |      |         |      |   |        
|Net income                                           |  | $    | 5,656   |      | $ | 3,966  
|                                                     |  |      |         |      |   |        
|Assets employed at year end                          |  | $    | 536,152 |      | $ | 402,992
|                                                     |  |      |         |      |   |        

SBA 7a Division

The SBA 7a Division performance is measured in terms of profitability, asset quality, asset size, loan production and servicing revenue. SBA 7a loans have
provided a recurring revenue stream from three sources  interest earned on retained loans, gain on sale of loans sold and servicing of loans sold to others. For the year ended December 31, 2004, the SBA 7a Division had a pre-tax profit of
$4.6 million, with net interest income of $2.3 million, other operating income of $6.3 million, and other operating expenses of $3.6 million. Net income improved due to an increase in premiums paid on loans sold combined with an improved net
interest income due to the retention of loans, partially offset by a higher cost of operations. As a result of the retention of SBA 7a loans, total assets of the SBA 7a Division were $105.4 million at December 31, 2004.

The following chart illustrates the earnings, asset and loan production growth of the SBA 7a Division for each of the years indicated.



|                                                     |  |      |         |      |   |       
|---------------------------------------------------- |  | ---- | ------- | ---- | - | ------
|                                                     |  | 2004 |         | 2003
|Interest income                                      |  | $    | 5,287   |      | $ | 3,918 
|Interest expense                                     |  |      | 2,960   |      |   | 2,171 
|                                                     |  |      |         |      |   |       
|Net interest income before provision for loan losses |  |      | 2,327   |      |   | 1,747 
|Provision (recovery) for loan losses                 |  |      | 400     |      |   | 454   
|Other operating income                               |  |      | 6,312   |      |   | 4,982 
|Other operating expense                              |  |      | 3,607   |      |   | 3,003 
|                                                     |  |      |         |      |   |       
|Income before income tax provision                   |  |      | 4,632   |      |   | 3,272 
|Income tax provision                                 |  |      | 1,922   |      |   | 1,342 
|                                                     |  |      |         |      |   |       
|Net income                                           |  | $    | 2,710   |      | $ | 1,930 
|                                                     |  |      |         |      |   |       
|Assets employed at year end                          |  | $    | 105,454 |      | $ | 73,706
|                                                     |  |      |         |      |   |       

FINANCIAL CONDITION

Summary of Changes in Consolidated Balance Sheets

December 31, 2005 compared to December 31, 2004

We experienced continued increases in loans and deposits during 2005. As of December 31, 2005 total assets were $908.6 million, an increase of 41.6%
compared to $641.6 million as of December 31, 2004.



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Contributing to this growth, we completed a merger during the year which increased our assets by $125.8 million, loans by $80.6 million and deposits by
$114.2 million. Total gross loans increased to $740.4 million as of December 31, 2005 compared to $543.5 million as of December 31, 2004. Total deposits increased to $710.5 million as of December 31, 2005 compared to $549.8 million as
of December 31, 2004. Long-term debt increased to $37.2 million as of December 31, 2005 compared to $17.6 million as of December 31, 2004. Stockholders equity increased to $96.3 million as of December 31, 2005 compared to
$63.1 million as of December 31, 2004. Tangible equity (stockholders equity, net of goodwill) increased to $50.8 million as of December 31, 2005, compared to $45.7 million as of December 31, 2004.

Investments

Our investment portfolio consists
primarily of U.S. Treasury and agency securities, mortgage backed securities, SBA securities, overnight investments in the Federal Funds market and investments in low income housing limited liability partnerships. Our held to maturity portfolio
increased to $6.8 million as of December 31, 2005 compared to $4.2 million as of December 31, 2004. The increase in held to maturity securities was due to the purchase of $4.0 million in agency bonds and mortgage backed securities. Of the
$6.8 million, $1.1 million were held as collateral for public funds, treasury, tax and loan deposits and for other purposes at December 31, 2005.

Our available for sale portfolio was started in 2003 and totaled $49.7 million as of December 31, 2005. The available for sale portfolio is made up of agency mortgage backed securities that are readily marketable
and are marked to the lower of cost or market on a monthly basis. Of the $49.7 million, $18.3 million were held as collateral for public funds, treasury, tax and loan deposits and for other purposes at December 31, 2005.

Two securities totaling $1.4 million were pledged for our interest rate swap, one security is classified as held to maturity for $422,000 and the other
is classified as available for sale for $1.0 million. The collateral requirement for the interest rate swap is the greater of the mark to market value of the swap or $1.1 million. Therefore, as interest rates increase it is probable that the
collateral requirement will increase.

Average federal funds sold for the year ended December 31, 2005 totaled $8.7 million compared
to $16.7 million for the year ended December 31, 2004.

We held $1.9 million in Federal Reserve Bank stock as of December 31,
2005 compared to $1.2 million as of December 31, 2004. We held $3.0 million in Federal Home Loan Bank stock as of December 31, 2005 compared to $2.2 million as of December 31, 2004.

Loans

As a result of increased loan production and
the acquisition of Rancho Bernardo Bank, total gross loans have increased 36.2% to $740.4 million as of December 31, 2005 compared to $543.5 million as of December 31, 2004. Our total servicing portfolio increased to $936.7 million as of
December 31, 2005 compared to $715.5 million as of December 31, 2004. We service sold loans for others, primarily consisting of SBA 7a loans, which increased to $196.4 million as of December 31, 2005 compared to $172.0 million as of
December 31, 2004.



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The following chart summarizes the changes in the loan portfolio as of and for the years ended
December 31, 2005 and 2004:



|                                        |  |                        |         |   |      |   |         |          |  |   |          |   |  |        |  
|--------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | -------- |  | - | -------- | - |  | ------ | -
|Summary of loans as of December 31,     |  | 2005                   |         |   | 2004 |   |         | $ change |  |   | % change |  
|                                        |  | (dollars in thousands) |        
|Commercial                              |  | $                      | 53,552  |   |      | $ | 35,213  |          |  | $ | 18,339   |   |  | 52.08  | %
|Aircraft                                |  |                        | 28,617  |   |      |   | 28,819  |          |  |   | (202     | ) |  | -0.70  | %
|Real estate construction loans          |  |                        | 109,500 |   |      |   | 75,200  |          |  |   | 34,300   |   |  | 45.61  | %
|Real estate one- to four-family         |  |                        | 16,994  |   |      |   | 8,690   |          |  |   | 8,304    |   |  | 95.56  | %
|Real estate commercial and multi-family |  |                        | 510,620 |   |      |   | 378,109 |          |  |   | 132,511  |   |  | 35.05  | %
|Consumer home equity lines of credit    |  |                        | 10,459  |   |      |   | 8,027   |          |  |   | 2,432    |   |  | 30.30  | %
|Consumer other                          |  |                        | 10,620  |   |      |   | 9,473   |          |  |   | 1,147    |   |  | 12.11  | %
|                                        |  |                        |         |   |      |   |         |          |  |   |          |   |  |        |  
|Total gross loans                       |  |                        | 740,362 |   |      |   | 543,531 |          |  |   | 196,831  |   |  | 36.21  | %
|Deferred fees, costs and discounts      |  |                        | (3,290  | ) |      |   | (4,011  | )        |  |   | 721      |   |  | -17.98 | %
|Allowance for loan losses               |  |                        | (9,773  | ) |      |   | (7,508  | )        |  |   | (2,265   | ) |  | 30.17  | %
|                                        |  |                        |         |   |      |   |         |          |  |   |          |   |  |        |  
|Net loans                               |  | $                      | 727,299 |   |      | $ | 532,012 |          |  | $ | 195,287  |   |  | 36.71  | %
|                                        |  |                        |         |   |      |   |         |          |  |   |          |   |  |        |  
|Total loans serviced for others         |  | $                      | 196,350 |   |      | $ | 172,016 |          |  | $ | 24,334   |   |  | 14.15  | %
|                                        |  |                        |         |   |      |   |         |          |  |   |          |   |  |        |  
|Total servicing portfolio               |  | $                      | 936,712 |   |      | $ | 715,547 |          |  | $ | 221,165  |   |  | 30.91  | %
|                                        |  |                        |         |   |      |   |         |          |  |   |          |   |  |        |  

The following chart summarizes the lending activity as of and for the years ended
December 31, 2005 and 2004:



|                                         |  |                        |          |   |      |   |          |          |  |   |          |   |  |        |  
|---------------------------------------- |  | ---------------------- | -------- | - | ---- | - | -------- | -------- |  | - | -------- | - |  | ------ | -
|Activity for the year ended December 31, |  | 2005                   |          |   | 2004 |   |          | $ change |  |   | % change |  
|                                         |  | (dollars in thousands) |         
|Beginning balance                        |  | $                      | 532,012  |   |      | $ | 394,212  |          |  |   | 137,800  |   |  | 34.96  | %
|Loans originated  Banking Division      |  |                        | 432,672  |   |      |   | 354,641  |          |  |   | 78,031   |   |  | 22.00  | %
|Loans originated  SBA 7a Division       |  |                        | 60,342   |   |      |   | 65,938   |          |  |   | (5,596   | ) |  | -8.49  | %
|Loans aquired in merger                  |  |                        | 78,981   |   |      |   | 88,842   |          |  |   | (9,861   | ) |  | -11.10 | %
|Loans sold                               |  |                        | (87,155  | ) |      |   | (84,598  | )        |  |   | (2,557   | ) |  | 3.02   | %
|Principal repayments                     |  |                        | (288,721 | ) |      |   | (285,717 | )        |  |   | (3,004   | ) |  | 1.05   | %
|Other net changes                        |  |                        | (832     | ) |      |   | (1,306   | )        |  |   | 474      |   |  | -36.29 | %
|                                         |  |                        |          |   |      |   |          |          |  |   |          |   |  |        |  
|Ending balance                           |  | $                      | 727,299  |   |      | $ | 532,012  |          |  | $ | 195,287  |   |  | 36.71  | %
|                                         |  |                        |          |   |      |   |          |          |  |   |          |   |  |        |  

A significant portion of our lending productions are from commercial real estate lending. We
originated $306.0 million in commercial real estate loans for the year ended December 31, 2005 compared to $262.7 million for the year ended December 31, 2004. We sold $86.6 million in commercial real estate loans for the year ended
December 31, 2005 compared to $81.7 million for the year ended December 31, 2004. As a result of the increased production and the acquisition of Rancho Bernardo Bank, our commercial real estate portfolio increased to $510.6 million as of
December 31, 2005 compared to $378.1 million as of December 31, 2004. See Item 1A  Risk Factors.

Non-performing Assets.Non-performing assets consist of non-performing loans, other real estate owned (OREO) and repossessed assets. Non-performing loans are those loans which have: (i) been placed on non-accrual status,
(ii) been subject to troubled debt restructurings, (iii) been classified as doubtful under the Companys asset classification system, or (iv) become contractually past due 90 days or more with respect to principal or interest and
have not been restructured or otherwise placed on non-accrual status. The Company did not have any OREO at December 31, 2005 or December 31, 2004. As of December 31, 2005, there was one repossessed asset in the amount of $68,000
consisting of a single mobile home property and was valued using the



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collateral method based on a recent appraisal of the underlying collateral. There were no repossessed assets at December 31, 2004.



|                                                                                                                      |  |                        |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                      |  | December 31,2005       |         |   | December 31,2004 |  
|                                                                                                                      |  | (dollars in thousands) |        
|Non-accrual loans                                                                                                     |  | $                      | 3,647   |   |                  | $ | 4,027   |  
|Troubled debt restructurings                                                                                          |  |                        |        |   |                  |   |        |  
|Loans contractually past due 90 days or more with respect to either principal or interest and still accruing interest |  |                        |        |   |                  |   |        |  
|                                                                                                                      |  |                        |         |   |                  |   |         |  
|Total non-performing loans                                                                                            |  |                        | 3,647   |   |                  |   | 4,027   |  
|Repossessed assets                                                                                                    |  |                        | 68      |   |                  |   |        |  
|                                                                                                                      |  |                        |         |   |                  |   |         |  
|Total non-performing assets                                                                                           |  | $                      | 3,715   |   |                  | $ | 4,027   |  
|                                                                                                                      |  |                        |         |   |                  |   |         |  
|                                                                                                                      |  |                       
|SUPPLEMENTAL DATA                                                                                                     |  |                        |         |   |                  |   |         |  
|Total loans held for investment, net                                                                                  |  | $                      | 582,745 |   |                  | $ | 437,932 |  
|Undisbursed portion of construction and other loans                                                                   |  | $                      | 177,783 |   |                  | $ | 149,075 |  
|Government guaranteed portion of total loans                                                                          |  | $                      | 32,375  |   |                  | $ | 37,018  |  
|Non-performing loans, net of government guarantees                                                                    |  | $                      | 2,092   |   |                  | $ | 2,133   |  
|                                                                                                                      |  |                       
|Total non-performing loans/gross loans                                                                                |  |                        | 0.49    | % |                  |   | 0.74    | %
|Total non-performing assets/total assets                                                                              |  |                        | 0.41    | % |                  |   | 0.63    | %
|Total non-performing loans, net of guarantees/gross loans                                                             |  |                        | 0.28    | % |                  |   | 0.39    | %
|Total non-performing assets, net of guarantees/total assets                                                           |  |                        | 0.24    | % |                  |   | 0.33    | %
|                                                                                                                      |  |                       
|Allowance for loan losses                                                                                             |  | $                      | 9,773   |   |                  | $ | 7,508   |  
|Net charge offs to average loans outstanding                                                                          |  |                        | 0.04    | % |                  |   | 0.01    | %
|Loan loss allowance/loans, gross                                                                                      |  |                        | 1.32    | % |                  |   | 1.38    | %
|Loan loss allowance/loans held for investment                                                                         |  |                        | 1.68    | % |                  |   | 1.71    | %
|Loan loss allowance/non-performing loans                                                                              |  |                        | 267.97  | % |                  |   | 186.44  | %
|Loan loss allowance/non-performing assets                                                                             |  |                        | 263.07  | % |                  |   | 186.44  | %
|Loan loss allowance/non-performing loans, net of guarantees                                                           |  |                        | 467.16  | % |                  |   | 351.99  | %
|Loan loss allowance/non-performing assets, net of guarantees                                                          |  |                        | 452.45  | % |                  |   | 351.99  | %

Non-accrual Loans.Non-accrual loans are impaired loans where the original contractual
amount may not be fully collectible. The Company measures its impaired loans by using the fair value of the collateral if the loan is collateral-dependent and the present value of the expected future cash flows discounted at the loans
effective interest rate if the loan is not collateral-dependent. As of December 31, 2005 and 2004, all impaired or non-accrual loans were collateral-dependent. The Company places loans on non-accrual status that are delinquent 90 days or more
or when a reasonable doubt exists as to the collection of interest and principal. As of December 31, 2005, we had twenty-two loans to nine borrowers on non-accrual status, totaling $3.6 million. Of this total, $1.6 million, or 42.6%, was
guaranteed by the government. We had seven loans to seven borrowers on non-accrual status as of December 31, 2004, totaling $4.0 million. Of this total $1.9 million, or 47.0%, was guaranteed by the government. The decrease in non-performing
loans from December 31, 2004 to December 31, 2005 is primarily due to three loans totaling $1.8 million which were paid off or sold during the third quarter of 2005.

Interest income that would have been recorded on loans on non-accrual status, under the original terms of such loans, totaled $295,000 for the year ended
December 31, 2005, $154,000 for 2004, $182,000 for 2003. Management cannot predict the extent to which economic conditions may worsen or other factors which may impact our borrowers or our loan portfolio. Accordingly, there can be no assurance
that other loans will not become 90 days or more past due, be placed on non-accrual, become restructured loans, or become other real estate owned or repossessed assets in the future.



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Classified Assets.From time to time, management has reason to believe that certain borrowers may
not be able to repay their loans within the parameters of the present repayment terms, even though, in some cases, the loans are current at the time. These loans are graded in the classified loan grades of substandard,
doubtful, or loss and include non-performing loans discussed above. Each classified loan is monitored monthly. Classified assets (consisting of non-accrual loans, loans graded as substandard or lower and REO) at
December 31, 2005 and 2004 were $12.0 million and $6.1 million, respectively.

Risk Management. The investment of the
Companys funds is primarily in loans where a greater degree of risk is normally assumed than in other forms of investments. Sound underwriting of loans and continuing evaluations of the underlying collateral and performance of the borrowers
are an integral part in the maintenance of a high level of quality in the total assets of the Company. Net loan charge-offs for the year ended December 31, 2005 were $235,000, or 0.04% of average gross loans outstanding, compared to $34,000, or
0.01% of average gross loans outstanding, for the year ended December 31, 2004.

Allowance for Loan Losses. We have established
a methodology for the determination of provisions for loan losses. The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for loan losses as well as specific allowances that are tied to
individual loans. Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and a specific allowance for identified problem loans.

In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being
made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The allowance is increased by provisions charged against earnings
and reduced by net loan charge offs. Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible. Recoveries are generally recorded only when cash payments are
received.

The allowance for loan losses is maintained to cover estimated loan losses in the loan portfolio. The responsibility for the
review of our assets and the determination of the adequacy of the general valuation allowance lies with management and our Directors Loan Committee. They assign the loss reserve ratio for each type of asset and review the adequacy of the
allowance at least quarterly based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors.

Specific valuation allowances are established to absorb losses on loans for which full collectibility may not be reasonably assured as prescribed in SFAS
No. 114 (as amended by SFAS No. 118). The amount of the specific allowance is based on the estimated value of the collateral securing the loans and other analyses pertinent to each situation. Loans are identified for specific allowances
from information provided by several sources, including asset classification, third party reviews, delinquency reports, periodic updates to financial statements, public records and industry reports. All loan types are subject to specific allowances
once identified as an impaired or non-performing loan. Loans not subject to specific allowances are placed into pools by one of the following collateral types: commercial real estate, one- to four-family real estate, aircraft, consumer home equity,
consumer other, construction and other commercial loans. All non-specific reserves are allocated to one of these categories. Estimates of identifiable losses are reviewed continually and, generally, a provision for losses is charged against
operations on a monthly basis as necessary to maintain the allowance at an appropriate level. Management presents an analysis of the allowance for loan losses to our Board of Directors on a quarterly basis.

In order to determine the appropriate allowance for loan losses, our management and Directors Loan Committee meet quarterly to review the
portfolio. To the extent that any of these conditions are evidenced by identifiable problem credit or portfolio segment as of the evaluation date, the estimate of such condition may be reflected as a specific allowance applicable to such credit or
portfolio segment. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon the most recent information that has become available.



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As of December 31, 2005 the balance in the allowance for loan losses was $9.8 million compared to
$7.5 million as of December 31, 2004. In addition, the reserve for losses on commitments to extend credit was $295,000 and $203,000 as of December 31, 2005 and 2004, respectively. The balance of commitments to extend credit on undisbursed
construction and other loans and letters of credit was $213.5 million as of December 31, 2005 compared to $149.1 million as of December 31, 2004. Risks and uncertainties exist in all lending transactions, and even though there have
historically been no charge offs on construction and other loans that have not been fully disbursed, our management and the Directors Loan Committee establish reserve levels for each category based upon loan type as well as economic
uncertainties and other risks that exist as of each reporting period. In general there are no reserves established for the government guaranteed portion of commitments to extend credit.

As of December 31, 2005 the allowance was 1.32% of total gross loans compared to 1.38% as of December 31, 2004. As a percent of loans held for
investment, the allowance was 1.68% as of December 31, 2005 compared to 1.71% as of December 31, 2004. The level of classified loans has increased to $12.0 million, net of guarantees of $2.9 million, as of December 31, 2005 compared
to $6.1 million, net of guarantees of $3.2 million, as of December 31, 2004. In addition, there has been an increase in loans secured by commercial real estate to $510.6 million as of December 31, 2005 compared to $378.1 million as of
December 31, 2004. Relative to the overall loan portfolio, commercial real estate loans have remained steady at 69.0% of total gross loans as of December 31, 2005 compared to 69.6% as of December 31, 2004. Assumptions regarding the
collateral value of various underperforming loans may affect the level and allocation of the allowance for loan losses in future periods. The allowance may also be affected by trends in the amount of charge offs experienced within different loan
portfolios. The allowance for loan losses as a percentage of non-performing loans was 267.97% as of December 31, 2005 compared to 186.44% as of December 31, 2004. Management believes the allowance at December 31, 2005 is adequate
based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors.

We perform a migration analysis on a
quarterly basis using an eight quarter history of charge offs to average loans by collateral type. Our management and Directors Loan Committee have also established reserve levels for each category based upon loan type, as certain loan types
may not have incurred losses or have had minimal losses in the eight quarter migration analysis. Our management and Directors Loan Committee will consider trends in delinquencies and potential charge offs by loan type, market for the
underlying real estate or other collateral, trends in industry types, economic changes and other risks. In general, there are no reserves established for the government guaranteed portion of loans outstanding.



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The following table sets forth the Companys percent of allowance for loan losses to total allowance
for loan losses and the percent of loans to total loans in each of the categories listed at the dates indicated:



|                                           |  |                                        |       |                                      |        |                                                    |       |      |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                     |   |  |       |   |  | 
|------------------------------------------ |  | -------------------------------------- | ----- | ------------------------------------ | ------ | -------------------------------------------------- | ----- | ---- | ------ | - | --------------------------------- |  | ----- | -------------------------------------------------- |  | ----- | ------ |  | --------------------------------- | ----- |  | --------------------------------------------------- | - |  | ----- | - |  | 
|                                           |  | At or For the Years Ended December 31, |      
|                                           |  | 2005                                   |       |                                      | 2004   |                                                    |       | 2003 |       
|                                           |  | Amount                                 |       | Percent of Allowance to Total Amount |        | Percent ofLoans in EachCategory toTotal GrossLoans |       |      | Amount |   | Percent ofAllowanceto TotalAmount |  |       | Percent ofLoans in EachCategory toTotal GrossLoans |  |       | Amount |  | Percent ofAllowanceto TotalAmount |       |  | Percent ofLoans in EachCategory toTotal
Gross Loans |  
|Commercial loans                           |  | $                                      | 1,839 |                                      | 18.8%  |                                                    | 7.2   | %    |        | $ | 898                               |  | 12.0  | %                                                  |  | 6.5   | %      |  | $                                 | 824   |  | 15.8                                                | % |  | 5.1   | %
|Aircraft loans                             |  |                                        | 479   |                                      | 4.9%   |                                                    | 3.9   | %    |        |   | 426                               |  | 5.7   | %                                                  |  | 5.3   | %      |  |                                   | 544   |  | 10.4                                                | % |  | 7.6   | %
|Real estate:                               |  |                                        |       |                                      |        |                                                    |       |      |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                     |   |  |       |  
|Construction loans                         |  |                                        | 1,697 |                                      | 17.4%  |                                                    | 14.8  | %    |        |   | 1,599                             |  | 21.3  | %                                                  |  | 13.8  | %      |  |                                   | 536   |  | 10.3                                                | % |  | 16.6  | %
|Secured by:                                |  |                                        |       |                                      |        |                                                    |       |      |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                     |   |  |       |  
|One- to four-family residential properties |  |                                        | 437   |                                      | 4.5%   |                                                    | 2.3   | %    |        |   | 256                               |  | 3.4   | %                                                  |  | 1.6   | %      |  |                                   | 73    |  | 1.4                                                 | % |  | 2.4   | %
|Commercial properties                      |  |                                        | 4,547 |                                      | 46.5%  |                                                    | 69.0  | %    |        |   | 3,766                             |  | 50.2  | %                                                  |  | 69.6  | %      |  |                                   | 3,089 |  | 59.3                                                | % |  | 67.3  | %
|Consumer:                                  |  |                                        |       |                                      |        |                                                    |       |      |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                     |   |  |       |  
|Home equity lines of credit                |  |                                        | 137   |                                      | 1.4%   |                                                    | 1.4   | %    |        |   | 181                               |  | 2.4   | %                                                  |  | 1.5   | %      |  |                                   | 14    |  | 0.3                                                 | % |  | 0.5   | %
|Other                                      |  |                                        | 637   |                                      | 6.5%   |                                                    | 1.4   | %    |        |   | 382                               |  | 5.1   | %                                                  |  | 1.7   | %      |  |                                   | 130   |  | 2.5                                                 | % |  | 0.5   | %
|                                           |  |                                        |       |                                      |        |                                                    |       |      |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                     |   |  |       |   |  | 
|Total allowance                            |  | $                                      | 9,773 |                                      | 100.0% |                                                    | 100.0 | %    |        | $ | 7,508                             |  | 100.0 | %                                                  |  | 100.0 | %      |  | $                                 | 5,210 |  | 100.0                                               | % |  | 100.0 | %
|                                           |  |                                        |       |                                      |        |                                                    |       |      |        |   |                                   |  |       |                                                    |  |       |        |  |                                   |       |  |                                                     |   |  |       |   |  | 

Based on the recent history of charge offs in the Companys construction loan portfolios, the
Company has allocated a lower percentage of its reserve for loan losses to this portfolio, decreasing the percentage allocated to 17.4% as of December 31, 2005 from 21.3% as of December 31, 2004 for construction loans. Commercial real
estate has also experienced a decrease in net charge offs in recent years and therefore we have decreased that reserve allocation to 46.5% of the total reserves as of December 31, 2005 compared to 50.1% of the reserves as of December 31,
2004. Based on trends in the market place, we have increased the allocation of reserves for commercial loans to 18.8% as of December 31, 2005 from 12.0% as of December 31, 2004. Other changes are the result of relative changes in the size
of the loan portfolios. As a result of historical decreases in local and regional real estate values and the significant losses experienced by many financial institutions, there has been a greater level of scrutiny by regulatory authorities of the
loan portfolios of financial institutions undertaken as a part of the examinations of such institutions by banking regulators. While the Company believes it has established its existing allowance for loan losses in accordance with generally accepted
accounting principles, there can be no assurance that regulators, in reviewing the Companys loan portfolio, will not request the Company to significantly increase its allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that substantial increases will not be necessary should the quality of any loans deteriorate as a
result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect the Companys financial condition and results of operations.

Other Assets

Premises and
equipment, repossessed assets, accrued interest and other assets, income tax receivable and deferred tax asset, servicing asset, net and interest only strips, are the six major components of other assets. Premises and equipment increased to $6.9
million as of December 31, 2005 compared to $6.7 million as of December 31, 2004.

Repossessed assets were $68,000 as of
December 31, 2005 consisting of a single mobile home property as compared to zero as of December 31, 2004.



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The Company has invested in limited partnerships formed to develop and operate affordable housing units
for lower income tenants throughout the state of California. The costs of the investments are being amortized on a level-yield method over the life of the related tax credits. The partnerships must meet the regulatory requirements for affordable
housing for a minimum 15-year compliance period to fully utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credits may be denied for any period in which the projects are not in compliance and a portion
of the credits previously taken is subject to recapture with interest. The remaining federal tax credits to be utilized over a multiple-year period are $5.0 million as of December 31, 2005. The Companys usage of tax credits approximated
$355,000 and $430,000 during the years ended December 31, 2005 and 2004, respectively. Investment amortization amounted to $307,000 and $215,000 for the years ended December 31, 2005 and 2004, respectively.

Accrued interest and other assets increased to $13.7 million as of December 31, 2005 compared to $10.8 million as of December 31, 2004. The
major component of accrued interest and other assets is interest accrued and not yet received on loans.

Deferred tax assets, net, totaled
$6.2 million as of December 31, 2005 compared to $5.9 million as of December 31, 2004. The increase in the deferred tax asset, net, is primarily related to additional allowances for loan losses and certain accrued expenses.

Servicing assets, net, decreased to $3.8 million as of December 31, 2005 compared to $4.0 million as of December 31, 2004. At December 31,
2005, changes in the valuation of the servicing asset were negatively impacted by an impairment adjustment of $798,000 included in net loan servicing fees in the Consolidated Statement of Income. The valuation of the servicing asset reflects
estimates as to the expected life of the underlying loans which may be adversely affected by higher than expected levels of pay-offs in periods of lower rates or charge-offs in periods of economic difficulty. In addition, when property values
increase due to general economic conditions, borrowers have refinancing opportunities available to them, which may result in higher prepayment rates. Management periodically evaluates the servicing assets for impairment. For purposes of measuring
impairment, the rights are stratified based on original term to maturity. The amount of impairment recognized is the amount by which the servicing assets for a stratum exceed their fair value. The weighted average prepayment assumption was 9.14% as
of December 31, 2005 compared to 8.53% as of December 31, 2004.

Rights to future interest income from serviced loans that exceed
100 basis points of contractually specified servicing fees are classified as interest-only strips. Interest-only strips increased to $2.6 million as of December 31, 2005, compared to $1.7 million as of December 31, 2004. The increase is
due to the increase in loans serviced for others as a result of the loan sales in 2005, combined with the effect of the change in market value caused by the relatively stable average prepayment speeds. The weighted average prepayment speed was 9.14%
as of December 31, 2005 compared to 8.53% as of December 31, 2004.

Deposits and Borrowings

Total deposits increased to $710.5 million as of December 31, 2005 compared to $549.8 million as of December 31, 2004. Interest bearing deposits
increased to $545.5 million as of December 31, 2005 compared to $439.0 million as of December 31, 2004. Non-interest bearing deposits increased to $165.0 million as of December 31, 2005 compared to $110.8 million as of
December 31, 2004. Total wholesale deposits were $60.5 million as of December 31, 2005 compared to $58.8 million as of December 31, 2004. Total retail banking deposits increased 31.9% to $645.2 million as of December 31, 2005
compared to $489.2 million as of December 31, 2004. The increase in retail deposits is consistent with our strategy to grow our core deposit base and has occurred because of our expansion including the acquisition of Rancho Bernardo Community
Bank with one retail banking office.



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Short term borrowings totaled $52.3 million as of December 31, 2005 compared to $1.0 million as of
December 31, 2004. The increase primarily relates to increased funding for the increased loan demand in 2005 compared to 2004. Long-term borrowing obligations to the FHLB resulting from the Cuyamaca Bank acquisition totaled $1.5 million as of
December 31, 2005 compared to $2.8 million as of December 31, 2004. Long-term borrowing obligations to the FHLB resulting from the Rancho Bernardo Community Bank acquisition totaled $1.0 million as of December 31, 2005. We established
a line of credit with the FHLB collateralized by commercial loans and government securities. Funds from the credit line were used to purchase government securities and increase our liquidity.

In 2000, we issued $10.0 million in trust preferred securities, which are debt-like securities that are designated as additional capital for regulatory
purposes. In September 2003, we issued $5.0 million in trust preferred securities. In August 2005, we issued an additional $20.0 million in trust preferred securities. These securities are classified as long-term debt on the balance sheet. The
average balance outstanding of all long-term debt was $25.5 million for the year ended December 31, 2005, compared to $15.4 million for the year ended December 31, 2004. Proceeds from the issuance of trust preferred securities in 2005 were
used to fund the Rancho Bernardo Community Bank acquisition and provide additional capital to the Bank.

Capital

Our stockholders equity increased to $96.3 million as of December 31, 2005 compared to $63.1 million as of December 31, 2004. The $33.2
million increase in stockholders equity from December 31, 2004 to December 31, 2005 is a result of net income of $12.6 million for the year ended December 31, 2005 plus the net effect from $21.6 million in goodwill as the result
of the acquisition of Rancho Bernardo Community Bank, combined with proceeds from the exercise of stock options offset by cash dividends paid to shareholders. Tangible equity increased to $50.8 million as of December 31, 2005 from $45.7 million
as of December 31, 2004.

On February 26, 2004, the Company announced the payment of a cash dividend of $0.05 per common share
(payable on March 31, 2004) and the initiation of a policy of paying quarterly cash dividends. The Company paid $0.05 per share for each quarter in 2004. The Company paid $0.10 per share for each quarter in 2005. From 1998 until the first
quarter of 2004, the Company had paid no cash dividends. Whether or not any cash dividends will be paid in the future will be determined by our Board of Directors after consideration of various factors.Community Bancorps and the
Banks profitability and regulatory capital ratios, in addition to other financial conditions, will be key factors considered by our Board of Directors in making such determinations regarding the payment of dividends. As a holding company,
dividends from the Bank provide a substantial portion of Community Bancorps cash flow used to service the interest payments on our Trust Preferred Securities and our other obligations, including the cash dividend program. See Item 5
 Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Various statutory provisions restrict the amount of dividends the Bank can pay to us without regulatory approval. In
connection with the $35.0 million in outstanding trust preferred securities, we have the right to defer the payment of interest on these securities. If we were to exercise such deferral right, we are restricted during such deferral period from
paying any dividends on our common stock.

Management considers capital requirements as part of its strategic planning process. The
strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings. The ability to obtain capital is dependent upon the capital markets as well as our performance.
Management regularly evaluates sources of capital and the timing required to meet its strategic objectives.



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At December 31, 2005 and 2004, all capital ratios were above all current Federal capital guidelines
for a well capitalized bank. For additional information, see Item 8  Financial Statements and Supplementary Data  Footnote 10 Regulatory Matters within this Form 10-K.



|                                         |  |              |   |  |       |  
|---------------------------------------- |  | ------------ | - |  | ----- | -
|                                         |  | December 31, |  
|CAPITAL RATIOS                           |  | 2005         |   |  | 2004  |  
|Holding Company Ratios                   |  |              |   |  |       |  
|Total capital (to risk-weighted assets)  |  | 11.79        | % |  | 11.47 | %
|Tier 1 capital (to risk-weighted assets) |  | 10.55        | % |  | 10.22 | %
|Tier 1 capital (to average assets)       |  | 10.18        | % |  | 9.48  | %
|Tangible equity to tangible assets       |  | 5.89         | % |  | 7.33  | %
|                                         |  |             
|Bank only Ratios                         |  |              |   |  |       |  
|Total capital (to risk-weighted assets)  |  | 11.49        | % |  | 11.19 | %
|Tier 1 capital (to risk-weighted assets) |  | 10.25        | % |  | 9.94  | %
|Tier 1 capital (to average assets)       |  | 9.91         | % |  | 9.30  | %

The Company has a credit line with the FHLB with a limit of $120.0 million as of December 31,
2005, with a balance outstanding of $54.8 million. Of the total advances from the FHLB, $52.3 million have a remaining term of less than one year. In addition, we have credit lines with other correspondent banks of $55.0 million. There were no
advances against these lines as of December 31, 2005.

Liquidity

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for
customers credit needs and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our Asset/Liability Committee and our Board of Directors. This process is intended to ensure the
maintenance of sufficient funds to meet our needs, including adequate cash flow for off-balance sheet instruments.

Our primary sources of
liquidity are derived from financing activities which include the acceptance of customer and broker deposits, federal funds facilities and advances from the Federal Home Loan Bank of San Francisco. These funding sources are augmented by payments of
principal and interest on loans, the routine liquidation of securities from the trading securities portfolio and sales and participation of eligible loans. Primary uses of funds include withdrawal of and interest payments on deposits, productions
and purchases of loans, purchases of investment securities, and payment of operating expenses.

We experienced net cash outflows from
operating activities of $40.5 million during the year ended December 31, 2005 compared to net cash outflows of $38.2 million during the year ended December 31, 2004. Net cash outflows from operating activities during the years ended
December 31, 2005 and 2004 were primarily from production of loans held for sale in excess of proceeds from the sale of loans partially offset by our net income.

Net cash outflows from investing activities totaled $72.5 million during the year ended December 31, 2005 compared to net cash inflows of $5.5 million during the years ended December 31, 2004. Net cash
outflows from investing activities for 2005 can be primarily attributed to the growth of our loan portfolio and the purchase of additional investments offset by proceeds from principal repayments on loans held for investment and cash obtained from
the acquisition of Rancho Bernardo Community Bank. Net cash inflows from investing activities for 2004 can be primarily attributed to a decrease in our federal funds sold.

We experienced net cash inflows from financing activities of $115.1 million and $29.6 million during the years ended December 31, 2005 and 2004,
respectively. During the year ended December 31, 2005 net cash



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inflows were primarily from increases in borrowings from our Federal Home Loan Bank line of credit, increases in interest and non-interest bearing deposits,
as well as the issuance of trust preferred securities of $20.0 million. During the year ended December 31, 2004, net cash inflows were primarily from increases in interest and non-interest bearing deposits offset by paydowns on the Federal Home
Loan Bank line of credit.

As a means of augmenting our liquidity, we have established federal funds lines with correspondent banks. At
December 31, 2005 our available borrowing capacity includes approximately $55.0 million in federal funds line facilities and $65.2 million in unused FHLB advances. We believe our liquidity sources to be stable and adequate. At December 31,
2005, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.

The liquidity
of the parent company, Community Bancorp Inc., is primarily dependent on the payment of cash dividends by its subsidiary, Community National Bank, subject to limitations imposed by the National Bank Act. During the year ended December 31, 2005,
there were $500,000 in dividends by the Bank to Community Bancorp Inc. used primarily to fund the second quarter dividend. During the year ended December 31, 2004, the Bank paid dividends of $8.3 million to Community Bancorp Inc. related to the
acquisition of Cuyamaca Bank N.A. The decrease in dividends paid by the Bank to Community Bancorp during 2005 was due to the issuance of $20.0 million in trust preferred securities by Community Bancorp. As of December 31, 2005, approximately
$17.8 million of undivided profits of the Bank were available for dividends to the Company.

The Company is a party to financial
instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The
Company uses the same credit policies in making commitments and conditional obligations. See Footnote 17, Commitments and Contingencies included in Item 8  Financial Statements and Supplementary Data of this Report for
further information.

Other Significant Cash and Contractual Borrowings

As of December 31, 2005 the financial borrowings and commitments are as follows:



|                              |  |                       |         |                  |   |            |  |             |       |                  |   |       |  |   |       
|----------------------------- |  | --------------------- | ------- | ---------------- | - | ---------- |  | ----------- | ----- | ---------------- | - | ----- |  | - | ------
|                              |  | Payment Due by Period
|                              |  | Total                 |         | Less than 1 year |   | 1- 3 years |  | 3 - 5 years |       | Morethan 5 years
|                              |  |                       |         |                 
|                              |  | (in thousands)       
|Contractual Obligations:      |  |                       |         |                  |   |            |  |             |       |                  |   |       |  |   |       
|Trust Preferred Securities*   |  | $                     | 40,458  |                  | $ | 1,418      |  | $           | 2,340 |                  | $ | 1,997 |  | $ | 34,703
|Other borrowings*             |  |                       | 55,129  |                  |   | 52,422     |  |             | 1,389 |                  |   | 818   |  |   | 500   
|Operating leases              |  |                       | 10,071  |                  |   | 1,577      |  |             | 2,875 |                  |   | 2,609 |  |   | 3,010 
|                              |  |                       |         |                  |   |            |  |             |       |                  |   |       |  |   |       
|Total Contractual Obligations |  | $                     | 105,658 |                  | $ | 55,417     |  | $           | 6,604 |                  | $ | 5,424 |  | $ | 38,213
|                              |  |                       |         |                  |   |            |  |             |       |                  |   |       |  |   |       

---

|* | Includes contractual interest payable on fixed rate obligations.
|- | ----------------------------------------------------------------

Capital Resources

We plan to perform tenant improvements at our headquarters facility in 2006. In relation to these
improvements, we expect to incur capital expenditures of approximately $100,000 for the year ended December 31, 2006.



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|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Interest Rate Risk Management

Interest rate risk (IRR) and credit risk constitute the two greatest sources of
financial exposure for insured financial institutions. Please refer to Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition  Loans, for a discussion of our
lending activities. IRR represents the impact that changes in absolute and relative levels of market interest rates may have upon our net interest income (NII). Changes in the NII are the result of changes in the net interest spread
between interest-earning assets and interest-bearing liabilities (timing risk), the relationship between various rates (basis risk), and changes in the shape of the yield curve.

We realize income principally from the differential or spread between the interest earned on loans, investments, other interest-earning assets and the
interest incurred on deposits and borrowings. The volumes and yields on loans, deposits and borrowings are affected by market interest rates. As of December 31, 2005, 87.5% of our loan portfolio was tied to adjustable rate indices. Of our total
loan portfolio, 57.3% are adjustable rate loans that are tied to prime and re-price within 90 days. As of December 31, 2005, 44.4% of our deposits were time deposits with a stated maturity (generally one year or less) and a fixed rate of
interest. As of December 31, 2005, 33.6% of our long-term debt was fixed rate with a weighted average remaining term of 21.3 years. We entered into an interest rate swap in December 2002 which effectively changes the fixed rate trust preferred
to a variable rate liability with a six month adjustment period. The Gap table below reflects the affects of this interest rate swap.

Changes in the market level of interest rates directly and immediately affect our interest spread, and therefore profitability. Sharp and significant changes to market rates can cause the interest spread to shrink or expand significantly in
the near term, principally because of the timing differences between the adjustable rate loans and the maturities (and therefore re-pricing) of the deposits and borrowings.

Asset and Liability Management

Our Asset/Liability Committee (ALCO) is responsible for
managing our assets and liabilities in a manner that balances profitability, IRR and various other risks including liquidity. ALCO operates under policies and within risk limits prescribed by, reviewed and approved by the Board of Directors.

The ALCO seeks to stabilize our NII by matching rate-sensitive assets and liabilities through maintaining the maturity and re-pricing of
these assets and liabilities at appropriate levels given the interest rate environment. When the amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified time periods, NII generally will be negatively impacted by
increasing rates and positively impacted by decreasing rates. Conversely, when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities within specified time periods, net interest income will generally be positively
impacted by increasing rates and negatively impacted by decreasing rates. The speed and velocity of re-pricing assets and liabilities will also contribute to the effects on our NII, as will the presence or absence of periodic and lifetime interest
rate caps and floors.

We utilize two methods for measuring interest rate risk, gap analysis and interest income simulations. Gap analysis
focuses on measuring absolute dollar amounts subject to re-pricing within certain periods of time, particularly the one year maturity horizon. Interest income simulations are produced using a software model that is based on actual cash flows and
re-pricing characteristics for all of our financial instruments and incorporate market-based assumptions regarding the impact of changing interest rates on current volumes of applicable financial instruments.

A traditional yet analytically limited measure of a financial institutions IRR is the static gap analysis. Static gap is the difference
between the amount of assets and liabilities (adjusted for any off-balance sheet



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positions) which are expected to mature or re-price within a specific period. Generally, a positive gap benefits an institution during periods of rising
interest rates, and a negative gap benefits an institution during periods of declining interest rates.

At December 31, 2005, 43.1% of
our deposits were comprised of certificate of deposit (CD) accounts, the majority of which have original terms averaging about thirteen months. The remaining, weighted average term to maturity for our CD accounts approximated five months
at December 31, 2005. Generally, our offering rates for CD accounts move directionally with the general level of short term interest rates, though the margin may vary due to competitive pressures. In addition to the CDs, the Company has $230.1
million in interest bearing transaction accounts (savings, money markets and interest bearing checking) as of December 31, 2005, with rates being paid between 0.15% and 3.20%. While the maturities of interest bearing deposits in the following
gap table imply that declines in interest rates will result in further declines in interest rates paid on deposits, interest rates cannot drop below 0%, and there is a behavioral limit somewhere above 0% as to how low the rates can be reduced before
our customers no longer will maintain the deposit with the bank which can affect the perceived asset sensitivity of the Company.

Interest Rate
Sensitivity on Selected Assets and Liabilities

The following table sets forth information concerning re-pricing opportunities for our
interest-earning assets and interest bearing liabilities as of December 31, 2005. The amount of assets and liabilities shown within a particular period were determined in accordance with their contractual maturities, except that adjustable rate
products are included in the period in which they are first scheduled to adjust and not in the period in which they mature. Such assets and liabilities are classified by the earlier of their maturity or re-pricing date.



|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|------------------------------------------------------ |  | ---------------------- | ------- | - | ------------------------------- | - | ------- | -------------------------------- |  | - | ------------------------------- | - |  | ---------- | ------- | - | ------------- | - | -------- | - |  | - | ------- | -
|Contractual Static GAP Position as ofDecember 31, 2005 |  | 0 - 3 months           |         |   | Greater than3 monthsto 6 months |   |         | Greater than6 monthsto 12 months |  |   | Greater than12 monthsto 5 years |   |  | Thereafter |         |   | Total balance |  
|                                                       |  | (dollars in thousands) |        
|Interest sensitive assets:                             |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Loans receivable:                                      |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Adjustable rate loans, gross                           |  | $                      | 444,938 |   |                                 | $ | 45,284  |                                  |  | $ | 51,925                          |   |  | $          | 104,843 |   |               | $ |         |   |  | $ | 646,990 |  
|Fixed rate loans, gross (1)(2)                         |  |                        | 14,517  |   |                                 |   | 8,353   |                                  |  |   | 1,886                           |   |  |            | 24,788  |   |               |   | 43,828   |   |  |   | 93,372  |  
|Investments:                                           |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Investment securities held-to-maturity                 |  |                        | 269     |   |                                 |   | 853     |                                  |  |   | 505                             |   |  |            | 1,257   |   |               |   | 3,869    |   |  |   | 6,753   |  
|Investment securities available-for-sale               |  |                        | 4,147   |   |                                 |   | 4,077   |                                  |  |   | 10,131                          |   |  |            | 27,689  |   |               |   | 3,616    |   |  |   | 49,660  |  
|Federal funds sold                                     |  |                        | 20,645  |   |                                 |   |        |                                  |  |   |                                |   |  |            |        |   |               |   |         |   |  |   | 20,645  |  
|Other investments                                      |  |                        | 2,827   |   |                                 |   |        |                                  |  |   | 145                             |   |  |            | 80      |   |               |   | 4,866    |   |  |   | 7,918   |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Total interest sensitive assets                        |  |                        | 487,343 |   |                                 |   | 58,567  |                                  |  |   | 64,592                          |   |  |            | 158,657 |   |               |   | 56,179   |   |  |   | 825,338 |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Interest sensitive liabilities:                        |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Deposits:                                              |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Non-interest bearing                                   |  |                        |        |   |                                 |   |        |                                  |  |   |                                |   |  |            |        |   |               |   | 164,956  |   |  |   | 164,956 |  
|Interest bearing (1)                                   |  |                        | 332,765 |   |                                 |   | 98,255  |                                  |  |   | 84,667                          |   |  |            | 29,830  |   |               |   |         |   |  |   | 545,517 |  
|Other borrowings (3)                                   |  |                        | 66,243  |   |                                 |   |        |                                  |  |   | 750                             |   |  |            | 22,000  |   |               |   | 500      |   |  |   | 89,493  |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Total interest sensitive liabilities                   |  | $                      | 399,008 |   |                                 | $ | 98,255  |                                  |  | $ | 85,417                          |   |  | $          | 51,830  |   |               | $ | 165,456  |   |  | $ | 799,966 |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|GAP Analysis                                           |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Interest rate sensitivity gap                          |  | $                      | 88,335  |   |                                 | $ | (39,688 | )                                |  | $ | (20,825                         | ) |  | $          | 106,827 |   |               | $ | (109,277 | ) |  | $ | 25,372  |  
|GAP as % of total interest sensitive assets            |  |                        | 10.70   | % |                                 |   | -4.81   | %                                |  |   | -2.52                           | % |  |            | 12.94   | % |               |   | -13.24   | % |  |   | 3.07    | %
|Cumulative interest rate sensitivity gap               |  | $                      | 88,335  |   |                                 | $ | 48,647  |                                  |  | $ | 27,822                          |   |  | $          | 134,649 |   |               | $ | 25,372   |   |  | $ | 25,372  |  
|Cumulative gap as % of total interest sensitive assets |  |                        | 10.70   | % |                                 |   | 5.89    | %                                |  |   | 3.37                            | % |  |            | 16.31   | % |               |   | 3.07     | % |  |   | 3.07    | %



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---

|(1) | Fixed rate loans and time deposits are assumed to mature on their contractual maturity date, and no assumptions have been assumed for historical prepayment experience. The actual
maturities of these instruments could vary substantially if future prepayments differ from the Companys assumptions
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Non-accrual loans are included as fixed rate loans for purposes of this table.
|--- | ------------------------------------------------------------------------------

|(3) | Other borrowings reflect the effects of the interest rate swap.
|--- | ---------------------------------------------------------------

Static Gap analysis has certain limitations. Measuring the volume of re-pricing or maturing assets and liabilities does not always measure the full impact on net interest income. Static Gap analysis does not account for rate caps on
products; dynamic changes such as increasing prepay speeds as interest rates decrease, basis risk, or the benefit of non-rate funding sources. The relationship between product rate re-pricing and market rate changes (basis risk) is not the same for
all products. The majority of our loan portfolio re-prices quickly and completely following changes in market rates, while non-term deposit rates in general move more slowly and usually incorporate only a fraction of the change in rates. Products
categorized as non-rate sensitive, such as non-interest-bearing demand deposits, in the static Gap analysis behave like long-term fixed rate funding sources. Both of these factors tend to make our behavior more asset sensitive than is indicated in
the static Gap analysis.

Interest rate simulations provide us with an estimate of both the dollar amount and percentage change in NII
under various rate scenarios. All assets and liabilities are normally subjected to up to 300 basis points (bp) in increases and decreases in interest rates in 100 basis point increments. Under each interest rate scenario, we
project our net interest income. From these results, we can then develop alternatives in dealing with the tolerance thresholds.

The
following table shows the effects of changes in projected net interest income for the twelve months ending December 31, 2006 under the interest rate shock scenarios stated. The table was prepared as of December 31, 2005, at which time the
prime rate was 7.25%.



|                       |  |                             |        |                     |   |         |                         |  |        |  
|---------------------- |  | --------------------------- | ------ | ------------------- | - | ------- | ----------------------- |  | ------ | -
|Changesin Rates        |  | ProjectedNet interestIncome |        | ChangefromBase Case |   |         | % Change from Base Case | 
|(dollars in thousands) | 
|+ 300 bp               |  | $                           | 65,034 |                     | $ | 12,790  |                         |  | 24.48  | %
|+ 200 bp               |  | $                           | 61,004 |                     | $ | 8,760   |                         |  | 16.77  | %
|+ 100 bp               |  | $                           | 56,608 |                     | $ | 4,364   |                         |  | 8.35   | %
|0 bp                   |  | $                           | 52,244 |                     | $ |        |                         |  | 0.00   | %
|- 100 bp               |  | $                           | 47,625 |                     | $ | (4,619  | )                       |  | -8.84  | %
|- 200 bp               |  | $                           | 43,159 |                     | $ | (9,085  | )                       |  | -17.39 | %
|- 300 bp               |  | $                           | 41,575 |                     | $ | (10,669 | )                       |  | -20.42 | %

Assumptions are inherently uncertain, and, consequently, the model cannot precisely measure net
interest income or precisely predict the impact of changes in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market
conditions and management strategy.



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                                      |  | PAGE
|Report of Independent Registered Public Accounting Firm                                                         |  | 66  
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                                    |  | 67  
|Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2005, 2004 and 2003 |  | 68  
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2005, 2004 and 2003            |  | 69  
|Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                      |  | 70  
|Notes to Consolidated Financial Statements                                                                      |  | 73  



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Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Stockholders of Community Bancorp Inc.

We have audited the accompanying consolidated balance sheets of Community Bancorp Inc. and
subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income and comprehensive income, stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2005. 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 provide a reasonable basis for
our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
Community Bancorp Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2006 expressed an unqualified opinion on managements assessment of the effectiveness of the Companys internal control over
financial reporting and an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.



|                            
|----------------------------
|/s/    DELOITTE & TOUCHE LLP
|Costa Mesa, California      
|March 13, 2006              



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COMMUNITY BANCORP INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)



|                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                                                                             |  | December 31, |        
|                                                                                                                                                                                                                                             |  | 2005         |         |   | 2004 |  
|ASSETS:                                                                                                                                                                                                                                      |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                    |  | $            | 17,107  |   |      | $ | 14,842  |  
|Interest bearing deposits in financial institutions                                                                                                                                                                                          |  |              | 430     |   |      |   | 1,825   |  
|Federal funds sold                                                                                                                                                                                                                           |  |              | 20,645  |   |      |   | 9,565   |  
|Investments:                                                                                                                                                                                                                                 |  |              |         |   |      |   |         |  
|Held-to-maturity at amortized cost; pledged $1,483 (2005) and $2,111 (2004), estimated fair value of $6,600 (2005) and $4,251
(2004)                                                                                                         |  |              | 6,753   |   |      |   | 4,198   |  
|Available-for-sale, at estimated fair value; pledged $19,342 (2005) and $12,750 (2004)                                                                                                                                                       |  |              | 49,660  |   |      |   | 26,562  |  
|Federal Reserve Bank & Federal Home Loan Bank stock, at cost                                                                                                                                                                                 |  |              | 4,866   |   |      |   | 3,388   |  
|Loans held for investment, net                                                                                                                                                                                                               |  |              | 582,745 |   |      |   | 437,932 |  
|Less allowance for loan losses                                                                                                                                                                                                               |  |              | (9,773  | ) |      |   | (7,508  | )
|                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Net loans held for investment                                                                                                                                                                                                                |  |              | 572,972 |   |      |   | 430,424 |  
|Loans held for sale, net                                                                                                                                                                                                                     |  |              | 154,327 |   |      |   | 101,588 |  
|Premises and equipment, net                                                                                                                                                                                                                  |  |              | 6,971   |   |      |   | 6,737   |  
|Other real estate owned and repossessed assets                                                                                                                                                                                               |  |              | 68      |   |      |   |        |  
|Affordable housing investments                                                                                                                                                                                                               |  |              | 2,395   |   |      |   | 2,579   |  
|Accrued interest                                                                                                                                                                                                                             |  |              | 3,822   |   |      |   | 2,086   |  
|Income tax receivable                                                                                                                                                                                                                        |  |              | 563     |   |      |   |        |  
|Deferred tax asset, net                                                                                                                                                                                                                      |  |              | 6,167   |   |      |   | 5,928   |  
|Servicing assets, net                                                                                                                                                                                                                        |  |              | 3,833   |   |      |   | 4,011   |  
|Interest-only strips, at fair value                                                                                                                                                                                                          |  |              | 2,622   |   |      |   | 1,749   |  
|Other assets                                                                                                                                                                                                                                 |  |              | 9,908   |   |      |   | 8,737   |  
|Goodwill and other intangibles                                                                                                                                                                                                               |  |              | 45,441  |   |      |   | 17,387  |  
|                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Total assets                                                                                                                                                                                                                                 |  | $            | 908,550 |   |      | $ | 641,606 |  
|                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                         |  |              |         |   |      |   |         |  
|Deposits                                                                                                                                                                                                                                     |  |              |         |   |      |   |         |  
|Interest bearing                                                                                                                                                                                                                             |  | $            | 545,517 |   |      | $ | 438,995 |  
|Non-interest bearing                                                                                                                                                                                                                         |  |              | 164,956 |   |      |   | 110,771 |  
|                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Total deposits                                                                                                                                                                                                                               |  |              | 710,473 |   |      |   | 549,766 |  
|Short-term borrowing                                                                                                                                                                                                                         |  |              | 52,290  |   |      |   | 1,000   |  
|Long-term debt                                                                                                                                                                                                                               |  |              | 37,203  |   |      |   | 17,640  |  
|Accrued expenses and other liabilities                                                                                                                                                                                                       |  |              | 12,326  |   |      |   | 10,082  |  
|                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Total liabilities                                                                                                                                                                                                                            |  |              | 812,292 |   |      |   | 578,488 |  
|                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Commitments and Contingencies (Notes 10, 16 and 17)                                                                                                                                                                                          |  |              |         |   |      |   |         |  
|Stockholders equity                                                                                                                                                                                                                         |  |              |         |   |      |   |         |  
|Common stock, $0.625 par value; authorized 10,000,000 shares, issued and outstanding; 5,939,397 (including 11,670 restricted stock awarded
under the equity based compensation plan) at December 31, 2005 and 5,162,725 at December 31, 2004 |  |              | 3,705   |   |      |   | 3,227   |  
|Additional paid-in capital                                                                                                                                                                                                                   |  |              | 61,696  |   |      |   | 38,994  |  
|Deferred compensation  restricted stock                                                                                                                                                                                                     |  |              | (85     | ) |      |   |         |  
|Accumulated other comprehensive loss, net of taxes of $270 (2005) and $66 (2004)                                                                                                                                                             |  |              | (386    | ) |      |   | (73     | )
|Retained earnings                                                                                                                                                                                                                            |  |              | 31,328  |   |      |   | 20,970  |  
|                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                                                                                                   |  |              | 96,258  |   |      |   | 63,118  |  
|                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                                                   |  | $            | 908,550 |   |      | $ | 641,606 |  
|                                                                                                                                                                                                                                             |  |              |         |   |      |   |         |  

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



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(dollars in thousands, except per share data)



|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                                                                     |  | For the years ended December 31, |          
|                                                                                                                                     |  | 2005                             |           |   | 2004 |   |           | 2003 | 
|Interest Income:                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Interest on loans                                                                                                                    |  | $                                | 51,591    |   |      | $ | 31,383    |      |  | $ | 25,580    |  
|Interest on federal funds sold                                                                                                       |  |                                  | 263       |   |      |   | 240       |      |  |   | 143       |  
|Interest on interest bearing deposits in financial institutions                                                                      |  |                                  | 27        |   |      |   | 14        |      |  |   | 5         |  
|Interest on investments                                                                                                              |  |                                  | 1,975     |   |      |   | 994       |      |  |   | 1,058     |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total interest income                                                                                                                |  |                                  | 53,856    |   |      |   | 32,631    |      |  |   | 26,786    |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Interest Expense:                                                                                                                    |  |                                  |           |   |      |   |           |      |  |   |           |  
|Deposits                                                                                                                             |  |                                  | 10,196    |   |      |   | 4,586     |      |  |   | 5,100     |  
|Short-term borrowing                                                                                                                 |  |                                  | 891       |   |      |   | 116       |      |  |   | 313       |  
|Long-term debt                                                                                                                       |  |                                  | 1,728     |   |      |   | 962       |      |  |   | 757       |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total interest expense                                                                                                               |  |                                  | 12,815    |   |      |   | 5,664     |      |  |   | 6,170     |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net interest income before provision for loan losses                                                                                 |  |                                  | 41,041    |   |      |   | 26,967    |      |  |   | 20,616    |  
|Provision for loan losses                                                                                                            |  |                                  | 1,231     |   |      |   | 1,176     |      |  |   | 1,639     |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net interest income after provision for loan losses                                                                                  |  |                                  | 39,810    |   |      |   | 25,791    |      |  |   | 18,977    |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Other operating income:                                                                                                              |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net gain on sale of loans                                                                                                            |  |                                  | 6,968     |   |      |   | 6,683     |      |  |   | 5,161     |  
|Customer service charges                                                                                                             |  |                                  | 1,087     |   |      |   | 831       |      |  |   | 735       |  
|Loan servicing fees, net                                                                                                             |  |                                  | 157       |   |      |   | 829       |      |  |   | 666       |  
|Gain (loss) on repossessed assets                                                                                                    |  |                                  | 157       |   |      |   | (143      | )    |  |   | 61        |  
|Other fee income                                                                                                                     |  |                                  | 1,654     |   |      |   | 1,460     |      |  |   | 1,068     |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total other operating income                                                                                                         |  |                                  | 10,023    |   |      |   | 9,660     |      |  |   | 7,691     |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Other operating expenses:                                                                                                            |  |                                  |           |   |      |   |           |      |  |   |           |  
|Salaries and employee benefits                                                                                                       |  |                                  | 16,407    |   |      |   | 11,421    |      |  |   | 9,608     |  
|Occupancy                                                                                                                            |  |                                  | 2,335     |   |      |   | 1,818     |      |  |   | 1,319     |  
|Professional services                                                                                                                |  |                                  | 1,968     |   |      |   | 3,009     |      |  |   | 1,074     |  
|Depreciation and amortization                                                                                                        |  |                                  | 1,299     |   |      |   | 821       |      |  |   | 799       |  
|Data processing                                                                                                                      |  |                                  | 934       |   |      |   | 765       |      |  |   | 762       |  
|Office expenses                                                                                                                      |  |                                  | 910       |   |      |   | 710       |      |  |   | 663       |  
|Other expenses                                                                                                                       |  |                                  | 5,125     |   |      |   | 3,545     |      |  |   | 2,952     |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Total other operating expenses                                                                                                       |  |                                  | 28,978    |   |      |   | 22,089    |      |  |   | 17,177    |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Income before income tax provision                                                                                                   |  |                                  | 20,855    |   |      |   | 13,362    |      |  |   | 9,491     |  
|Income tax provision                                                                                                                 |  |                                  | 8,259     |   |      |   | 4,996     |      |  |   | 3,595     |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Net income                                                                                                                           |  |                                  | 12,596    |   |      |   | 8,366     |      |  |   | 5,896     |  
|Other comprehensive income  unrealized gain / (loss) on available-for-sale securities, net of income taxes of $(214), $14 and
$(53) |  |                                  | (313      | ) |      |   | 2         |      |  |   | (75       | )
|Comprehensive income                                                                                                                 |  | $                                | 12,283    |   |      | $ | 8,368     |      |  | $ | 5,821     |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Basic earnings per share                                                                                                             |  | $                                | 2.29      |   |      | $ | 1.83      |      |  | $ | 1.51      |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Diluted earnings per share                                                                                                           |  | $                                | 2.17      |   |      | $ | 1.71      |      |  | $ | 1.42      |  
|                                                                                                                                     |  |                                  |           |   |      |   |           |      |  |   |           |  
|Average shares outstanding for basic earnings per share                                                                              |  |                                  | 5,501,774 |   |      |   | 4,570,734 |      |  |   | 3,900,350 |  
|Average shares outstanding for diluted earnings per share                                                                            |  |                                  | 5,814,462 |   |      |   | 4,885,069 |      |  |   | 4,144,666 |  

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



68



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

For the Years Ended December 31, 2005, 2004 and 2003

(dollars in thousands)



|                                                                                |  |              |  |                           |       |                                     |   |        |                                        |   |      |                  |  |   |       |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------- |  | ------------ |  | ------------------------- | ----- | ----------------------------------- | - | ------ | -------------------------------------- | - | ---- | ---------------- |  | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                                                                                |  | Common Stock |  | Additional Paid-InCapital |       | AccumulatedOtherComprehensiveIncome |   |        | Deferred Compensation Restricted Stock |   |      | RetainedEarnings |  |   | Total |  
|                                                                                |  | Shares       |  | Amount                    |       |                                     |   |        |                                       
|Balance at January 1, 2003                                                      |  | 3,542,307    |  | $                         | 2,214 |                                     | $ | 10,734 |                                        | $ |     |                  |  | $ |      |   |  | $ | 7,625  |   |  | $ | 20,573 |  
|Options exercised                                                               |  | 97,635       |  |                           | 61    |                                     |   | 558    |                                        |   |     |                  |  |   |      |   |  |   |       |   |  |   | 619    |  
|Unrealized loss on available for sale securities, net of income taxes of $(53)  |  |             |  |                           |      |                                     |   |       |                                        |   | (75  | )                |  |   |      |   |  |   |       |   |  |   | (75    | )
|Issuance of common stock, net of expenses of $807                               |  | 725,000      |  |                           | 453   |                                     |   | 9,439  |                                        |   |     |                  |  |   |      |   |  |   |       |   |  |   | 9,892  |  
|Tax benefit for options exercised                                               |  |              |  |                           |       |                                     |   | 176    |                                        |   |      |                  |  |   |       |   |  |   |        |   |  |   | 176    |  
|Net income                                                                      |  |             |  |                           |      |                                     |   |       |                                        |   |     |                  |  |   |      |   |  |   | 5,896  |   |  |   | 5,896  |  
|                                                                                |  |              |  |                           |       |                                     |   |        |                                        |   |      |                  |  |   |       |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2003                                                    |  | 4,364,942    |  |                           | 2,728 |                                     |   | 20,907 |                                        |   | (75  | )                |  |   |      |   |  |   | 13,521 |   |  |   | 37,081 |  
|                                                                                |  |              |  |                           |       |                                     |   |        |                                        |   |      |                  |  |   |       |   |  |   |        |   |  |   |        |  
|Options exercised                                                               |  | 118,844      |  |                           | 74    |                                     |   | 863    |                                        |   |     |                  |  |   |      |   |  |   |       |   |  |   | 937    |  
|Dividends paid                                                                  |  |              |  |                           |       |                                     |   |        |                                        |   |      |                  |  |   |       |   |  |   | (917   | ) |  |   | (917   | )
|Unrealized gain on available for sale securities, net of income taxes of $14    |  |             |  |                           |      |                                     |   |       |                                        |   | 2    |                  |  |   |      |   |  |   |       |   |  |   | 2      |  
|Issuance of common stock for merger                                             |  | 678,939      |  |                           | 425   |                                     |   | 16,927 |                                        |   |     |                  |  |   |      |   |  |   |       |   |  |   | 17,352 |  
|Tax benefit for options exercised                                               |  |              |  |                           |       |                                     |   | 297    |                                        |   |      |                  |  |   |       |   |  |   |        |   |  |   | 297    |  
|Net income                                                                      |  |             |  |                           |      |                                     |   |       |                                        |   |     |                  |  |   |      |   |  |   | 8,366  |   |  |   | 8,366  |  
|                                                                                |  |              |  |                           |       |                                     |   |        |                                        |   |      |                  |  |   |       |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2004                                                    |  | 5,162,725    |  |                           | 3,227 |                                     |   | 38,994 |                                        |   | (73  | )                |  |   |      |   |  |   | 20,970 |   |  |   | 63,118 |  
|                                                                                |  |              |  |                           |       |                                     |   |        |                                        |   |      |                  |  |   |       |   |  |   |        |   |  |   |        |  
|Options exercised                                                               |  | 126,081      |  |                           | 79    |                                     |   | 853    |                                        |   |     |                  |  |   |      |   |  |   |       |   |  |   | 932    |  
|Dividends paid                                                                  |  |              |  |                           |       |                                     |   |        |                                        |   |      |                  |  |   |       |   |  |   | (2,238 | ) |  |   | (2,238 | )
|Unrealized gain on available for sale securities, net of income taxes of $(214) |  |             |  |                           |      |                                     |   |       |                                        |   | (313 | )                |  |   |      |   |  |   |       |   |  |   | (313   | )
|Issuance of restricted stock                                                    |  | 11,670       |  |                           |       |                                     |   | 377    |                                        |   |      |                  |  |   | (377  | ) |  |   |        |   |  |   |       |  
|Amortization of restricted stock                                                |  |              |  |                           |       |                                     |   |        |                                        |   |      |                  |  |   | 292   |   |  |   |        |   |  |   | 292    |  
|Issuance of common stock for merger                                             |  | 638,921      |  |                           | 399   |                                     |   | 21,213 |                                        |   |     |                  |  |   |      |   |  |   |       |   |  |   | 21,612 |  
|Tax benefit for options exercised                                               |  |              |  |                           |       |                                     |   | 259    |                                        |   |      |                  |  |   |       |   |  |   |        |   |  |   | 259    |  
|Net income                                                                      |  |             |  |                           |      |                                     |   |       |                                        |   |     |                  |  |   |      |   |  |   | 12,596 |   |  |   | 12,596 |  
|                                                                                |  |              |  |                           |       |                                     |   |        |                                        |   |      |                  |  |   |       |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2005                                                    |  | 5,939,397    |  | $                         | 3,705 |                                     | $ | 61,696 |                                        | $ | (386 | )                |  | $ | (85   | ) |  | $ | 31,328 |   |  | $ | 96,258 |  
|                                                                                |  |              |  |                           |       |                                     |   |        |                                        |   |      |                  |  |   |       |   |  |   |        |   |  |   |        |  

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



69



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,



|                                                                              |  |                        |          |   |      |   |          |      |  |   |         |  
|----------------------------------------------------------------------------- |  | ---------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                              |  | 2005                   |          |   | 2004 |   |          | 2003 | 
|                                                                              |  | (dollars in thousands) |         
|Cash flows from operating activities:                                         |  |                        |          |   |      |   |          |      |  |   |         |  
|Net income                                                                    |  | $                      | 12,596   |   |      | $ | 8,366    |      |  | $ | 5,896   |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |                        |          |   |      |   |          |      |  |   |         |  
|Depreciation and amortization                                                 |  |                        | 1,299    |   |      |   | 821      |      |  |   | 799     |  
|Provision for loan losses                                                     |  |                        | 1,231    |   |      |   | 1,176    |      |  |   | 1,639   |  
|Net amortization of premiums on investment securities                         |  |                        | 460      |   |      |   | 117      |      |  |   | 200     |  
|Amortization of affordable housing investment                                 |  |                        | 307      |   |      |   | 215      |      |  |   | 79      |  
|Amortization of core deposit intangibles                                      |  |                        | 385      |   |      |   | 44       |      |  |   |        |  
|Amortization of deferred compensation  restricted stock                      |  |                        | 292      |   |      |   |         |      |  |   |        |  
|Loan origination fees net of loan origination costs deferred                  |  |                        | (1,316   | ) |      |   | 130      |      |  |   | (885    | )
|Gain on sale of loans held for sale                                           |  |                        | (6,193   | ) |      |   | (5,711   | )    |  |   | (4,811  | )
|(Gain) loss on sale of repossessed assets                                     |  |                        | (157     | ) |      |   | 143      |      |  |   |        |  
|Deferred income tax benefit                                                   |  |                        | (1,258   | ) |      |   | (849     | )    |  |   | (1,811  | )
|Capitalization of interest-only strips                                        |  |                        | (748     | ) |      |   | (1,072   | )    |  |   | (535    | )
|Amortization of interest-only strips                                          |  |                        | 238      |   |      |   | 140      |      |  |   | 69      |  
|Change in unrealized (gain) loss on interest-only strips                      |  |                        | (336     | ) |      |   | 92       |      |  |   | 81      |  
|Capitalization of servicing asset                                             |  |                        | (1,125   | ) |      |   | (1,044   | )    |  |   | (981    | )
|Amortization of servicing asset                                               |  |                        | 558      |   |      |   | 441      |      |  |   | 366     |  
|Impairment (recovery) in valuation allowance for servicing asset              |  |                        | 798      |   |      |   | (4       | )    |  |   | (15     | )
|Loss on trading securities                                                    |  |                        |         |   |      |   |         |      |  |   | 73      |  
|Loss on disposal of premises and equipment                                    |  |                        | 158      |   |      |   | 4        |      |  |   |        |  
|Unrealized (gain) loss on interest rate swap agreement                        |  |                        | (147     | ) |      |   | 153      |      |  |   | 307     |  
|Unrealized hedging (gain) loss on long term debt                              |  |                        | 147      |   |      |   | (153     | )    |  |   | (307    | )
|Origination of loans held for sale                                            |  |                        | (140,031 | ) |      |   | (133,230 | )    |  |   | (93,259 | )
|Proceeds from sale of loans held for sale                                     |  |                        | 93,348   |   |      |   | 90,309   |      |  |   | 79,130  |  
|Decrease (increase) in income tax receivable                                  |  |                        | 13       |   |      |   |         |      |  |   | 309     |  
|Increase (decrease) in income tax payable                                     |  |                        | (319     | ) |      |   | 173      |      |  |   | 146     |  
|Decrease (increase) in accrued interest and other assets                      |  |                        | (2,275   | ) |      |   | (1,271   | )    |  |   | (2,387  | )
|Increase in accrued expenses and other liabilities                            |  |                        | 1,608    |   |      |   | 2,852    |      |  |   | 647     |  
|                                                                              |  |                        |          |   |      |   |          |      |  |   |         |  
|Net cash used in operating activities                                         |  |                        | (40,467  | ) |      |   | (38,158  | )    |  |   | (15,250 | )
|                                                                              |  |                        |          |   |      |   |          |      |  |   |         |  



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,  Continued

|                                                                  |  |                        |   |  |          |   |  |          |  
|----------------------------------------------------------------- |  | ---------------------- | - |  | -------- | - |  | -------- | -
|                                                                  |  | 2005                   |   |  | 2004     |   |  | 2003     |  
|                                                                  |  | (dollars in thousands) |  
|Cash flows from investing activities:                             |  |                        |   |  |          |   |  |          |  
|Origination of loans held for investment                          |  | (352,983               | ) |  | (287,349 | ) |  | (227,528 | )
|Proceeds from principal paid on loans held for investment         |  | 288,721                |   |  | 285,717  |   |  | 189,734  |  
|Net change in interest bearing deposits in financial institutions |  | 1,395                  |   |  | (1,825   | ) |  | 99       |  
|Purchase of trading securities                                    |  |                       |   |  |         |   |  | (37,168  | )
|Sale of trading securities                                        |  |                       |   |  |         |   |  | 53,171   |  
|Purchases of investments held-to-maturity                         |  | (4,091                 | ) |  |         |   |  | (2,302   | )
|Maturities of investments held-to-maturity                        |  | 1,486                  |   |  | 3,469    |   |  | 14,170   |  
|Purchases of available-for-sale investments                       |  | (29,772                | ) |  | (10,039  | ) |  | (17,291  | )
|Maturities of available-for-sale investments                      |  | 10,043                 |   |  | 4,370    |   |  | 1,216    |  
|Purchases of Federal Reserve & Federal Home Loan Bank stocks      |  | (1,339                 | ) |  | (810     | ) |  | (937     | )
|Sales of Federal Home Loan Bank stock                             |  | 457                    |   |  |         |   |  | 486      |  
|Cash paid for acquisitions                                        |  | (15,147                | ) |  | (9,238   | ) |  |         |  
|Cash obtained from acquisitions                                   |  | 40,524                 |   |  | 4,805    |   |  |         |  
|Other repossessed assets acquired in foreclosure                  |  |                       |   |  | (39      | ) |  |         |  
|Paydown of debt acquired through foreclosure                      |  | (729                   | ) |  |         |   |  |         |  
|Proceeds from sale of repossessed assets                          |  | 1,788                  |   |  | 354      |   |  | 810      |  
|Increase in affordable housing investments                        |  | (122                   | ) |  | (1,305   | ) |  |         |  
|Purchases of premises and equipment                               |  | (1,571                 | ) |  | (1,642   | ) |  | (272     | )
|Proceeds from sale of premises and equipment                      |  | 24                     |   |  |         |   |  |          |  
|Decrease (increase) in restricted cash                            |  |                       |   |  |         |   |  | 1,152    |  
|Net (increase) decrease in federal funds sold                     |  | (11,080                | ) |  | 19,025   |   |  | (8,235   | )
|                                                                  |  |                        |   |  |          |   |  |          |  
|Net cash provided by (used in) investing activities               |  | (72,396                | ) |  | 5,493    |   |  | (32,895  | )
|                                                                  |  |                        |   |  |          |   |  |          |  



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



71



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,  Concluded



|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                                                                                             |  | 2005                   |         |   | 2004 |   |         | 2003 | 
|                                                                                                                                                             |  | (dollars in thousands) |        
|Cash flows from financing activities:                                                                                                                        |  |                        |         |   |      |   |         |      |  |   |        |  
|Net increase in deposits:                                                                                                                                    |  |                        |         |   |      |   |         |      |  |   |        |  
|Interest bearing                                                                                                                                             |  | $                      | 14,183  |   |      | $ | 48,827  |      |  | $ | 11,952 |  
|Non-interest bearing                                                                                                                                         |  |                        | 32,251  |   |      |   | 5,720   |      |  |   | 17,222 |  
|Proceeds from exercise of stock options                                                                                                                      |  |                        | 932     |   |      |   | 937     |      |  |   | 619    |  
|Cash dividends paid                                                                                                                                          |  |                        | (2,238  | ) |      |   | (917    | )    |  |   |       |  
|Issuance of long-term debt                                                                                                                                   |  |                        | 20,000  |   |      |   |        |      |  |   | 4,910  |  
|Proceeds from short-term borrowings                                                                                                                          |  |                        | 50,000  |   |      |   |        |      |  |   | 16,862 |  
|Repayment of short-term borrowings                                                                                                                           |  |                        |        |   |      |   | (25,000 | )    |  |   | (7,362 | )
|Proceeds from stock offering, net of expenses                                                                                                                |  |                        |        |   |      |   |        |      |  |   | 10,068 |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Net cash provided by financing activities                                                                                                                    |  |                        | 115,128 |   |      |   | 29,567  |      |  |   | 54,271 |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Net increase (decrease) in cash and cash equivalents                                                                                                         |  |                        | 2,265   |   |      |   | (3,098  | )    |  |   | 6,126  |  
|Cash and cash equivalents at beginning of year                                                                                                               |  |                        | 14,842  |   |      |   | 17,940  |      |  |   | 11,814 |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Cash and cash equivalents at end of year                                                                                                                     |  | $                      | 17,107  |   |      | $ | 14,842  |      |  | $ | 17,940 |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Supplemental disclosure of cash flow information:                                                                                                            |  |                        |         |   |      |   |         |      |  |   |        |  
|Cash paid during the year for:                                                                                                                               |  |                        |         |   |      |   |         |      |  |   |        |  
|Interest on time deposits                                                                                                                                    |  | $                      | 9,365   |   |      | $ | 4,029   |      |  | $ | 5,675  |  
|Interest on other borrowings                                                                                                                                 |  |                        | 2,565   |   |      |   | 1,059   |      |  |   | 1,049  |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Total interest paid                                                                                                                                          |  | $                      | 11,930  |   |      | $ | 5,088   |      |  | $ | 6,724  |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Income Taxes                                                                                                                                                 |  | $                      | 8,459   |   |      | $ | 6,301   |      |  | $ | 4,775  |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Supplemental disclosure of non-cash investing activities:                                                                                                    |  |                        |         |   |      |   |         |      |  |   |        |  
|Debt acquired on repossessed assets                                                                                                                          |  | $                      | 729     |   |      | $ |        |      |  | $ |       |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Other repossessed asssets acquired in foreclosure                                                                                                            |  | $                      | 1,699   |   |      | $ |        |      |  | $ |       |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Loans transferred to repossessed assets                                                                                                                      |  | $                      |        |   |      | $ | 39      |      |  | $ | 724    |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Loans held for investment transferred to held-for-sale                                                                                                       |  | $                      |        |   |      | $ | 21,897  |      |  | $ | 6,318  |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Debt transferred from long-term to short-term                                                                                                                |  | $                      | 1,290   |   |      | $ |        |      |  | $ |       |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Restricted stock grants                                                                                                                                      |  | $                      | 377     |   |      | $ |        |      |  | $ |       |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Tax benefit from options exercised                                                                                                                           |  | $                      | 259     |   |      | $ |        |      |  | $ |       |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Assets acquired from acquisitions                                                                                                                            |  | $                      | 124,401 |   |      | $ | 115,458 |      |  | $ |       |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Liabilities acquired from acquisitions                                                                                                                       |  | $                      | 116,081 |   |      | $ | 106,299 |      |  | $ |       |  
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  
|Supplemental disclosure of non-cash financing activities:                                                                                                    |  |                        |         |   |      |   |         |      |  |   |        |  
|Change in unrealized gain/(loss) on available-for-sale securities, net of income tax benefit of $(214), $14 and $(53) recorded in Other
Comprehensive Income |  | $                      | (313    | ) |      | $ | 2       |      |  | $ | (75    | )
|                                                                                                                                                             |  |                        |         |   |      |   |         |      |  |   |        |  

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



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COMMUNITY BANCORP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For Each of the Three Years in the Period Ended December 31, 2005

1. Summary of Significant Accounting Policies:

Basis of presentation

The consolidated financial statements include the accounts of Community Bancorp Inc. and its wholly owned subsidiary, Community National Bank, (the
Bank), collectively referred to herein as the Company. Intercompany balances and transactions have been eliminated.

Nature of
Operations

The Company is headquartered in Escondido, California and operates eleven branch offices located in Bonsall, El Cajon,
Encinitas, Escondido, Fallbrook, La Mesa, Murietta, Rancho Bernardo, Santee, Temecula and Vista, California. The Company also operates nine Small Business Administration (SBA) loan production offices that originate loans in California,
Arizona and Nevada. The Companys primary sources of revenue are SBA, construction, and other real estate based loans to individuals and small to middle-market businesses.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (generally
accepted accounting principles) and to general practices within the banking industry. The following is a description of the more significant policies.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance
for loan losses, the valuation of the servicing assets, servicing liability and interest-only strips, the valuation of repossessed assets and the valuation of the acquired assets and liabilities of Cuyamaca Bank, N.A. and Rancho Bernardo Community
Bank.

Cash and Cash Equivalents

For
purposes of the balance sheet and statements of cash flows, cash and cash equivalents include cash and non-interest bearing receivables due from banks.

Investments

Management determines the appropriate classification of securities at the time of purchase. If management has
the intent and the Company has the ability at the time of purchase to hold securities until maturity, they may be classified as held-to-maturity. Investment securities held-to-maturity are stated at cost, adjusted for amortization of premiums and
accretion of discounts over the period to maturity of the related security using the interest method. Securities to be held for indefinite periods of time, but not necessarily with the intent to trade or to be held-to-maturity or on a long-term
basis, are classified as available-for-sale are accounted for at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income, net of deferred taxes. Realized gains or losses on the sale of
securities available-for-sale, if any, are determined using the amortized cost of the specific securities sold. Non-marketable securities are recorded at cost and assessed for impairment on a periodic basis.



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Loans and Related Interest and Fees

Loans held for investment are stated at the principal amount outstanding and loans held for sale are carried at the lower of cost or market at any given reporting date. Market is determined by obtaining estimated
pricing from third party investors in similar types of product and considers loan type, maturity, interest rate, margin (if applicable) and other factors.

Interest income on loans is recorded on an accrual basis in accordance with the terms of the respective loan. The accrual of interest on loans is discontinued when, in managements judgment, a reasonable doubt
exists as to the collectibility of interest and principal or when the principal and interest due on a loan becomes delinquent for 90 days. When loans are placed on non-accrual status, all interest previously accrued, but not collected, is reversed
against current period interest income. Income on non-accrual loans is subsequently recognized only to the extent that cash is received and the loans principal balance is deemed collectible. Non-accrual loans that become current as to both
principal and interest are returned to accrual status.

Non-refundable fees and related direct costs associated with the production of
loans are deferred and netted against outstanding loan balances. Net deferred fees and costs are recognized into interest income over the contractual life of the loan using the interest method. The amortization of loan fees is discontinued on
non-accrual loans. Other fees on loans are recorded as income when earned.

Sales and Servicing of SBA 7a Loans

The Company originates loans to customers under the SBA 7a program that generally provides for SBA guarantees of 50% to 85% of each loan. The Company
sells a portion of the SBA 7a loans originated. On loans sold, the Company allocates the carrying value of such loans between the portion sold and the portion retained, based upon estimates of their relative fair value at the time of sale. The
difference between the adjusted carrying value and the face amount of the portion retained is amortized to interest income over the life of the related loans using the interest method.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities (SFAS No. 140), the Company recognizes a servicing asset or liability at the time a loan is sold and the Company retains the servicing, based on the present value of the estimated future cash flows. The
servicing asset is amortized proportionately over the period based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the servicing rights estimated at the time of sale.
Projected net servicing income is determined on the basis of the estimated future balance of the underlying loan portfolio, which decreases over time from scheduled loan amortization and prepayments. The Company estimates future prepayment rates
based on relevant characteristics of the servicing portfolio, such as loan types, original terms to maturity and historical prepayment speeds, as well as current interest rate levels, market forecasts and other economic conditions.

In subsequent valuations if the fair value of the servicing asset is less than the amortized carrying value, the asset is considered impaired. A
valuation allowance must be established for the impaired asset by a charge against income for the difference between the amortized carrying value and the fair value.

Rights to future servicing income from serviced loans that exceed 100 basis points of contractually specified servicing fees are classified as interest-only strips. Although collected as servicing income, management
has determined that any income received above 100 basis points is used solely as an offset to the premium received on the guaranteed portion sold and therefore is essentially a separately created financial instrument that should be treated as an
interest-only strip, which if need be, the Bank has the option to sell in the secondary market. The interest-only strips are initially recorded at fair value based on the present value of the estimated future cash flows and amortized over their
estimated remaining life. The fair value of the portfolio is recalculated on a quarterly basis with any unrealized gains or losses recorded in earnings in the period of change of fair value.



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Allowance for Loan Losses

An allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan portfolio and other extensions of credit, including off-balance
sheet credit extensions. The allowance is based upon a continuing review of the portfolio, past loan loss experience and current economic conditions, which may affect the borrowers ability to pay, guarantees by government agencies and the
underlying collateral value of the loans. Loans which are deemed to be uncollectible are charged off and deducted from the allowance. Changes in these factors and conditions may cause managements estimate of the allowance to increase or
decrease and result in adjustments to our provision for loan losses.

In determining the appropriate level of the allowance for loan
losses, our management and Directors Loan Committee initially identify all classified, restructured or non-performing loans and analyzes each loan for impairment, as well as any government guarantees on these loans, which in general do not
require an allowance for loan loss. Loans are considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the original contractual terms of the loan agreement. If the measure of the impaired loan is
less than the recorded investment in the loan, a valuation allowance is established with a corresponding charge to the provision for loan losses. We measure an impaired loan by using the fair value of the collateral if the loan is
collateral-dependent and the present value of the expected future cash flows discounted at the loans effective interest rate if the loan is not collateral-dependent.

After the specific allowances for loans are allocated, the remaining loans are pooled based on collateral type. A range of potential losses is determined
using an eight quarter historical analysis by pool based on the relative carrying value at the time of charge off. In addition, our management and Directors Loan Committee establish reserve levels for each pool based upon loan type as well as
market condition for the underlying collateral, considering such factors as trends in the real estate market, economic uncertainties and other risks that exist as of each reporting period. In general there are no reserves established for the
government guaranteed portion of loans outstanding. All non-specific reserves are allocated to each of these pools.

Changes in the
financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses and the
associated provision for loan losses.

In addition, various regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments related to information available to them at the time of their examinations.

Based on the Companys evaluation process to determine the level of the allowance for loan losses mentioned previously and as the
majority of the Companys non-performing loans are secured, management believes the allowance level to be adequate as of December 31, 2005 to absorb the estimated known and inherent risks identified through its analysis.

The Company has established a reserve for losses on commitments to extend credit. The reserves for losses on commitments to extend credit are determined
based on the historical losses on the underlying collateral of the commitment. The majority of these commitments are on construction loans. Management and the Directors Loan Committee also establish reserves for each pool based upon loan type
as well as market conditions for the underlying real estate or other collateral, considering such factors as trends in the real estate market, economic uncertainties and other risks that exist as of each reporting period. In general there are no
reserves established for the government guaranteed portion of commitments to extend credit.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to operating expense utilizing the straight-line method
over the estimated useful lives, which range from three to ten



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years. Leasehold improvements are capitalized and amortized on a straight-line basis over the term of their lease or the estimated useful life of the
improvement, whichever is shorter. Buildings are depreciated on a straight-line basis over 40 years and expenditures for maintenance and repairs are charged to expense as incurred.

Other Real Estate Owned and Repossessed Assets

Real estate properties or repossessed assets acquired
through foreclosure or deed-in-lieu of foreclosure are initially recorded at the lower of cost or fair value less estimated costs to sell at the date of foreclosure through a charge to the allowance for estimated loan losses. Subsequent declines in
value are charged to operations.

Affordable Housing Investments

The Company has invested in limited partnerships formed to develop and operate affordable housing units for lower income tenants throughout the state of California. The costs of the investments are being amortized on
a level-yield method over the life of the related tax credits. If the partnerships cease to qualify during the compliance period, the credits may be denied for any period in which the projects are not in compliance and a portion of the credits
previously taken is subject to recapture with interest.

Goodwill and Other Intangibles

Net assets arising from acquisitions are recorded at fair value at the date of acquisition. The historical cost basis of individual assets and liabilities
are adjusted to reflect their fair value. Identified intangibles are amortized on an accelerated or straight-line basis over the period benefited. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or if events or
circumstances indicate a potential impairment, at the reporting unit level.

Other intangible assets subject to amortization are evaluated
for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss will be recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The
carrying amount of the intangible is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. Other intangibles included on the Consolidated Balance Sheet consists of core deposit
intangibles that are amortized using an estimated life of 8.5 and 7.8 years, respectively for the Cuyamaca and Rancho Bernardo acquisitions.

Derivatives and Hedging Activity

The Company may use derivative financial instruments to manage its exposure arising from
changes in interest rates. The Company does not hold or issue derivative financial instruments for trading purposes. The Company follows the guidance from SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Under
these standards, the Company accounts for derivatives on its balance sheet at fair value as assets or liabilities. Gains or losses resulting from changes in those fair values are recorded depending on the use of the derivative and whether or not it
qualifies for hedge accounting. The swap cash flows as a result of the hedge are reported in interest expense. The Companys interest rate swap agreement was classified as a fair value hedge on one of its trust preferred securities;
consequently, the changes in the fair value of the interest rate swap recognized in earnings are offset by the changes in the fair value of the hedged trust preferred securities. As the hedging relationship met certain conditions provided for in
SFAS No. 133, the Company assumes no ineffectiveness in the hedging relationship.

Income Taxes

Deferred income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and



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tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date.

Trust Preferred Securities

The Company invests in
three wholly owned special purpose entities: Community (CA) Capital Trust I (Trust I), Community (CA) Capital Statutory Trust II (Trust II) and Community (CA) Capital Statutory Trust III (Trust III). Trust I
entered into an interest rate swap agreement in 2002 which was classified as a fair value hedge of the Trust. Effectively the value of Trust I is reported at fair value due to the net effect of the hedge. The unrealized gains and losses resulting
from changes in value of the interest rate swap and the hedged trust preferred securities are recorded though income (See Note 11, Derivatives and Hedging Activity for further discussion). The Company accounts for its investment in the
Trusts using the equity method under which the subsidiaries net earnings are recognized in the Bancorps statement of income, pursuant to Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Components of comprehensive income are reported in the financial statements in
the period in which they are recognized. The components of other comprehensive income include unrealized gain or losses on available-for-sale securities.

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents, and other potentially dilutive securities outstanding
during the period.

Stock Option Plans

At December 31, 2005 the Company had outstanding stock options and other stock based awards (see Note 15). The Company accounts for stock options using the intrinsic value method under the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and provides proforma net income and proforma earnings per share disclosures for employee stock option grants as if the fair-value-based method,
defined in SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), had been applied. At December 31, 2005, the Company recorded compensation expense of $292,000 in net income as a result of restricted stock awards
granted to certain employees during 2005. No restricted stock awards were granted in 2004 or 2003.

Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Companys net income would have been reduced to the pro forma per share amounts indicated below:



|                                                                                                                                                |  |                                                  |        |   |      |   |       |      |  |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ------ | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                                                                                                |  | 2005                                             |        |   | 2004 |   |       | 2003 | 
|                                                                                                                                                |  | (dollars in thousands, except
per share amounts) |       
|Net income, as reported                                                                                                                         |  | $                                                | 12,596 |   |      | $ | 8,366 |      |  | $ | 5,896 |  
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                                                  | (422   | ) |      |   | (258  | )    |  |   | (172  | )
|                                                                                                                                                |  |                                                  |        |   |      |   |       |      |  |   |       |  
|Proforma net income                                                                                                                             |  | $                                                | 12,174 |   |      | $ | 8,108 |      |  | $ | 5,724 |  
|                                                                                                                                                |  |                                                  |        |   |      |   |       |      |  |   |       |  
|Basic income per share, as reported                                                                                                             |  | $                                                | 2.29   |   |      | $ | 1.83  |      |  | $ | 1.51  |  
|Proforma basic income per share                                                                                                                 |  | $                                                | 2.21   |   |      | $ | 1.77  |      |  | $ | 1.47  |  
|Diluted income per share, as reported                                                                                                           |  | $                                                | 2.17   |   |      | $ | 1.71  |      |  | $ | 1.42  |  
|Proforma diluted income per share                                                                                                               |  | $                                                | 2.09   |   |      | $ | 1.66  |      |  | $ | 1.38  |  



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Recent Accounting Developments:

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149) and is effective for hedging relationships entered into or
modified after June 30, 2003. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of SFAS No. 149 did not have a material impact on the Companys financial condition, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity (SFAS
No. 150), which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic companies. The adoption of SFAS No. 150 did not have a material impact on the
Companys financial condition, results of operations or cash flows.

In December 2003, the AICPA issued SOP 03-3, which requires that
loans purchased at a discount due to poor credit quality be recorded at fair value and prohibits the recognition of a loss accrual or valuation allowance at the time of purchase. SOP 03-3 also limits the yield that may be accreted to the excess of
the undiscounted expected cash flows over the initial investment of the loan. Subsequent increases in expected cash flows are recognized prospectively through an adjustment of yield over its remaining life and decreases in expected cash flows are
recognized as an impairment. The Company adopted SOP 03-3 and was effective on loans or debt securities acquired after December 31, 2004. The adoption of SOP 03-3 did not have a material impact on the Companys financial condition, results
of operations or cash flows.

In December 2003, the FASB issued FIN No. 46R,Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51. FIN No. 46R requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest
entitys activities or is entitled to receive a majority of the entitys residual returns or both. FIN No. 46R also requires disclosures about variable interest entities that companies are not required to consolidate but in which
a company has a significant variable interest. The consolidation requirements must be adopted no later than the beginning of the first fiscal year or interim period beginning after March 15, 2004. The Company adopted the provision of
FIN No. 46R as of December 31, 2003. The adoption of FIN No. 46R did not have a material impact on the Companys financial condition, results of operations or cash flows.

In March 2004, the Emerging Issues Task Force (EITF) reached consensus on the guidance provided in EITF Issue No. 03-1, The Meaning
of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1) as applicable to debt and equity securities that are within the scope of SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities and equity securities that are accounted for using the cost method specified in Accounting Policy Board Opinion No. 18 The Equity Method of Accounting for Investments in Common Stock. An investment
is impaired if the fair value of the investment is less than its cost. EITF 03-1 outlines that an impairment would be considered other-than-temporary unless: a) the investor has the ability and intent to hold an investment for a reasonable period of
time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment, and b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary.
Although not presumptive, a pattern of selling investments prior to the forecasted recovery of fair value may call into question the investors intent. The severity and duration of the impairment should also be considered in determining
whether the impairment is other-than-temporary. The Company adopted EITF 03-1 on July 1, 2004. The adoption of EITF 03-1 did not have a material impact on the operations or the financial condition of the Company.



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In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation,
which supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those
equity instruments. This statement focuses primarily on accounting for transactions in which any entity obtains employee services in share-based payment transactions. This statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for
the award  the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. This statement is effective for public entities that do
not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company will adopt SFAS No. 123(R) on January 1, 2006. The adoption of SFAS No. 123(R) is
not expected to have a material impact on the operations or the financial condition of the Company. Initial estimates for 2006 put the impact to earnings at approximately $227,000 pre-tax.

In November 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) 115-1/124-1, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments.This FSP provides additional guidance on when an investment in a debt or equity security should be considered impaired and when that impairment should be considered other-than-temporary and
recognized as a loss in earnings. Specifically, the guidance clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. The FSP also
requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Companies are required to apply the guidance in this FSP to reporting periods beginning after December 15, 2005. We expect that
the adoption of this FSP will not have a significant effect on our financial condition or results of operation.

In May 2005, the FASB
issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154),which is a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements. This statement changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle and applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior periods financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior
periods presented, this statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding
adjustment be made to the opening balance of retained earnings for that period rather than being reported in an income statement. This statement is effective for accounting changes made in fiscal years beginning after December 15, 2005. The
Company will adopt SFAS No. 154 on January 1, 2006.

In December 2005, the FASB issued SOP 94-6-1, Terms of Loan Products that
may give rise to a concentration of Credit Risk. The FASB staff position is intended to emphasize the requirement to assess the adequacy of disclosures for all lending products and the effect of changes in market or economic conditions on the
adequacy of those disclosures. No changes are expected from this staff position.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current years presentation.



79



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2. Merger-related Activity:

Cuyamaca Bank, N.A. Merger. Pursuant to the Agreement and Plan of Merger, dated June 28, 2004, by and between the Company and Cuyamaca Bank, N.A. (the Merger Agreement), the Company acquired all the assets
and assumed the liabilities of Cuyamaca Bank, N.A. Cuyamacas results of operations were included in the Companys results beginning October 1, 2004.

Under the terms of the Merger Agreement, shareholders of Cuyamaca Bank common stock had the choice to receive cash, shares of Community or a combination up to a maximum of 70% of the total consideration being in
Community shares. The transaction was valued at $26.6 million, or $25.56 per share, including the fair value of options outstanding (the exchange ratio for stock consideration was 1.0439 shares of Community common stock for each Cuyamaca share). The
total consideration was paid in 678,939 of Community stock and $7.4 million in cash, in accordance with the provisions of the Merger Agreement. Cuyamaca Bank operated banking offices in the east San Diego County cities of Santee, El Cajon and La
Mesa and in the north San Diego County city of Encinitas. All of the banking offices of Cuyamaca are being operated by Community National Bank.

The Merger was accounted for under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations. Accordingly, the purchase price was allocated to the assets acquired and the liabilities
assumed based on their estimated fair values at the merger date as summarized below.



|                                                                                       |  |   |         |   |  |  | 
|-------------------------------------------------------------------------------------- |  | - | ------- | - |  |  | 
|(dollars in thousands, except per share data)                                          | 
|                                                                                      
|Purchase price                                                                         | 
|Cuyamaca Bank, N.A. common stock exchanged                                             |  |   | 650,387 |   |  |  | 
|Exchange ratio                                                                         |  |   | 1.0439  |   |  |  | 
|                                                                                       |  |   |         |   |  |  | 
|Total shares of the Companys common stock exchanged                                   |  |   | 678,939 |   |  |  | 
|Fair value per share of the Companys common stock (1)                                 |  | $ | 25.56   |   |  |  | 
|                                                                                       |  |   |         |   |  |  | 
|Total value of the Companys common stock exchanged                                    |  | $ | 17,352  |  
|Cash paid for Cuyamaca Bank, N. A common stock                                         |  |   | 7,445   |  
|Direct acquisition costs                                                               |  |   | 1,823   |  
|                                                                                       |  |   |         |   |  |  | 
|Total purchase price                                                                   |  | $ | 26,620  |  
|                                                                                       |  |   |         |   |  |  | 
|Allocation of the purchase price                                                       |  |   |         |   |  |  | 
|Cuyamaca Bank, N. A. stockholders equity                                              |  | $ | 9,108   |  
|Estimated adjustments to reflect assets aquired and liabilities assumed at fair value: |  |   |         |   |  |  | 
|Investments                                                                            |  |   | 2       |  
|Loans                                                                                  |  |   | (919    | )
|Premises and equipment                                                                 |  |   | 61      |  
|Other assets and deferred income tax                                                   |  |   | (158    | )
|Deposits                                                                               |  |   | (126    | )
|Other liabilities                                                                      |  |   | 284     |  
|                                                                                       |  |   |         |   |  |  | 
|Estimated adjustment to fair value of net assets acquired                              |  |   | 8,252   |  
|                                                                                       |  |   |         |   |  |  | 
|Estimated gross goodwill and other intangibles resulting from the Merger (2)           |  | $ | 18,368  |  
|                                                                                       |  |   |         |   |  |  | 

---

|(1) | The value of the shares of common stock exchanged with Cuyamaca Bank, N.A. stockholders was based upon the 20 day average closing price of the Company shares ending on
September 24, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes $2.3 million allocated to core deposit intangibles. (See Footnote 8).
|--- | ------------------------------------------------------------------------------

Rancho Bernardo Community Bank Merger. Pursuant to the Agreement to Merge and Plan of Reorganization, dated April 21, 2005, by and between the Company and Rancho Bernardo Community Bank (the Agreement),
the Company acquired all the assets and assumed the liabilities of Rancho Bernardo Community Bank. Rancho Bernardos results of operations were included in the Companys results of operations beginning August 19, 2005.



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Under the terms of the Agreement, shareholders of Rancho Bernardo Community Bank common stock had the
choice to receive cash, shares of Community or a combination of the two. The transaction was valued at $36.7 million, or $33.15 per share, including the fair value of options outstanding (the exchange ratio for stock consideration was 0.949 shares
of Community common stock for each Rancho Bernardo share). The total consideration was paid in 638,921 shares of Community stock and $13.3 million in cash, in accordance with the provisions of the Agreement. Rancho Bernardo Community Bank operated
one banking office in the north San Diego community of Rancho Bernardo. The banking office of Rancho Bernardo is being operated by Community National Bank.

The Merger was accounted for under the purchase method of accounting in accordance with SFAS No. 141. Accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based on
their estimated fair values at the Merger date as summarized below. The allocation of the purchase price will be modified over the next eight months, as more information is obtained about the fair value of assets acquired and liabilities assumed.
For informational and comparative purposes, certain tables have been expanded to include a column entitled Rancho Bernardo, August 19, 2005. This column represents balances acquired from Rancho Bernardo as of August 19, 2005,
including purchase price adjustments.



|                                                                                       |  |   |         |   |  |  | 
|-------------------------------------------------------------------------------------- |  | - | ------- | - |  |  | 
|(dollars in thousands, except per share data)                                          |  |   |         |   |  |  | 
|                                                                                       |  |  
|Purchase price                                                                         |  |   |         |   |  |  | 
|Rancho Bernardo Community Bank, N.A. common stock exchanged                            |  |   | 673,257 |   |  |  | 
|Exchange ratio                                                                         |  |   | 0.949   |   |  |  | 
|                                                                                       |  |   |         |   |  |  | 
|Total shares of the Companys common stock exchanged                                   |  |   | 638,921 |   |  |  | 
|Fair value per share of the Companys common stock (1)                                 |  | $ | 33.15   |   |  |  | 
|                                                                                       |  |   |         |   |  |  | 
|Total value of the Companys common stock exchanged                                    |  | $ | 21,180  |  
|Cash paid for Rancho Bernardo Bank, N. A common stock                                  |  |   | 13,313  |  
|Fair value of outstanding stock options and direct acquistion costs                    |  |   | 2,219   |  
|                                                                                       |  |   |         |   |  |  | 
|Total purchase price                                                                   |  | $ | 36,712  |  
|                                                                                       |  |   |         |   |  |  | 
|Allocation of the purchase price                                                       |  |   |         |   |  |  | 
|Rancho Bernardo Community Bank, N. A. stockholders equity                             |  | $ | 10,047  |  
|Estimated adjustments to reflect assets aquired and liabilities assumed at fair value: |  |   |         |   |  |  | 
|Loans                                                                                  |  |   | 63      |  
|Other assets and deferred income tax                                                   |  |   | (834    | )
|Deposits                                                                               |  |   | (107    | )
|Other liabilities                                                                      |  |   | 41      |  
|                                                                                       |  |   |         |   |  |  | 
|Estimated adjustment to fair value of net assets acquired                              |  |   | 9,210   |  
|                                                                                       |  |   |         |   |  |  | 
|Estimated gross goodwill and other intangibles resulting from the Merger (2)           |  | $ | 27,502  |  
|                                                                                       |  |   |         |   |  |  | 

---

|(1) | The value of the shares of common stock exchanged with Rancho Bernardo Community Bank stockholders was based upon the 20 day average closing price of the Company shares ending on
August 12, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes $2.6 million allocated to core deposit intangibles. (See Footnote 8).
|--- | ------------------------------------------------------------------------------



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Unaudited Pro Forma Condensed Combined Financial Information

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company had the Merger taken place at
January 1, 2004.

Unaudited Pro Forma Condensed Combined Financial Information

(dollars in thousands, except per share amounts)



|                                                          |  |              |           |      |   |          
|--------------------------------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                                          |  | December 31,
|                                                          |  | 2005         |           | 2004
|Net interest income                                       |  | $            | 44,658    |      | $ | 36,628   
|Other operating income                                    |  |              | 10,248    |      |   | 11,050   
|Provision for loan losses                                 |  |              | 1,528     |      |   | 1,717    
|Other operating expense                                   |  |              | 31,597    |      |   | 29,785   
|                                                          |  |              |           |      |   |          
|Income before income tax provision                        |  |              | 21,781    |      |   | 16,176   
|Income tax provision                                      |  |              | 8,637     |      |   | 6,183    
|                                                          |  |              |           |      |   |          
|Net income                                                |  | $            | 13,144    |      | $ | 9,993    
|                                                          |  |              |           |      |   |          
|Earnings per share:                                       |  |              |           |      |   |          
|Basic                                                     |  | $            | 2.23      |      | $ | 1.75     
|                                                          |  |              |           |      |   |          
|Fully diluted                                             |  | $            | 2.11      |      | $ | 1.66     
|                                                          |  |              |           |      |   |          
|Average shares outstanding for basic earnings per share   |  |              | 5,904,382 |      |   | 5,716,186
|Average shares outstanding for diluted earnings per share |  |              | 6,217,070 |      |   | 6,030,521

3. Investments:

The Company held $1.9 million and $1.2 million in Federal Reserve Bank stock as of December 31, 2005 and 2004, respectively. The Company held $3.0 million in Federal Home Loan Bank stock as of December 31,
2005, compared to $2.2 million as of December 31, 2004.

The following table presents the amortized cost, gross unrealized gains and
losses, and estimated fair value of investment securities as of December 31, 2005 and 2004. The section entitled Rancho Bernardo Bank at August 19, 2005 represents the investments which were acquired as of August 19, 2005.



|                                        |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|--------------------------------------- |  | ---------------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------ | - |  | - | ------
|                                        |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFairValue
|                                        |  | (dollars in thousands)
|At December 31, 2005                    |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Held-to-Maturity                        |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities       |  | $                      | 2,049  |                      | $ | 10                    |  | $ | (163               | ) |  | $ | 1,896 
|SBA loan pools                          |  |                        | 4,704  |                      |   | 6                     |  |   | (6                 | ) |  |   | 4,703 
|                                        |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Total held-to-maturity                  |  | $                      | 6,753  |                      | $ | 16                    |  | $ | (169               | ) |  | $ | 6,600 
|                                        |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Available-for-sale                      |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities       |  | $                      | 50,327 |                      | $ |                      |  | $ | (667               | ) |  | $ | 49,660
|                                        |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|At December 31, 2004                    |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Held-to-Maturity                        |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities       |  | $                      | 3,281  |                      | $ | 53                    |  | $ | (6                 | ) |  | $ | 3,328 
|SBA loan pools                          |  |                        | 917    |                      |   | 6                     |  |   |                   |   |  |   | 923   
|                                        |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Total held-to-maturity                  |  | $                      | 4,198  |                      | $ | 59                    |  | $ | (6                 | ) |  | $ | 4,251 
|                                        |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Available-for-sale                      |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities       |  | $                      | 26,701 |                      | $ | 39                    |  | $ | (178               | ) |  | $ | 26,562
|                                        |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Rancho Bernardo Bank at August 19, 2005 |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Available-for-sale                      |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities       |  | $                      | 4,094  |                      | $ |                      |  | $ |                   |   |  | $ |      
|                                        |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       



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As of December 31, 2005, the Company had pledged $19.3 million of its agency mortgage-backed
securities, classified as available for sale, for public deposits and other purposes.

The following table presents the current fair value
and the associated unrealized losses only on investments classified as held to maturity and available for sale with unrealized holding losses at December 31, 2005. The table also discloses whether these securities have had unrealized holding
losses for less than 12 months or for 12 months or longer:



|                                                             |  |                        |        |                  |                   |      |            |       |                  |     |  |            |    |                  |  |   |        |  |   |      |  
|------------------------------------------------------------ |  | ---------------------- | ------ | ---------------- | ----------------- | ---- | ---------- | ----- | ---------------- | --- |  | ---------- | -- | ---------------- |  | - | ------ |  | - | ---- | -
|                                                             |  | Less than 12 Months    |        |                  | 12 Months or More |      |            | Total |                 
|Description of Securities                                    |  | Fair Value             |        | UnrealizedLosses |                   |      | Fair Value |       | UnrealizedLosses |     |  | Fair Value |    | UnrealizedLosses | 
|                                                             |  | (dollars in thousands) |       
|Mortgage-backed securities, classified as held-to-maturity   |  |                        |        |                  |                   |      |            |       |                  |     |  |            |    |                  |  |   |        |  |   |      |  
|FHLMC                                                        |  | $                      | 287    |                  | $                 | (2   | )          |       | $                | 420 |  | $          | (2 | )                |  | $ | 707    |  | $ | (4   | )
|FNMA                                                         |  |                        | 4,445  |                  |                   | (159 | )          |       |                  |    |  |            |   |                  |  |   | 4,445  |  |   | (159 | )
|SBA                                                          |  |                        | 412    |                  |                   | (6   | )          |       |                  |    |  |            |   |                  |  |   | 412    |  |   | (6   | )
|                                                             |  |                        |        |                  |                   |      |            |       |                  |     |  |            |    |                  |  |   |        |  |   |      |  
|                                                             |  | $                      | 5,144  |                  | $                 | (167 | )          |       | $                | 420 |  | $          | (2 | )                |  | $ | 5,564  |  | $ | (169 | )
|                                                             |  |                        |        |                  |                   |      |            |       |                  |     |  |            |    |                  |  |   |        |  |   |      |  
|Mortgage-backed securities, classified as available-for-sale |  |                        |        |                  |                   |      |            |       |                  |     |  |            |    |                  |  |   |        |  |   |      |  
|FHLMC                                                        |  | $                      | 22,847 |                  | $                 | (421 | )          |       | $                |    |  | $          |   |                  |  | $ | 22,847 |  | $ | (421 | )
|FNMA                                                         |  |                        | 26,813 |                  |                   | (246 | )          |       |                  |    |  |            |   |                  |  |   | 26,813 |  |   | (246 | )
|                                                             |  |                        |        |                  |                   |      |            |       |                  |     |  |            |    |                  |  |   |        |  |   |      |  
|                                                             |  | $                      | 49,660 |                  | $                 | (667 | )          |       | $                |    |  | $          |   |                  |  | $ | 49,660 |  | $ | (667 | )
|                                                             |  |                        |        |                  |                   |      |            |       |                  |     |  |            |    |                  |  |   |        |  |   |      |  

As of December 31, 2005, the unrealized holding losses related to variable rate agency
mortgage-backed securities, such as unrealized holding losses are the result of an increase in market interest rates in the second half of 2005 are not the result of credit or principal risk. There were 24 investment positions that were in an
unrealized loss position, one of which has been in that position 12 months or more. Based on the nature of the investments and other considerations discussed above, as well as managements intent and ability to hold these securities until the
unrealized loss is recovered, management concluded that such unrealized losses were not other than temporary as of December 31, 2005.

The contractual maturities of securities held to maturity at December 31, 2005 were as follows:



|                                                      |  |                        |       |                     |   |                               |  |      |  
|----------------------------------------------------- |  | ---------------------- | ----- | ------------------- | - | ----------------------------- |  | ---- | -
|Year maturing                                         |  | Amortized Cost         |       | Estimated FairValue |   | WeightedAverage InterestYield | 
|                                                      |  | (dollars in thousands) |      
|Mortgage-backed securities                            |  |                        |       |                     |   |                               |  |      |  
|Due greater than one year through five years          |  | $                      | 140   |                     | $ | 140                           |  | 5.14 | %
|Due greater than five years through ten years         |  |                        | 4,875 |                     |   | 4,731                         |  | 4.33 | %
|Mortgage-backed securities due greater than ten years |  |                        | 1,088 |                     |   | 1,079                         |  | 4.34 | %
|                                                      |  |                        |       |                     |   |                               |  |      |  
|Subtotal mortgage-backed securities                   |  |                        | 6,103 |                     |   | 5,950                         |  | 4.35 | %
|SBA pass through securities                           |  |                        |       |                     |   |                               |  |      |  
|Due greater than ten years                            |  |                        | 650   |                     |   | 650                           |  | 5.27 | %
|                                                      |  |                        |       |                     |   |                               |  |      |  
|Total                                                 |  | $                      | 6,753 |                     | $ | 6,600                         |  | 4.44 | %
|                                                      |  |                        |       |                     |   |                               |  |      |  



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The contractual maturities of investment securities available-for-sale at December 31, 2005 were as
follows:



|                                                      |  |                        |        |                     |   |                               |  |      |  
|----------------------------------------------------- |  | ---------------------- | ------ | ------------------- | - | ----------------------------- |  | ---- | -
|Year maturing                                         |  | Amortized Cost         |        | Estimated FairValue |   | WeightedAverage InterestYield | 
|                                                      |  | (dollars in thousands) |       
|Mortgage-backed securities                            |  |                        |        |                     |   |                               |  |      |  
|Due greater than one year through five years          |  | $                      |       |                     | $ |                              |  | 0.00 | %
|Due greater than five years through ten years         |  |                        | 4,955  |                     |   | 4,954                         |  | 5.24 | %
|Mortgage-backed securities due greater than ten years |  |                        | 45,372 |                     |   | 44,706                        |  | 4.04 | %
|                                                      |  |                        |        |                     |   |                               |  |      |  
|Total                                                 |  | $                      | 50,327 |                     | $ | 49,660                        |  | 4.16 | %
|                                                      |  |                        |        |                     |   |                               |  |      |  

4. Sales and Servicing of SBA 7a Loans:

At December 31, 2005, changes in the valuation of the servicing asset were negatively impacted by an impairment adjustment of $798,000 of the
servicing asset. Changes in the valuation of the servicing asset were not considered material for the period ending December 31, 2004. In estimating fair values at December 31, 2005, the Company utilized a weighted average prepayment
assumption of approximately 9.14% and a discount rate of 11.25%. In estimating fair values at December 31, 2004, the Company utilized a weighted average prepayment assumption of approximately 8.53% and a discount rate of 10.00%.

The activity for the servicing asset for the years ended December 31, 2005, 2004 and 2003 is summarized as follows:



|                                              |  |                        |       |   |      |   |       |      |  |   |       |  
|--------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                              |  | 2005                   |       |   | 2004 |   |       | 2003 | 
|                                              |  | (dollars in thousands) |      
|Balance at beginning of year                  |  | $                      | 4,011 |   |      | $ | 3,247 |      |  | $ | 2,617 |  
|Servicing assets aquired in merger            |  |                        | 53    |   |      |   | 155   |      |  |   |      |  
|Servicing assets recognized on SBA loans sold |  |                        | 1,125 |   |      |   | 1,046 |      |  |   | 981   |  
|Amortization                                  |  |                        | (558  | ) |      |   | (441  | )    |  |   | (366  | )
|(Provision for) recovery of valuation reserve |  |                        | (798  | ) |      |   | 4     |      |  |   | 15    |  
|                                              |  |                        |       |   |      |   |       |      |  |   |       |  
|Balance at end of year                        |  | $                      | 3,833 |   |      | $ | 4,011 |      |  | $ | 3,247 |  
|                                              |  |                        |       |   |      |   |       |      |  |   |       |  
|Fair value of servicing assets                |  | $                      | 3,833 |   |      | $ | 4,011 |      |  | $ | 3,247 |  
|                                              |  |                        |       |   |      |   |       |      |  |   |       |  

The activity for the valuation reserve for the servicing asset for the years ended
December 31, 2005, 2004 and 2003 is summarized as follows:



|                                |  |                        |     |   |      |   |     |      |  |   |     |  
|------------------------------- |  | ---------------------- | --- | - | ---- | - | --- | ---- |  | - | --- | -
|                                |  | 2005                   |     |   | 2004 |   |     | 2003 | 
|                                |  | (dollars in thousands) |    
|Balance at beginning of year    |  | $                      | (31 | ) |      | $ | (35 | )    |  | $ | (50 | )
|Provision for valuation reserve |  |                        |    |   |      |   | (11 | )    |  |   | (10 | )
|Recovery of valuation reserve   |  |                        | 31  |   |      |   | 15  |      |  |   | 25  |  
|                                |  |                        |     |   |      |   |     |      |  |   |     |  
|Balance at end of year          |  | $                      |    |   |      | $ | (31 | )    |  | $ | (35 | )
|                                |  |                        |     |   |      |   |     |      |  |   |     |  



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The following table summarizes the estimated aggregate amortization expense for loan servicing rights:



|                          |  |                        |      
|------------------------- |  | ---------------------- | -----
|                          |  | December 31, 2005     
|Years ending December 31: |  | (dollars in thousands)
|2006                      |  | $                      | 452  
|2007                      |  |                        | 407  
|2008                      |  |                        | 367  
|2009                      |  |                        | 326  
|2010                      |  |                        | 291  
|Thereafter                |  |                        | 1,990
|                          |  |                        |      
|Total                     |  | $                      | 3,833
|                          |  |                        |      

The fair value of interest-only strips was $2.6 million and $1.7 million at December 31, 2005
and 2004, respectively. Unrealized gains or losses on interest-only strips were positively impacted by fair value adjustments of $437,000 for the period ending December 31, 2005. The fair value of interest-only strips was estimated using a
weighted average prepayment assumption of approximately 9.14% and a discount rate of 11.25%. At December 31, 2004, the fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 8.53% and a
discount rate of 10.00%.

5. Loans

The
following is a summary of loans as of December 31, 2005 and 2004:



|                                                       |  |                        |         |   |                         |   |         |                                     |  |   |                    |   |  |                         |         |   |            |   |         |                   |  |                         |         |   |            |   |   |  |   |        |   |  |   |        |  
|------------------------------------------------------ |  | ---------------------- | ------- | - | ----------------------- | - | ------- | ----------------------------------- |  | - | ------------------ | - |  | ----------------------- | ------- | - | ---------- | - | ------- | ----------------- |  | ----------------------- | ------- | - | ---------- | - | - |  | - | ------ | - |  | - | ------ | -
|                                                       |  | December 31,           |         |   |                         |  
|                                                       |  | 2005                   |         |   | 2004                    |   |         | Rancho Bernardo BankAugust 19, 2005 | 
|                                                       |  | Loans Heldfor Sale     |         |   | Loans HeldforInvestment |   |         | TotalLoans                          |  |   | Loans Heldfor Sale |   |  | Loans HeldforInvestment |         |   | TotalLoans |   |         | LoansHeld forSale |  | Loans HeldforInvestment |         |   | TotalLoans |  
|                                                       |  | (dollars in thousands) |        
|Construction loans                                     |  | $                      |        |   |                         | $ | 109,500 |                                     |  | $ | 109,500            |   |  | $                       |        |   |            | $ | 75,200  |                   |  | $                       | 75,200  |   |            | $ |  |  | $ | 39,416 |   |  | $ | 39,416 |  
|Real estate one- to four-family                        |  |                        |        |   |                         |   | 16,994  |                                     |  |   | 16,994             |   |  |                         |        |   |            |   | 8,690   |                   |  |                         | 8,690   |   |            |   |  |  |   | 3,741  |   |  |   | 3,741  |  
|Real estate commercial                                 |  |                        | 154,049 |   |                         |   | 356,571 |                                     |  |   | 510,620            |   |  |                         | 101,385 |   |            |   | 276,724 |                   |  |                         | 378,109 |   |            |   |  |  |   | 18,659 |   |  |   | 18,659 |  
|Consumer home equity lines of credit                   |  |                        |        |   |                         |   | 10,459  |                                     |  |   | 10,459             |   |  |                         |        |   |            |   | 8,027   |                   |  |                         | 8,027   |   |            |   |  |  |   | 5,150  |   |  |   | 5,150  |  
|Other consumer                                         |  |                        |        |   |                         |   | 10,620  |                                     |  |   | 10,620             |   |  |                         |        |   |            |   | 9,473   |                   |  |                         | 9,473   |   |            |   |  |  |   | 578    |   |  |   | 578    |  
|Commercial                                             |  |                        |        |   |                         |   | 53,552  |                                     |  |   | 53,552             |   |  |                         |        |   |            |   | 35,213  |                   |  |                         | 35,213  |   |            |   |  |  |   | 13,052 |   |  |   | 13,052 |  
|Aircraft                                               |  |                        |        |   |                         |   | 28,617  |                                     |  |   | 28,617             |   |  |                         |        |   |            |   | 28,819  |                   |  |                         | 28,819  |   |            |   |  |  |   |       |   |  |   |       |  
|                                                       |  |                        |         |   |                         |   |         |                                     |  |   |                    |   |  |                         |         |   |            |   |         |                   |  |                         |         |   |            |   |   |  |   |        |   |  |   |        |  
|Total gross loans                                      |  |                        | 154,049 |   |                         |   | 586,313 |                                     |  |   | 740,362            |   |  |                         | 101,385 |   |            |   | 442,146 |                   |  |                         | 543,531 |   |            |   |  |  |   | 80,596 |   |  |   | 80,596 |  
|Deferred loan origination costs (fees)                 |  |                        | 499     |   |                         |   | (1,671  | )                                   |  |   | (1,172             | ) |  |                         | 447     |   |            |   | (2,052  | )                 |  |                         | (1,605  | ) |            |   |  |  |   | (288   | ) |  |   | (288   | )
|Discount on unguaranteed portion of SBA loans retained |  |                        | (221    | ) |                         |   | (1,897  | )                                   |  |   | (2,118             | ) |  |                         | (244    | ) |            |   | (2,162  | )                 |  |                         | (2,406  | ) |            |   |  |  |   | (58    | ) |  |   | (58    | )
|Allowance for loan losses                              |  |                        |        |   |                         |   | (9,773  | )                                   |  |   | (9,773             | ) |  |                         |        |   |            |   | (7,508  | )                 |  |                         | (7,508  | ) |            |   |  |  |   | (1,269 | ) |  |   | (1,269 | )
|                                                       |  |                        |         |   |                         |   |         |                                     |  |   |                    |   |  |                         |         |   |            |   |         |                   |  |                         |         |   |            |   |   |  |   |        |   |  |   |        |  
|Net loans                                              |  | $                      | 154,327 |   |                         | $ | 572,972 |                                     |  | $ | 727,299            |   |  | $                       | 101,588 |   |            | $ | 430,424 |                   |  | $                       | 532,012 |   |            | $ |  |  | $ | 78,981 |   |  | $ | 78,981 |  
|                                                       |  |                        |         |   |                         |   |         |                                     |  |   |                    |   |  |                         |         |   |            |   |         |                   |  |                         |         |   |            |   |   |  |   |        |   |  |   |        |  

The Companys lending activities are concentrated primarily in the western Riverside and San
Diego counties of Southern California. Although the Company seeks to avoid undue concentrations of loans to a single industry based upon a single class of collateral or real estate, real estate associated business areas are among the principal
industries in the Companys market area. As a result, the Companys loan and collateral portfolios are,



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to a significant degree, concentrated in those industries. The Company evaluates credit on an individual basis and determines collateral requirements
accordingly. When real estate is taken as collateral, advances are generally limited to a certain percentage of the appraised value of the collateral at the time the loan is made, depending on the type of loan, the underlying property and other
factors.

As of December 31, 2005 and 2004, the Company had commitments to extend credit on construction and other loans of $209.7
million and $147.0 million, respectively.

The maturity distribution of the loan portfolio as of December 31, 2005 is as follows:



|                   |  |                        |         |                                |   |             |  |                                    |         |  |   |       
|------------------ |  | ---------------------- | ------- | ------------------------------ | - | ----------- |  | ---------------------------------- | ------- |  | - | ------
|                   |  | Loans Held forSale     |         | Loans Held forInvestment,gross |   | Total Loans |  | RanchoBernardo BankAugust 19, 2005
|                   |  | (dollars in thousands)
|Less than one year |  | $                      | 1,827   |                                | $ | 273,061     |  | $                                  | 274,888 |  | $ | 59,650
|One to five years  |  |                        | 525     |                                |   | 85,611      |  |                                    | 86,136  |  |   | 6,737 
|After five years   |  |                        | 151,975 |                                |   | 227,363     |  |                                    | 379,338 |  |   | 14,209
|                   |  |                        |         |                                |   |             |  |                                    |         |  |   |       
|Total gross loans  |  | $                      | 154,327 |                                | $ | 586,035     |  | $                                  | 740,362 |  | $ | 80,596
|                   |  |                        |         |                                |   |             |  |                                    |         |  |   |       

The rate composition of the loan portfolio as of December 31, 2005 is as follows:



|                    |  |                        |         |                                |   |             |  |                                    |         |  |   |       
|------------------- |  | ---------------------- | ------- | ------------------------------ | - | ----------- |  | ---------------------------------- | ------- |  | - | ------
|                    |  | Loans Held forSale     |         | Loans Held forInvestment,gross |   | Total Loans |  | RanchoBernardo BankAugust 19, 2005
|                    |  | (dollars in thousands)
|Fixed rate loans    |  | $                      | 11,886  |                                | $ | 81,486      |  | $                                  | 93,372  |  | $ | 2,968 
|Variable rate loans |  |                        | 142,441 |                                |   | 504,549     |  |                                    | 646,990 |  |   | 77,628
|                    |  |                        |         |                                |   |             |  |                                    |         |  |   |       
|Total gross loans   |  | $                      | 154,327 |                                | $ | 586,035     |  | $                                  | 740,362 |  | $ | 80,596
|                    |  |                        |         |                                |   |             |  |                                    |         |  |   |       

As of December 31, 2005 and 2004, the government guaranteed portion of total gross loans was
$32.4 million and $37.0 million, respectively. As of December 31, 2005, the loan to one borrower limit was $14.0 million.

In the
normal course of business, the Company has granted loans to certain directors and their affiliates under terms which are consistent with the Companys general lending policies.

The activity for loans outstanding with these directors and their affiliates follows:



|                                  |  |                        |       |   |      |   |       |  
|--------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | -
|                                  |  | 2005                   |       |   | 2004 |  
|                                  |  | (dollars in thousands) |      
|Balance, beginning of year        |  | $                      | 5,121 |   |      | $ | 4,851 |  
|Loans granted, including renewals |  |                        | 6     |   |      |   | 407   |  
|Repayments                        |  |                        | (142  | ) |      |   | (137  | )
|                                  |  |                        |       |   |      |   |       |  
|Balance, end of year              |  | $                      | 4,985 |   |      | $ | 5,121 |  
|                                  |  |                        |       |   |      |   |       |  

The Company had no additional commitments for loans to affiliates as of December 31, 2005 and
2004.



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6. Allowance for Loan Losses

A summary of the transactions in the allowance for loan losses on loans held for investment, including provisions for impaired loans, follows:



|                                                           |  |                        |       |   |      |   |       |      |  |   |       |  
|---------------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                           |  | 2005                   |       |   | 2004 |   |       | 2003 | 
|                                                           |  | (dollars in thousands) |      
|Balance at beginning of year                               |  | $                      | 7,508 |   |      | $ | 5,210 |      |  |   | 3,945 |  
|Reserve acquired in merger                                 |  |                        | 1,269 |   |      |   | 1,156 |      |  |   |      |  
|Provision for loan losses                                  |  |                        | 1,231 |   |      |   | 1,176 |      |  |   | 1,639 |  
|Losses charged off                                         |  |                        | (504  | ) |      |   | (66   | )    |  |   | (680  | )
|Recoveries                                                 |  |                        | 269   |   |      |   | 32    |      |  |   | 335   |  
|Less: Provision for losses on commitments to extend credit |  |                        |      |   |      |   |      |      |  |   | (29   | )
|                                                           |  |                        |       |   |      |   |       |      |  |   |       |  
|Allowance for losses on loans outstanding                  |  | $                      | 9,773 |   |      | $ | 7,508 |      |  | $ | 5,210 |  
|                                                           |  |                        |       |   |      |   |       |      |  |   |       |  

The reserve for losses on commitments to extend credit, included in accrued expenses and other
liabilities, was $295,000 at December 31, 2005 and $203,000 at December 31, 2004. The increase was the result of the Rancho Bernardo merger.

The following presents a summary of impaired loans and any impairment allowance by loan type:



|                     |  |                        |       |                     |   |               |  |                     |       |  |   |    
|-------------------- |  | ---------------------- | ----- | ------------------- | - | ------------- |  | ------------------- | ----- |  | - | ---
|                     |  | 2005                   |       | 2004               
|                     |  | (dollars in thousands)
|                     |  | ImpairedLoans          |       | ImpairmentAllowance |   | ImpairedLoans |  | ImpairmentAllowance
|SBA                  |  | $                      | 828   |                     | $ | 166           |  | $                   | 2,838 |  | $ | 344
|Commercial           |  |                        | 2,294 |                     |   | 200           |  |                     | 1,189 |  |   | 238
|Real Estate          |  |                        | 526   |                     |   | 105           |  |                     |      |  |   |   
|                     |  |                        |       |                     |   |               |  |                     |       |  |   |    
|Total impaired loans |  | $                      | 3,648 |                     | $ | 471           |  | $                   | 4,027 |  | $ | 582
|                     |  |                        |       |                     |   |               |  |                     |       |  |   |    

For the years ended December 31, 2005, 2004, and 2003 interest income of $436,000, $4,800 and
$91,000 was recorded on impaired loans on a cash basis, respectively, and the average balance of impaired loans was $4.8 million, $4.9 million and $3.9 million, respectively. There were no loans contractually past due 90 days or more and still
accruing as of December 31, 2005 and 2004.

7. Premises and Equipment:

Premises and equipment as of December 31, 2005 and 2004 are as follows:



|                                          |  |                        |        |   |      |   |        |                                      |  |   |        |  
|----------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ------------------------------------ |  | - | ------ | -
|                                          |  | 2005                   |        |   | 2004 |   |        | Rancho BernardoBank August 19 , 2005 | 
|                                          |  | (dollars in thousands) |       
|Land                                      |  | $                      | 797    |   |      | $ | 797    |                                      |  | $ |       |  
|Building                                  |  |                        | 1,467  |   |      |   | 1,460  |                                      |  |   |       |  
|Furniture, fixtures and equipment         |  |                        | 8,547  |   |      |   | 7,798  |                                      |  |   | 1,308  |  
|Leasehold improvements                    |  |                        | 2,922  |   |      |   | 2,829  |                                      |  |   | 155    |  
|                                          |  |                        |        |   |      |   |        |                                      |  |   |        |  
|                                          |  |                        | 13,733 |   |      |   | 12,884 |                                      |  |   | 1,463  |  
|Accumulated depreciation and amortization |  |                        | (6,762 | ) |      |   | (6,147 | )                                    |  |   | (1,314 | )
|                                          |  |                        |        |   |      |   |        |                                      |  |   |        |  
|                                          |  | $                      | 6,971  |   |      | $ | 6,737  |                                      |  | $ | 149    |  
|                                          |  |                        |        |   |      |   |        |                                      |  |   |        |  

Total depreciation expense was $1.3 million, $821,000 and $799,000 in 2005, 2004 and 2003,
respectively.



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8. Goodwill and Other Intangibles

The Company performs an impairment assessment in the third quarter of each year or more frequently if circumstances necessitate. During the fourth quarter 2005, the Company performed its annual impairment test and
concluded that there was no impairment to the book value of the Companys goodwill. Absent any impairment indicators, the Company expects to perform its next impairment test during the third quarter of 2006.

The gross carrying value and accumulated amortization related to core deposit intangibles at December 31, 2005 and 2004 are presented below:



|                         |  |                        |       |      |   |      
|------------------------ |  | ---------------------- | ----- | ---- | - | -----
|                         |  | December 31,          
|                         |  | 2005                   |       | 2004
|                         |  | (dollars in thousands)
|Gross Carrying Value     |  | $                      | 4,846 |      | $ | 2,275
|Accumulated Amortization |  |                        | 429   |      |   | 44   
|                         |  |                        |       |      |   |      
|Net Carrying Value       |  | $                      | 4,417 |      | $ | 2,231
|                         |  |                        |       |      |   |      

As a result of the Cuyamaca Bank and Rancho Bernardo Community Bank mergers, the Company recorded
$2.3 and $2.6 million, respectively of core deposit intangibles. The amortization period for the Cuyamaca and Rancho Bernardo core deposit intangibles were approximately 8.5 years and 7.8 years, respectively. Amortization expense on core deposit
intangibles was $385,000 and $44,000 for the years ended December 31, 2005 and 2004, respectively. The Company estimates that the annual amortization expense will be approximately $594,000 for 2006, 2007, 2008, 2009 and 2010.

9. Deposits and Interest Expense:

Deposits by major
classification as of December 31, 2005 and 2004 are as follows:



|                               |  |                        |         |      |   |                                    |  |   |        
|------------------------------ |  | ---------------------- | ------- | ---- | - | ---------------------------------- |  | - | -------
|                               |  | 2005                   |         | 2004 |   | Rancho BernardoBankAugust 19, 2005
|                               |  | (dollars in thousands)
|Non-interest bearing demand    |  | $                      | 164,956 |      | $ | 110,771                            |  | $ | 36,462 
|Interest bearing demand        |  |                        | 69,169  |      |   | 61,269                             |  |   | 6,151  
|Money market savings           |  |                        | 137,968 |      |   | 98,982                             |  |   | 25,536 
|Savings                        |  |                        | 23,029  |      |   | 22,109                             |  |   | 6,996  
|Time deposits $100,000 or more |  |                        | 209,737 |      |   | 178,579                            |  |   | 14,976 
|Time deposits under $100,000   |  |                        | 105,614 |      |   | 78,056                             |  |   | 11,917 
|                               |  |                        |         |      |   |                                    |  |   |        
|Total                          |  | $                      | 710,473 |      | $ | 549,766                            |  | $ | 102,038
|                               |  |                        |         |      |   |                                    |  |   |        

Interest expense on deposits for the years ended December 31, 2005, 2004 and 2003 is
comprised of the following:



|                                |  |                        |        |      |   |       |  |   |      
|------------------------------- |  | ---------------------- | ------ | ---- | - | ----- |  | - | -----
|                                |  | 2005                   |        | 2004 |   | 2003 
|                                |  | (dollars in thousands)
|Interest bearing demand         |  | $                      | 130    |      | $ | 81    |  | $ | 105  
|Money market savings            |  |                        | 1,607  |      |   | 571   |  |   | 581  
|Savings                         |  |                        | 39     |      |   | 29    |  |   | 60   
|Time deposits, $100,000 or more |  |                        | 2,277  |      |   | 2,796 |  |   | 2,717
|Time deposits under $100,000    |  |                        | 6,143  |      |   | 1,109 |  |   | 1,637
|                                |  |                        |        |      |   |       |  |   |      
|Total                           |  | $                      | 10,196 |      | $ | 4,586 |  | $ | 5,100
|                                |  |                        |        |      |   |       |  |   |      



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The following summarizes the scheduled maturity of time deposits as of December 31, 2005 (dollars in
thousands):



|                                 |  |   |        
|-------------------------------- |  | - | -------
|2006                             |  | $ | 285,790
|2007                             |  |   | 6,010  
|2008                             |  |   | 998    
|2009                             |  |   | 397    
|2010                             |  |   | 22,156 
|                                 |  |   |        
|Total                            |  | $ | 315,351
|                                 |  |   |        
|Three months or less             |  | $ | 118,495
|Over three months to six months  |  |   | 96,904 
|Over six months to twelve months |  |   | 70,390 
|Over twelve months               |  |   | 29,562 
|                                 |  |   |        
|Total                            |  | $ | 315,351
|                                 |  |   |        

The Company reclassifies any transaction accounts that are overdrawn at the reporting date
to consumer loans. The aggregate amount of overdrafts as of December 31, 2005 was $354,000 compared to $123,000 as of December 31, 2004.

10. Other Borrowed Funds:

The Company had the following borrowing facilities as of December 31, 2005 and 2004:



|                           |  |                         |         |                         |              |                        |       |   |                    |   |                        |  |       |                    |  |   |       
|-------------------------- |  | ----------------------- | ------- | ----------------------- | ------------ | ---------------------- | ----- | - | ------------------ | - | ---------------------- |  | ----- | ------------------ |  | - | ------
|                           |  | As of December 31, 2005 |         | As of December 31, 2004
|                           |  | Maximumborrowing        |         | Expiration date         |              | Month-endinterest rate |       |   | Outstandingbalance |   | Month-endinterest rate |  |       | Outstandingbalance
|Trust Preferred I *        |  | $                       | 10,000  |                         | Sep 30, 2030 |                        | 11.00 | % |                    | $ | 10,000                 |  | 11.00 | %                  |  | $ | 10,000
|Trust Preferred II         |  |                         | 5,000   |                         | Sep 01, 2033 |                        | 7.45  | % |                    |   | 5,000                  |  | 5.45  | %                  |  |   | 5,000 
|Trust Preferred III        |  |                         | 20,000  |                         | Aug 31, 2035 |                        | 5.85  | % |                    |   | 20,000                 |  | N/A   |                    |  |   | N/A   
|Federal Home Loan Bank     |  |                         | 119,981 |                         | Open ended   |                        | 4.05  | % |                    |   | 54,790                 |  | 2.21  | %                  |  |   | 3,790 
|Pacific Coast Bankers Bank |  |                         | 20,000  |                         | Jun 30, 2006 |                        | N/A   |   |                    |   |                       |  | N/A   |                    |  |   |      
|Wells Fargo                |  |                         | 15,000  |                         | Open ended   |                        | N/A   |   |                    |   |                       |  | N/A   |                    |  |   |      
|U.S. Bank                  |  |                         | 20,000  |                         | Open ended   |                        | N/A   |   |                    |   |                       |  | N/A   |                    |  |   |       
|                           |  |                         |         |                         |              |                        |       |   |                    |   |                        |  |       |                    |  |   |       
|                           |  | $                       | 209,981 |                         |              |                        |       |   |                    | $ | 89,790                 |  |       |                    |  | $ | 18,790
|                           |  |                         |         |                         |              |                        |       |   |                    |   |                        |  |       |                    |  |   |       

---

|* | The interest rate swap agreement effectively converts the 11.0% fixed rate interest payments to variable payments. The effective rate as of December 31, 2005 was
9.37%.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of December 31, 2005 and 2004, the Company had $34.7 million and $14.8 million, respectively, of trust preferred securities, net of the fair value hedge mark-to-market adjustment of $297,000 and $150,000,
respectively, outstanding classified as long-term debt. The following is a brief description of each security:

Community (CA) Capital
Trust I, a Delaware business trust, issued $10.0 million of 11.0% Fixed Rate Capital Trust Pass-through Securities (TRUPS-Registered Trademark), with liquidation value of $1,000 per share. The securities have semi-annual interest
payments, with principal due at maturity in 2030. The Trust used the proceeds from the sale of the trust preferred securities to purchase junior subordinated debentures of the Company. The Company received $9.7 million from the Trust upon issuance
of the junior subordinated debentures, of which $3.2 million was used to pay off borrowings of the Company, and $5.8 million was contributed to the Bank to increase its capital. The Company entered into an interest rate swap agreement on
December 16, 2002 in order to hedge the interest payments on the long-term debt (see Note 11).



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Community (CA) Statutory Capital Trust II, a Connecticut business trust, issued $5.0 million of Floating
Rate Capital Trust Pass-through Securities, with a liquidation value of $1,000 per share. The securities, which mature in 2033, are callable at par after five years and pay cash distributions at a per annum rate and reset quarterly at the three
month LIBOR plus 2.95%. The Trust used the proceeds from the sale of the trust preferred securities to purchase junior subordinated debentures of the Company. The Company received $4.9 million from the Trust upon issuance of the junior subordinated
debentures, of which $4.8 million was contributed to the Bank to increase its capital.

Community (CA) Statutory Capital Trust III, a
Delaware business trust, issued $20.0 million of Fixed/Floating Rate Capital Trust Pass-through Securities, with a liquidation value of $1,000 per share. The securities, which mature in 2035, pay interest at a fixed rate of interest of 5.85% for the
first five years, and a floating rate of interest thereafter at LIBOR plus 1.69%. The Trust used the proceeds from the sale of the trust preferred securities to fund the Rancho Bernardo Community Bank acquisition. The Company received $20.0 million
from the Trust upon issuance of the junior subordinated debentures, of which $15.1 million was paid for the Rancho Bernardo Community acquisition as of September 30, 2005, $4.4 million was contributed to the Bank to increase its capital and the
remainder was used for other corporate purposes.

With the adoption of FIN 46R, the Company deconsolidated its grantor trusts. As a result,
the junior subordinated debentures issued by the Company to the grantor trusts, totaling $34.7 million and $14.8 million, are reflected in the consolidated balance sheet in the liabilities section at December 31, 2005 and 2004,
respectively, under the caption long-term debt. Prior years have been reclassified to conform to the current year presentation.

The Company also has an open ended line of credit with the Federal Home Loan Bank of San Francisco (the FHLB), which provides up to $120.0 million as of December 31, 2005. Interest rates vary based upon the term of the
borrowing at the time of the advance. The line of credit was obtained to maintain liquidity at the Bank. Interest is payable on a monthly basis, and the effective rate at December 31, 2005 was 4.05%. The outstanding balance was $54.8 million as
of December 31, 2005, and the average balance of the advances for the year ended December 31, 2005 was $29.3 million. The weighted average interest rate was 3.32% for the year ended December 31, 2005. The line of credit requires that
collateral in the form of loans or securities be pledged as security for the loan. As of December 31, 2005, loans with a principal balance of $129.6 million and a mortgage backed security with a principal balance of $43.1 million were pledged
to the FHLB as collateral for the line. In addition to the collateral requirement, the Company is required to purchase FHLB stock. The Company had $3.0 million in FHLB stock as of December 31, 2005.

The Company maintains an unsecured line of credit with another correspondent bank which provides up to $20.0 million through June 30, 2006 bearing a
variable interest rate as established by the lender on a daily basis. The line of credit was obtained to provide additional liquidity on a short-term basis to the Bank. Interest is payable on a daily basis, and the principal is callable at any time
by the lender. Under these agreements, there were no borrowings outstanding at December 31, 2005 and no activity during the year ended December 31, 2005.

The Company has an open ended unsecured line of credit with another correspondent bank which provides up to $15.0 million bearing a variable interest rate as established by the lender on a daily basis. The line of
credit was obtained to provide additional liquidity on a short-term basis to the Bank. Interest is payable on a daily basis, and the principal is callable at any time by the lender. Under these agreements, there were no borrowings outstanding at
December 31, 2005 and no activity during the year ended December 31, 2005.

The Company has an open ended unsecured line of
credit with another correspondent bank which provides up to $20.0 million bearing a variable interest rate as established by the lender on a daily basis. The line of credit was obtained to provide additional liquidity on a short-term basis to the
Bank. Interest is payable on a daily basis, and the principal is callable at any time by the lender. Under these agreements, there were no borrowings outstanding at December 31, 2005 and no activity during the year ended December 31, 2005.



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The following table reflects the contractual maturities of borrowings as of December 31, 2005:



|                         |  |                        |       
|------------------------ |  | ---------------------- | ------
|Year ending December 31, |  | (dollars in thousands)
|2006                     |  | $                      | 52,290
|2007                     |  |                        | 1,250 
|2008                     |  |                        |      
|2009                     |  |                        | 750   
|2010                     |  |                        |      
|Thereafter               |  |                        | 35,203
|                         |  |                        |       
|Total                    |  | $                      | 89,493
|                         |  |                        |       

11. Derivatives and Hedging Activity:

In 2002, the Company entered into an interest rate swap agreement to effectively convert the 11% fixed rate interest payments on the $10.0 million
long-term debt issued by Trust I to variable payments, based upon six-month LIBOR as a goal to reduce (shorten) the duration of the trust preferred securities from over 20 years to six months. The reduction of the duration will more effectively
match the re-pricing characteristics of the Banks assets. The majority of the Banks loans are adjustable rate loans tied to the prime index. The interest rate swap agreement was classified as a fair value hedge of the long-term debt, and
consequently, the unrealized gains and losses resulting from changes in value of the interest rate swap and the hedged trust preferred securities are recorded though income. As the hedging relationship met the conditions provided for in SFAS
No. 133, the Company assumes no ineffectiveness in the hedging relationship. At December 31, 2005, the interest rate swap received a fixed rate of 11.0% and paid a variable rate, based upon six-month LIBOR plus spread, of 9.36%, with a
notional value of $10.0 million and a fair value, based on broker quoted price, resulting in an unrealized loss of approximately $297,000. The swap will mature in March 2030.

12. Fair Value of Financial Instruments:

Estimated fair values for the Companys financial
instruments and a description of the methodologies and assumptions used to determine such amounts follows:

Cash, Cash Equivalents,
Interest Bearing Deposits in Financial Institutions, Federal Funds Sold, Accrued Interest Receivable and Accrued Interest Payable: The carrying amount is assumed to be the fair value because of the liquidity of these instruments.

Federal Reserve Bank and Federal Home Loan Bank stock: The carrying value approximates the fair value because the stock can be redeemed at par.

Investments: Fair values are based on quoted market prices available as of the balance sheet dates. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar securities.

Loans: Fair values are estimated for
portfolios of loans with similar financial characteristics. Loans are segregated by type and further segmented into fixed and adjustable rate interest terms and by credit risk categories. The fair value estimates do not take into consideration the
value of the loan portfolio in the event the loans had to be sold outside the parameters of normal operating activities.

The fair value of
fixed rate loans and non-performing or adversely classified adjustable rate loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk
inherent in the loans. The discount rates used are the Banks current offer rates for comparable instruments with similar terms.



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The fair value of performing adjustable rate loans which re-price in one month or less is estimated to be
the carrying value. These loans re-price frequently at market rates and the credit risk is not considered to be greater than normal. The fair value of performing adjustable rate loans which re-price in one month or more are calculated by discounting
scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans.

The fair value of loans held for sale is determined based on quoted secondary market prices.

Interest-only strips: The fair value of interest-only strips has been determined by discounted cash flow methods, using market discount rates and prepayment factors.

Affordable Housing Investments: The fair value of the affordable housing investments is the original cost of the investments which is being
amortized on a level-yield method over the life of the related tax credits.

Deposits: The fair value of deposits with no stated
maturity, such as non-interest bearing demand deposits, savings and checking accounts, is equal to the amount payable on demand as of the balance sheet date. The fair value of time deposits is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for deposits with similar remaining maturities.

Borrowings: The
fair value of borrowings is based on the discounted value of contractual cash flows. The discount rate is estimated using rates currently offered for borrowings with similar remaining maturities and characteristics. Borrowings which mature in less
than one year or that have a variable rate of interest are shown at carrying value.

Commitments to Extend Credit and Standby Letters of
Credit: The fair value of commitments to extend credit is estimated to be zero since the current competitive financial community does not routinely charge fees for commitments to extend credit. The fair value of standby letters of credit is
based on fees currently charged for similar agreements.

Interest Rate Swap: The fair value of the interest rate swap agreement is
based on a broker quoted price, which is based on the discounted value of the contractual cash flows, as determined by the current interest rate curve over the contractual period of the swap.

Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from offering for sale at one time the Companys entire holdings of a particular financial instrument. Because no market exists for a portion of the Companys
financial instruments, fair value estimates are based on what management believes to be conservative judgments regarding expected future cash flows, current economic conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values
have been estimated as of December 31, 2005 and 2004, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.



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The fair values of the Companys financial instruments as of December 31, 2005 and 2004 are as
follows:



|                                                             |  |                        |         |   |                     |   |         |                      |  |   |                     |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------- | ------- | - | ------------------- | - | ------- | -------------------- |  | - | ------------------- | - |  | - | ------- | -
|                                                             |  | 2005                   |         |   | 2004                |  
|                                                             |  | (dollars in thousands) |        
|                                                             |  | CarryingAmount         |         |   | Fair ValueEstimates |   |         | CarryingAmount       |  |   | Fair ValueEstimates |  
|Financial Assets:                                            |  |                        |         |   |                     |   |         |                      |  |   |                     |   |  |   |         |  
|Cash and cash equivalents                                    |  | $                      | 17,107  |   |                     | $ | 17,107  |                      |  | $ | 14,842              |   |  | $ | 14,842  |  
|Interest bearing deposits in financial institutions          |  |                        | 430     |   |                     |   | 430     |                      |  |   | 1,825               |   |  |   | 1,825   |  
|Federal funds sold                                           |  |                        | 20,645  |   |                     |   | 20,645  |                      |  |   | 9,565               |   |  |   | 9,565   |  
|Investments held-to-maturity                                 |  |                        | 6,753   |   |                     |   | 6,599   |                      |  |   | 4,198               |   |  |   | 4,251   |  
|Investments available for sale                               |  |                        | 49,660  |   |                     |   | 49,660  |                      |  |   | 26,562              |   |  |   | 26,562  |  
|Federal Reserve Bank and Federal                             |  |                        |         |   |                     |   |         |                      |  |   |                     |   |  |   |         |  
|Home Loan Bank stock                                         |  |                        | 4,866   |   |                     |   | 4,866   |                      |  |   | 3,388               |   |  |   | 3,388   |  
|Loans held for investment                                    |  |                        | 572,972 |   |                     |   | 570,958 |                      |  |   | 430,424             |   |  |   | 430,770 |  
|Loans held for sale                                          |  |                        | 154,327 |   |                     |   | 158,610 |                      |  |   | 101,588             |   |  |   | 105,635 |  
|Affordable housing investments                               |  |                        | 2,395   |   |                     |   | 2,395   |                      |  |   | 2,579               |   |  |   | 2,579   |  
|Accrued interest receivable                                  |  |                        | 3,822   |   |                     |   | 3,822   |                      |  |   | 2,086               |   |  |   | 2,086   |  
|Interest-only strips                                         |  |                        | 2,622   |   |                     |   | 2,622   |                      |  |   | 1,749               |   |  |   | 1,749   |  
|                                                             |  |                        |         |  
|Financial Liabilities:                                       |  |                        |         |   |                     |   |         |                      |  |   |                     |   |  |   |         |  
|Deposits                                                     |  |                        | 710,473 |   |                     |   | 709,649 |                      |  |   | 549,766             |   |  |   | 549,458 |  
|Short-term borrowing                                         |  |                        | 52,290  |   |                     |   | 52,290  |                      |  |   | 1,000               |   |  |   | 1,000   |  
|Long-term debt                                               |  |                        | 37,203  |   |                     |   | 37,463  |                      |  |   | 17,640              |   |  |   | 17,640  |  
|Accrued interest payable                                     |  |                        | 1,881   |   |                     |   | 1,881   |                      |  |   | 1,297               |   |  |   | 1,297   |  
|                                                             |  |                        |         |  
|                                                             |  | Notional/Contractual   |         |   | Amount              |   |         | Notional/Contractual |  |   | Amount              |  
|Off-Balance Sheet Financial Instruments:                     |  |                        |         |   |                     |   |         |                      |  |   |                     |   |  |   |         |  
|Commitments to extend credit on new loans                    |  | $                      | 12,124  |   |                     | $ |        |                      |  | $ | 13,904              |   |  | $ |        |  
|Commitments to extend credit on construction and other loans |  |                        | 209,744 |   |                     |   |        |                      |  |   | 146,958             |   |  |   |        |  
|Standby letters of credit                                    |  |                        | 3,785   |   |                     |   | 32      |                      |  |   | 2,117               |   |  |   | (32     | )
|Interest rate swap                                           |  |                        | 10,000  | * |                     |   | (297    | )                    |  |   | 10,000              | * |  |   | (150    | )
|* Notional Value                                             |  |                        |         |   |                     |   |         |                      |  |   |                     |   |  |   |         |  

13. Income Taxes:

The components of income tax provision (benefit) for the years ended December 31, 2005, 2004 and 2003 are as follows:



|          |  |                        |        |   |      |   |        |      |  |   |        |  
|--------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|          |  | 2005                   |        |   | 2004 |   |        | 2003 | 
|          |  | (dollars in thousands) |       
|Current:  |  |                        |        |   |      |   |        |      |  |   |        |  
|Federal   |  | $                      | 7,165  |   |      | $ | 5,190  |      |  | $ | 4,143  |  
|State     |  |                        | 2,486  |   |      |   | 1,723  |      |  |   | 1,263  |  
|          |  |                        |        |   |      |   |        |      |  |   |        |  
|          |  |                        | 9,651  |   |      |   | 6,913  |      |  |   | 5,406  |  
|          |  |                        |        |   |      |   |        |      |  |   |        |  
|Deferred: |  |                        |        |   |      |   |        |      |  |   |        |  
|Federal   |  |                        | (1,104 | ) |      |   | (1,400 | )    |  |   | (1,414 | )
|State     |  |                        | (288   | ) |      |   | (517   | )    |  |   | (397   | )
|          |  |                        |        |   |      |   |        |      |  |   |        |  
|          |  |                        | (1,392 | ) |      |   | (1,917 | )    |  |   | (1,811 | )
|          |  |                        |        |   |      |   |        |      |  |   |        |  
|          |  | $                      | 8,259  |   |      | $ | 4,996  |      |  | $ | 3,595  |  
|          |  |                        |        |   |      |   |        |      |  |   |        |  



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A reconciliation of the difference between the expected federal statutory income tax provision (benefit)
of 35% and the actual income tax provision (benefit) for the three years ended December 31, 2005, 2004 and 2003 is shown in the following table:



|                                                      |  |                        |       |   |      |   |       |      |  |   |       |  
|----------------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                      |  | 2005                   |       |   | 2004 |   |       | 2003 | 
|                                                      |  | (dollars in thousands) |      
|Computed expected federal income taxes              |  | $                      | 7,299 |   |      | $ | 4,677 |      |  | $ | 3,322 |  
|State income taxes, net of federal income tax benefit |  |                        | 1,421 |   |      |   | 684   |      |  |   | 509   |  
|Affordable housing investment tax credits             |  |                        | (306  | ) |      |   | (174  | )    |  |   | (100  | )
|Other, net                                            |  |                        | (155  | ) |      |   | (191  | )    |  |   | (136  | )
|                                                      |  |                        |       |   |      |   |       |      |  |   |       |  
|                                                      |  | $                      | 8,259 |   |      | $ | 4,996 |      |  | $ | 3,595 |  
|                                                      |  |                        |       |   |      |   |       |      |  |   |       |  

The tax effects of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities as of December 31, 2005 and 2004 are as follows:



|                                                                      |  |                        |        |   |      |   |       |  
|--------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ----- | -
|                                                                      |  | 2005                   |        |   | 2004 |  
|                                                                      |  | (dollars in thousands) |       
|Deferred tax assets:                                                  |  |                        |        |   |      |   |       |  
|                                                                      |  |                       
|Loan loss allowance                                                   |  | $                      | 3,803  |   |      | $ | 2,825 |  
|Unrealized gains on loans held for sale                               |  |                        | 1,801  |   |      |   | 1,666 |  
|State income taxes                                                    |  |                        | 869    |   |      |   | 562   |  
|Accrued compensation expenses                                         |  |                        | 699    |   |      |   | 287   |  
|Unrealized loss on available for sale securities                      |  |                        | 280    |   |      |   | 66    |  
|Fair value adjustments on acquired assets and liabilities             |  |                        | 279    |   |      |   | 312   |  
|Deferred loan costs                                                   |  |                        | 266    |   |      |   | 424   |  
|Deferred rent                                                         |  |                        | 154    |   |      |   | 104   |  
|Non-accrual interest recognized as income for taxes but not for books |  |                        | 124    |   |      |   | 120   |  
|Restricted stock                                                      |  |                        | 123    |   |      |   |      |  
|Depreciable assets  state                                            |  |                        | 27     |   |      |   |      |  
|Other accrued expenses                                                |  |                        | 15     |   |      |   |      |  
|                                                                      |  |                        |        |   |      |   |       |  
|                                                                      |  |                        | 8,440  |   |      |   | 6,366 |  
|                                                                      |  |                        |        |   |      |   |       |  
|Deferred tax liabilities:                                             |  |                        |        |   |      |   |       |  
|                                                                      |  |                       
|Fair value adjustments of core deposits intangible                    |  |                        | (1,857 | ) |      |   |      |  
|Depreciable assets  federal                                          |  |                        | (263   | ) |      |   | (307  | )
|Other liabilities                                                     |  |                        | (153   | ) |      |   | (131  | )
|                                                                      |  |                        |        |   |      |   |       |  
|                                                                      |  |                        | (2,273 | ) |      |   | (438  | )
|                                                                      |  |                        |        |   |      |   |       |  
|Deferred tax asset, net                                               |  | $                      | 6,167  |   |      | $ | 5,928 |  
|                                                                      |  |                        |        |   |      |   |       |  

Based upon the level of historical taxable income and projections for future taxable income over
the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

As of December 31, 2005 income taxes receivable totaled approximately $563,000. As of December 31, 2004, income taxes payable totaled
approximately $319,000 and is included in accrued expenses and other liabilities.

14. Dividends:

On February 26, 2004, the Company announced the payment of a cash dividend of $0.05 per common share and the initiation of a policy of paying
quarterly cash dividends. The Company paid $0.05 per share for each quarter in 2004. On February 1, 2005, the Company announced an increase in cash dividend payments of $0.10 per common share during 2005. The Company paid $0.10 per share each
quarter during 2005.



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15. Stock Compensation Plans:

The Company had the following stock plan under which shares were available for grant at December 31, 2005, the 2005 Equity Compensation Plan. The Companys Board of Directors may grant stock options, stock
appreciation rights, and restricted stock awards (collectively Awards) to officers and key employees of the Company. Stock option awards are granted with an exercise price equal to the stocks fair market value at the date of grant.
All stock option awards have 10 year terms and generally vest one-fifth annually over the five years following date of grant, subject to certain restrictions. Restricted stock awards are restricted shares of the Companys common stock granted
with vesting terms established by the Companys Compensation Committee. During 2005, the Company awarded 11,670 of restricted common stock under the plan. Stock-based compensation expense related to these awards totaled $292,000 during 2005.
Unearned compensation related to these stock awards totaled $85,000 at December 31, 2005, and is included as a separate component of stockholders equity and amortized over the vesting period of the related grants. No restricted stock awards
were granted in 2004.

The following table presents shares authorized, available for future grant and shares outstanding under each of the
authorized plans as of December 31, 2005:



|              |  |            |  |           |  |            
|------------- |  | ---------- |  | --------- |  | -----------
|              |  | Authorized |  | Available |  | Outstanding
|1985 Plan     |  | 471,714    |  |          |  |           
|1993 Plan (2) |  | 848,727    |  |          |  | 370,753    
|2003 Plan (2) |  | 308,446    |  |          |  | 229,305    
|2005 Plan (1) |  | 316,554    |  | 264,875   |  | 40,009     
|              |  |            |  |           |  |            
|Total         |  | 1,945,441  |  | 264,875   |  | 640,067    
|              |  |            |  |           |  |            

---

|(1) | Of the totals authorized and outstanding, 11,670 restricted stock awards were granted.
|--- | --------------------------------------------------------------------------------------

|(2) | The unallocated shares were rolled over into the 2005 Plan.
|--- | -----------------------------------------------------------

The following table summarizes stock option activity for the periods indicated as follows:



|                            |  |                |   |           |                               |           |                |           |   |                               |   |                |  |         |                               |  |                |       |                               |        |  |   |      
|--------------------------- |  | -------------- | - | --------- | ----------------------------- | --------- | -------------- | --------- | - | ----------------------------- | - | -------------- |  | ------- | ----------------------------- |  | -------------- | ----- | ----------------------------- | ------ |  | - | -----
|                            |  | 1985 Plan      |   | 1993 Plan |                               | 2003 Plan |                | 2005 Plan
|                            |  | NumberofShares |   |           | WeightedAverageExercise Price |           | NumberofShares |           |   | WeightedAverageExercise Price |   | NumberofShares |  |         | WeightedAverageExercise Price |  | NumberofShares |       | WeightedAverageExercise Price
|Balance  January 1, 2003   |  | 1,276          |   |           | $                             | 6.76      |                | 634,732   |   |                               | $ | 6.22           |  |        |                               |  | $              |      |                               |       |  | $ |     
|Granted                     |  |               |   |           |                               |          |                | 10,100    |   |                               |   | 8.83           |  | 84,600  |                               |  |                | 18.29 |                               |       |  |   |     
|Exercised                   |  | (1,276         | ) |           |                               | 6.76      |                | (96,359   | ) |                               |   | 4.51           |  |        |                               |  |                |      |                               |       |  |   |     
|Expired                     |  |               |   |           |                               |          |                | (10,483   | ) |                               |   | 7.23           |  |        |                               |  |                |      |                               |       |  |   |     
|                            |  |                |   |           |                               |           |                |           |   |                               |   |                |  |         |                               |  |                |       |                               |        |  |   |      
|Balance  December 31, 2003 |  |               |   |           |                               |          |                | 537,990   |   |                               |   | 6.55           |  | 84,600  |                               |  |                | 18.29 |                               |       |  |   |     
|Granted                     |  |               |   |           |                               |          |                |          |   |                               |   |               |  | 220,846 |                               |  |                | 15.54 |                               |       |  |   |     
|Exercised                   |  |               |   |           |                               |          |                | (69,205   | ) |                               |   | 6.10           |  | (49,639 | )                             |  |                | 10.39 |                               |       |  |   |     
|Expired                     |  |               |   |           |                               |          |                | (1,453    | ) |                               |   | 7.40           |  | (9,500  | )                             |  |                | 19.22 |                               |       |  |   |     
|                            |  |                |   |           |                               |           |                |           |   |                               |   |                |  |         |                               |  |                |       |                               |        |  |   |      
|Balance  December 31, 2004 |  |               |   |           |                               |          |                | 467,332   |   |                               |   | 6.61           |  | 246,307 |                               |  |                | 17.38 |                               |       |  |   |     
|Granted                     |  |               |   |           |                               |          |                |          |   |                               |   |               |  | 15,000  |                               |  |                | 30.48 |                               | 40,009 |  |   | 18.23
|Exercised                   |  |               |   |           |                               |          |                | (96,579   | ) |                               |   | 5.71           |  | (29,502 | )                             |  |                | 12.90 |                               |       |  |   |     
|Expired                     |  |               |   |           |                               |          |                |          |   |                               |   |               |  | (2,500  | )                             |  |                | 25.88 |                               |       |  |   |     
|                            |  |                |   |           |                               |           |                |           |   |                               |   |                |  |         |                               |  |                |       |                               |        |  |   |      
|Balance  December 31, 2005 |  |               |   |           | $                             |          |                | 370,753   |   |                               | $ | 6.85           |  | 229,305 |                               |  | $              | 18.72 |                               | 40,009 |  | $ | 23.62
|                            |  |                |   |           |                               |           |                |           |   |                               |   |                |  |         |                               |  |                |       |                               |        |  |   |      



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The fair value of stock option awards were estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions:



|                          |  |       |   |  |       |   |  |       |  
|------------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                          |  | 2005  |   |  | 2004  |   |  | 2003  |  
|Dividend yield            |  | 1.37  | % |  | 1.56  | % |  | 0.00  | %
|Expected volatility       |  | 33.38 | % |  | 45.59 | % |  | 35.18 | %
|Risk free interest rates  |  | 4.09  | % |  | 3.59  | % |  | 1.09  | %
|Expected lives (in years) |  | 4.0   |   |  | 5.0   |   |  | 5.0   |  

The per share weighted-average fair value of stock options granted during 2005, 2004 and 2003 were
$7.68, $6.04 and $5.50, respectively.

The following table summarizes information concerning outstanding and exercisable options:



|                                               |  |                     |  |                                                  |  |                               |       |                   |         |                               |   |      
|---------------------------------------------- |  | ------------------- |  | ------------------------------------------------ |  | ----------------------------- | ----- | ----------------- | ------- | ----------------------------- | - | -----
|                                               |  | Options Outstanding |  | Options Exercisable                             
|At December 31, 2005: Range of Exercise Prices |  | NumberOutstanding   |  | Weighted-AverageRemainingContractual Life(years) |  | Weighted-AverageExercisePrice |       | NumberExercisable |         | Weighted-AverageExercisePrice
|$4.43  $6.52                                  |  | 129,827             |  | 3.37                                             |  | $                             | 5.90  |                   | 129,827 |                               | $ | 5.90 
|6.62  7.23                                    |  | 48,162              |  | 4.04                                             |  |                               | 6.90  |                   | 43,351  |                               |   | 6.88 
|7.35  7.35                                    |  | 190,220             |  | 2.21                                             |  |                               | 7.35  |                   | 190,220 |                               |   | 7.35 
|7.57  19.75                                   |  | 135,086             |  | 6.74                                             |  |                               | 12.96 |                   | 121,054 |                               |   | 12.79
|19.79  34.71                                  |  | 136,772             |  | 8.68                                             |  |                               | 25.81 |                   | 34,596  |                               |   | 24.37
|                                               |  |                     |  |                                                  |  |                               |       |                   |         |                               |   |      
|4.43  34.71                                   |  | 640,067             |  | 4.92                                             |  |                               | 12.15 |                   | 519,048 |                               |   | 9.35 
|                                               |  |                     |  |                                                  |  |                               |       |                   |         |                               |   |      
|                                               |  |                    
|                                               |  | Options Outstanding |  | Options Exercisable                             
|                                               |  | NumberOutstanding   |  | Weighted-AverageRemainingContractual Life(years) |  | Weighted-AverageExercisePrice |       | NumberExercisable |         | Weighted-AverageExercisePrice
|At December 31, 2004                           |  | 713,639             |  | 5.39                                             |  | $                             | 10.33 |                   | 572,879 |                               | $ | 8.12 
|                                               |  |                     |  |                                                  |  |                               |       |                   |         |                               |   |      
|At December 31, 2003                           |  | 622,590             |  | 5.54                                             |  |                               | 8.15  |                   | 461,189 |                               |   | 6.72 
|                                               |  |                     |  |                                                  |  |                               |       |                   |         |                               |   |      

16. Rental Commitments:

As of December 31, 2005 aggregate minimum rental commitments for certain real property under non-cancelable operating leases having an initial or remaining term of more than one year are as follows:



|           |  |                        |       
|---------- |  | ---------------------- | ------
|           |  | Rental Commitments    
|           |  | (dollars in thousands)
|2006       |  | $                      | 1,577 
|2007       |  |                        | 1,472 
|2008       |  |                        | 1,403 
|2009       |  |                        | 1,315 
|2010       |  |                        | 1,294 
|Thereafter |  |                        | 3,010 
|           |  |                        |       
|Total      |  | $                      | 10,071
|           |  |                        |       



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Total rental expense was $1.7 million, $1.3 million and $875,000 in 2005, 2004 and 2003, respectively.
Management expects that in the normal course of business, leases that expire will be renewed or replaced by other leases.

17. Commitments and
Contingencies:

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business. These
financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the
balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional
obligations.

Commitments to extend credit amounting to $12.1 million and $13.9 million were outstanding at December 31, 2005 and
2004, respectively. 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 has undisbursed portions of construction loans totaling $209.7 million and $147.0 million as of December 31, 2005 and 2004,
respectively. These commitments are agreements to lend to a customer subject to meeting certain construction progress requirements. The underlying construction loans have fixed expiration dates.

Standby letters of credit and financial guarantees amounting to $3.8 million and $2.1 million were outstanding at December 31, 2005 and 2004,
respectively. Standby letters of credit and financial guarantees 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 private borrowing
arrangements. Most guarantees carry a one year term or less.

The Company generally requires collateral or other security to support
financial instruments with credit risk. Management does not anticipate any material loss will result from the outstanding commitments to extend credit, standby letters of credit and financial guarantees.

The Company periodically sells the guaranteed and unguaranteed portions of SBA loans it originates and retains the servicing on such loans. Upon sale in
the secondary market, the purchaser of the guaranteed portion of 7a Loans pays a premium to the Company which, generally, is between 6% and 10% of the guaranteed amount. The Company also receives a servicing fee equal to 1% to 2% of the amount sold
in the secondary market. In the event that a 7a Loan goes into default within 270 days of its sale, or prepays within 90 days, the Company is required to repurchase the loan and refund the premium to the purchaser. During the three year period ended
December 31, 2005, the Company has not repurchased any loans that defaulted within the first 270 days, and has had only two loans prepay within the first 90 days. A reserve has not been deemed necessary as the likelihood of a refund is
considered remote.

Because of the nature of its activities, the Company is, from time to time, subject to pending and threatened legal
actions which arise out of the normal course of its business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Companys financial position, results of operations or cash
flows.

The Company has negotiated employment agreements with certain officers. These agreements provide for the payment of base salaries
plus incentives based on agreed upon minimum standards of performance. While



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there is no provision for payment due to termination for cause, the agreements specify payment of the base salary for up to 12 months for termination without
cause, and up to 24 months upon a change in control, as defined in the agreements.

The Company has entered into salary continuation
agreements with certain members of its Board of Directors. These agreements provide monthly cash payment to the board members or their beneficiaries in the event of death or disability, beginning in the month after retirement date or upon death, and
extending for a minimum period of 3 years, or until death, whichever is greater. The commitments are funded by a life insurance policy owned by the Company, and the present value of the Companys liability under the agreement is included in
accrued expenses and other liabilities in the accompanying consolidated balance sheets.

The Company has invested in low income housing
projects which provide the Company income tax credits. The investments call for capital contributions up to an amount specified in the partnership agreements. As of December 31, 2005 and 2004, the Company had commitments to contribute capital
totaling $3.0 million and $3.1 million, respectively, and is included in accrued expenses and other liabilities on the balance sheet.

18. Employee
Benefit Plans:

The Companys employee savings and retirement plan (the 401k Plan) is for the benefit of substantially
all employees. Contributions to the 401k Plan by the Company are at the discretion of the Board of Directors and are subject to certain limitations described in the plan. The Company made contributions to the 401k Plan of $289,000, $208,000 and
$170,000 in 2005, 2004 and 2003, respectively. Company employees are able to choose Company stock as an investment option. Also, employees have the option of taking the Company contributions to this 401k Plan, if any, in Company stock purchased in
the open market or other investment options established for the Plan.

The Companys Executive Non-qualified Excess Plan
(Deferred Compensation Plan) was established in November 2004 to allow for a select group of highly compensated employees, executives and directors to defer their compensation in excess of the qualified plan limits. There is no employer
match for deferred compensation, although there is a discretionary contribution available at the option of the Company. While the contributions are shown as a liability on the books of the company, the assets are invested in funds identical or
similar to those for the 401(k) plan, with the exception that there is no Company stock investment option. The assets of the plan are assets of the Bank, and not the individuals personal assets. Distributions are limited and based on certain
criteria being met.

In conjunction with the Deferred Compensation Plan, the Bank has also purchased two life insurance policies. The
individuals insured are two of the Companys executives and have the option to elect not to participate in the plan. Each individual insured has signed an acknowledgement that they are not the owners of the insurance policy.

19. Restricted Cash Balances:

The Bank is required
to maintain reserve balances with the Federal Reserve Bank if vault cash levels do not adequately meet reserve requirements. Reserve requirements are based on a percentage of deposit liabilities. The reserves held at the Federal Reserve Bank as of
December 31, 2005 and 2004 were approximately zero and $7.3 million, respectively. The decline in the balance of reserves held at the Federal Reserve Bank was a result of the Bank implementing a deposit reclassification program which reduced
the balance of transaction accounts requiring reserves and re-classed the balances as savings accounts for Federal Reserve reporting requirements. The Company has no restricted cash as of December 31, 2005 and 2004.



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20. Regulatory Matters:

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys and Banks financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 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, 2005 and
2004, that the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2005 and
2004, the most recent notification from the Office of the Comptroller of the Currency (OCC) 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. There are no conditions or events since that notification that management believes have changed the Banks category.

The Banks actual capital amounts and ratios are presented in the table as of December 31, 2005 and 2004.



|                                         |  |                        |        |       |                             |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ---------------------- | ------ | ----- | --------------------------- | - | ------ | -------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | Actual                 |        |       | For capitaladequacypurposes |   |        | To be well capitalizedunder prompt correctiveaction provisions |       
|                                         |  | (dollars in thousands) |       
|                                         |  | Amount                 |        | Ratio |                             |   | Amount |                                                                | Ratio  |  |      | Amount |  | Ratio |       
|As of December 31, 2005                  |  |                        |        |       |                             |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Total capital (to risk weighted assets)  |  | $                      | 93,249 |       | 11.49                       | % |        | $                                                              | 64,925 |  | 8.00 | %      |  | $     | 81,156 |  | 10.00 | %
|Tier 1 capital (to risk weighted assets) |  |                        | 83,181 |       | 10.25                       |   |        |                                                                | 32,462 |  | 4.00 |        |  |       | 48,694 |  | 6.00  |  
|Tier 1 capital (to average assets)       |  |                        | 83,181 |       | 9.91                        |   |        |                                                                | 33,581 |  | 4.00 |        |  |       | 41,976 |  | 5.00  |  
|                                         |  |                        |        |       |                             |  
|As of December 31, 2004                  |  |                        |        |       |                             |   |        |                                                                |        |  |      |        |  |       |        |  |       |  
|Total capital (to risk weighted assets)  |  | $                      | 65,935 |       | 11.19                       | % |        | $                                                              | 47,120 |  | 8.00 | %      |  | $     | 58,900 |  | 10.00 | %
|Tier 1 capital (to risk weighted assets) |  |                        | 58,569 |       | 9.94                        |   |        |                                                                | 23,560 |  | 4.00 |        |  |       | 35,340 |  | 6.00  |  
|Tier 1 capital (to average assets)       |  |                        | 58,569 |       | 9.30                        |   |        |                                                                | 25,200 |  | 4.00 |        |  |       | 31,500 |  | 5.00  |  

Under federal banking law, dividends declared by the Bank in any calendar year may not, without
the approval of the OCC, exceed its net income for that year combined with its retained income from the preceding two years. However, the OCC has previously issued a bulletin to all national banks outlining guidelines limiting the circumstances
under which national banks may pay dividends even if the banks are otherwise statutorily authorized to pay dividends. The limitations impose a requirement or in some cases suggest that prior approval of the OCC should be obtained before a dividend
is paid if a national bank is the subject of administrative action or if the payment could be viewed by the OCC as unsafe or unusual.



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The Companys actual capital amounts and ratios are presented in the table as of December 31,
2005 and 2004. There are no prompt corrective action thresholds at the holding company.



|                                         |  |                        |        |       |                             |   |        |   |        |  |      |  
|---------------------------------------- |  | ---------------------- | ------ | ----- | --------------------------- | - | ------ | - | ------ |  | ---- | -
|                                         |  | Actual                 |        |       | For capitaladequacypurposes |  
|                                         |  | (dollars in thousands) |       
|                                         |  | Amount                 |        | Ratio |                             |   | Amount |   | Ratio  | 
|As of December 31, 2005                  |  |                        |        |       |                             |   |        |   |        |  |      |  
|Total capital (to risk weighted assets)  |  | $                      | 95,591 |       | 11.79                       | % |        | $ | 64,880 |  | 8.00 | %
|Tier 1 capital (to risk weighted assets) |  |                        | 85,523 |       | 10.55                       |   |        |   | 32,440 |  | 4.00 |  
|Tier 1 capital (to average assets)       |  |                        | 85,523 |       | 10.18                       |   |        |   | 33,606 |  | 4.00 |  
|                                         |  |                        |        |      
|As of December 31, 2004                  |  |                        |        |       |                             |   |        |   |        |  |      |  
|Total capital (to risk weighted assets)  |  | $                      | 67,604 |       | 11.47                       | % |        | $ | 47,158 |  | 8.00 | %
|Tier 1 capital (to risk weighted assets) |  |                        | 60,231 |       | 10.22                       |   |        |   | 23,579 |  | 4.00 |  
|Tier 1 capital (to average assets)       |  |                        | 60,231 |       | 9.48                        |   |        |   | 25,404 |  | 4.00 |  

21. Net Earnings Per Share:

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS). There were no anti-dilutive securities in any of the three years presented.



|                                            |  |                                                          |        |                     |       |                  |   |       |  
|------------------------------------------- |  | -------------------------------------------------------- | ------ | ------------------- | ----- | ---------------- | - | ----- | -
|                                            |  | Income(numerator)                                        |        | Shares(denominator) |       | Per ShareAmounts |  
|                                            |  | (dollars and shares in thousands, except per share data) |       
|Basic 2005 EPS                              |  |                                                          |        |                     |       |                  |   |       |  
|Net income available to common shareholders |  | $                                                        | 12,596 |                     | 5,502 |                  | $ | 2.29  |  
|Effect of dilutive stock options            |  |                                                          |       |                     | 312   |                  |   | (0.12 | )
|                                            |  |                                                          |        |                     |       |                  |   |       |  
|Diluted 2005 EPS                            |  | $                                                        | 12,596 |                     | 5,814 |                  | $ | 2.17  |  
|                                            |  |                                                          |        |                     |       |                  |   |       |  
|Basic 2004 EPS                              |  |                                                          |        |                     |       |                  |   |       |  
|Net income available to common shareholders |  | $                                                        | 8,366  |                     | 4,571 |                  | $ | 1.83  |  
|Effect of dilutive stock options            |  |                                                          |       |                     | 314   |                  |   | (0.12 | )
|                                            |  |                                                          |        |                     |       |                  |   |       |  
|Diluted 2004 EPS                            |  | $                                                        | 8,366  |                     | 4,885 |                  | $ | 1.71  |  
|                                            |  |                                                          |        |                     |       |                  |   |       |  
|Basic 2003 EPS                              |  |                                                          |        |                     |       |                  |   |       |  
|Net income available to common shareholders |  | $                                                        | 5,896  |                     | 3,900 |                  | $ | 1.51  |  
|Effect of dilutive stock options            |  |                                                          |       |                     | 245   |                  |   | (0.09 | )
|                                            |  |                                                          |        |                     |       |                  |   |       |  
|Diluted 2003 EPS                            |  | $                                                        | 5,896  |                     | 4,145 |                  | $ | 1.42  |  
|                                            |  |                                                          |        |                     |       |                  |   |       |  



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22. Quarterly Results of Operations (Unaudited):



|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|--------------------------------------------------- |  | --------------------------------------------- | ------ | ----------------- | - | ------------ |  | ------------- | ------ |  | - | ------
|                                                    |  | Quarters Ended                               
|                                                    |  | December 31,2005                              |        | September 30,2005 |   | June 30,2005 |  | March 31,2005
|                                                    |  | (dollars in thousands, except per share data)
|Interest income                                     |  | $                                             | 16,230 |                   | $ | 14,863       |  | $             | 12,129 |  | $ | 10,634
|Interest expense                                    |  |                                               | 4,151  |                   |   | 3,802        |  |               | 2,840  |  |   | 2,022 
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Net interest income                                 |  |                                               | 12,079 |                   |   | 11,061       |  |               | 9,289  |  |   | 8,612 
|Provision for loan losses                           |  |                                               | 70     |                   |   | 430          |  |               | 413    |  |   | 318   
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Net interest income after provision for loan losses |  |                                               | 12,009 |                   |   | 10,631       |  |               | 8,876  |  |   | 8,294 
|Other operating income                              |  |                                               | 2,252  |                   |   | 2,467        |  |               | 2,721  |  |   | 2,583 
|Other operating expenses                            |  |                                               | 7,980  |                   |   | 7,436        |  |               | 6,873  |  |   | 6,689 
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Income before income tax provision                  |  |                                               | 6,281  |                   |   | 5,662        |  |               | 4,724  |  |   | 4,188 
|Income tax provision                                |  |                                               | 2,439  |                   |   | 2,278        |  |               | 1,893  |  |   | 1,649 
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Net income                                          |  | $                                             | 3,842  |                   | $ | 3,384        |  | $             | 2,831  |  | $ | 2,539 
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Earnings per share:                                 |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Basic                                               |  | $                                             | 0.65   |                   | $ | 0.61         |  | $             | 0.54   |  | $ | 0.49  
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Fully diluted                                       |  | $                                             | 0.62   |                   | $ | 0.58         |  | $             | 0.51   |  | $ | 0.46  
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|                                                    | 
|                                                    |  | Quarters Ended                               
|                                                    |  | December 31,2004                              |        | September 30,2004 |   | June 30,2004 |  | March 31,2004
|                                                    |  | (dollars in thousands, except per share data)
|Interest income                                     |  | $                                             | 10,193 |                   | $ | 7,807        |  | $             | 7,460  |  | $ | 7,171 
|Interest expense                                    |  |                                               | 1,704  |                   |   | 1,393        |  |               | 1,269  |  |   | 1,298 
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Net interest income                                 |  |                                               | 8,489  |                   |   | 6,414        |  |               | 6,191  |  |   | 5,873 
|Provision for loan losses                           |  |                                               | 338    |                   |   | 325          |  |               | 285    |  |   | 228   
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Net interest income after provision for loan losses |  |                                               | 8,151  |                   |   | 6,089        |  |               | 5,906  |  |   | 5,645 
|Other operating income                              |  |                                               | 2,743  |                   |   | 2,533        |  |               | 2,526  |  |   | 1,858 
|Other operating expenses                            |  |                                               | 6,982  |                   |   | 5,336        |  |               | 5,255  |  |   | 4,516 
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Income before income tax provision                  |  |                                               | 3,912  |                   |   | 3,286        |  |               | 3,177  |  |   | 2,987 
|Income tax provision                                |  |                                               | 1,423  |                   |   | 1,256        |  |               | 1,200  |  |   | 1,117 
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Net income                                          |  | $                                             | 2,489  |                   | $ | 2,030        |  | $             | 1,977  |  | $ | 1,870 
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Earnings per share:                                 |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Basic                                               |  | $                                             | 0.49   |                   | $ | 0.46         |  | $             | 0.45   |  | $ | 0.43  
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       
|Fully diluted                                       |  | $                                             | 0.46   |                   | $ | 0.43         |  | $             | 0.42   |  | $ | 0.40  
|                                                    |  |                                               |        |                   |   |              |  |               |        |  |   |       



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23. Segment Information

The following disclosure about segments of the Company is made in accordance with the requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company
segregates its operations into two primary segments: Banking Division and SBA 7a Division. The Company determines operating results of each segment based on an internal management system that allocates certain expenses to each segment.



|                                                    |  |                        |         |                |   |        |       |  |                 |         |                |   |         |  |                 |         |                |   |         |  |   |         |  |   |        |  |   |        
|--------------------------------------------------- |  | ---------------------- | ------- | -------------- | - | ------ | ----- |  | --------------- | ------- | -------------- | - | ------- |  | --------------- | ------- | -------------- | - | ------- |  | - | ------- |  | - | ------ |  | - | -------
|                                                    |  | 2005                   |         | 2004           |   | 2003  
|                                                    |  | BankingDivision        |         | SBA 7aDivision |   |        | Total |  | BankingDivision |         | SBA 7aDivision |   | Total   |  | BankingDivision |         | SBA 7aDivision |   | Total  
|                                                    |  | (dollars in thousands)
|Interest income                                     |  | $                      | 45,796  |                | $ | 8,060  |       |  | $               | 53,856  |                | $ | 27,344  |  | $               | 5,287   |                | $ | 32,631  |  | $ | 22,868  |  | $ | 3,918  |  | $ | 26,786 
|Interest expense                                    |  |                        | 7,596   |                |   | 5,219  |       |  |                 | 12,815  |                |   | 2,704   |  |                 | 2,960   |                |   | 5,664   |  |   | 3,999   |  |   | 2,171  |  |   | 6,170  
|                                                    |  |                        |         |                |   |        |       |  |                 |         |                |   |         |  |                 |         |                |   |         |  |   |         |  |   |        |  |   |        
|Net interest income                                 |  |                        | 38,200  |                |   | 2,841  |       |  |                 | 41,041  |                |   | 24,640  |  |                 | 2,327   |                |   | 26,967  |  |   | 18,869  |  |   | 1,747  |  |   | 20,616 
|Provision (recovery) for loan losses                |  |                        | 1,450   |                |   | (219   | )     |  |                 | 1,231   |                |   | 776     |  |                 | 400     |                |   | 1,176   |  |   | 1,185   |  |   | 454    |  |   | 1,639  
|                                                    |  |                        |         |                |   |        |       |  |                 |         |                |   |         |  |                 |         |                |   |         |  |   |         |  |   |        |  |   |        
|Net interest income after provision for loan losses |  |                        | 36,750  |                |   | 3,060  |       |  |                 | 39,810  |                |   | 23,864  |  |                 | 1,927   |                |   | 25,791  |  |   | 17,684  |  |   | 1,293  |  |   | 18,977 
|                                                    |  |                        |         |                |   |        |       |  |                 |         |                |   |         |  |                 |         |                |   |         |  |   |         |  |   |        |  |   |        
|Other operating income                              |  |                        | 3,599   |                |   | 6,424  |       |  |                 | 10,023  |                |   | 3,348   |  |                 | 6,312   |                |   | 9,660   |  |   | 2,709   |  |   | 4,982  |  |   | 7,691  
|Other operating expenses                            |  |                        | 25,527  |                |   | 3,451  |       |  |                 | 28,978  |                |   | 18,482  |  |                 | 3,607   |                |   | 22,089  |  |   | 14,174  |  |   | 3,003  |  |   | 17,177 
|                                                    |  |                        |         |                |   |        |       |  |                 |         |                |   |         |  |                 |         |                |   |         |  |   |         |  |   |        |  |   |        
|Income before income tax provision                  |  |                        | 14,822  |                |   | 6,033  |       |  |                 | 20,855  |                |   | 8,730   |  |                 | 4,632   |                |   | 13,362  |  |   | 6,219   |  |   | 3,272  |  |   | 9,491  
|Income tax provision                                |  |                        | 5,737   |                |   | 2,522  |       |  |                 | 8,259   |                |   | 3,074   |  |                 | 1,922   |                |   | 4,996   |  |   | 2,253   |  |   | 1,342  |  |   | 3,595  
|                                                    |  |                        |         |                |   |        |       |  |                 |         |                |   |         |  |                 |         |                |   |         |  |   |         |  |   |        |  |   |        
|Net income                                          |  | $                      | 9,085   |                | $ | 3,511  |       |  | $               | 12,596  |                | $ | 5,656   |  | $               | 2,710   |                | $ | 8,366   |  | $ | 3,966   |  | $ | 1,930  |  | $ | 5,896  
|                                                    |  |                        |         |                |   |        |       |  |                 |         |                |   |         |  |                 |         |                |   |         |  |   |         |  |   |        |  |   |        
|Assets employed at year end                         |  | $                      | 817,855 |                | $ | 90,695 |       |  | $               | 908,550 |                | $ | 536,152 |  | $               | 105,454 |                | $ | 641,606 |  | $ | 402,992 |  | $ | 73,706 |  | $ | 476,698
|                                                    |  |                        |         |                |   |        |       |  |                 |         |                |   |         |  |                 |         |                |   |         |  |   |         |  |   |        |  |   |        

24. Parent Company Financial Information

The following presents unconsolidated financial information of the parent company only:

Community Bancorp Inc. (Parent company only)

CONDENSED BALANCE SHEETS

As of December 31,



|                                                    |  |                        |         |      |   |       
|--------------------------------------------------- |  | ---------------------- | ------- | ---- | - | ------
|                                                    |  | 2005                   |         | 2004
|                                                    |  | (dollars in thousands)
|ASSETS:                                             |  |                        |         |      |   |       
|Cash                                                |  | $                      | 1,221   |      | $ | 875   
|Interest bearing deposits in financial institutions |  |                        | 1,480   |      |   | 980   
|Accrued interest and other assets                   |  |                        | 943     |      |   | 129   
|Investment in subsidiaries                          |  |                        | 129,703 |      |   | 76,773
|                                                    |  |                        |         |      |   |       
|TOTAL ASSETS                                        |  | $                      | 133,347 |      | $ | 78,757
|                                                    |  |                        |         |      |   |       
|LIABILITIES:                                        |  |                        |         |      |   |       
|Accounts payable                                    |  | $                      | 708     |      | $ | 324   
|Borrowings from subsidiaries                        |  |                        | 36,381  |      |   | 15,315
|                                                    |  |                        |         |      |   |       
|TOTAL LIABILITIES                                   |  |                        | 37,089  |      |   | 15,639
|TOTAL STOCKHOLDERS EQUITY                          |  |                        | 96,258  |      |   | 63,118
|                                                    |  |                        |         |      |   |       
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY          |  | $                      | 133,347 |      | $ | 78,757
|                                                    |  |                        |         |      |   |       



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Community Bancorp Inc. (Parent company only)

CONDENSED STATEMENTS OF INCOME

For
the years ended December 31,



|                                     |  |                        |        |      |   |       |  |   |      
|------------------------------------ |  | ---------------------- | ------ | ---- | - | ----- |  | - | -----
|                                     |  | 2005                   |        | 2004 |   | 2003 
|                                     |  | (dollars in thousands)
|Interest income                      |  | $                      | 77     |      | $ | 52    |  | $ | 53   
|Interest expense                     |  |                        | 1,684  |      |   | 971   |  |   | 874  
|Other operating income               |  |                        |       |      |   |      |  |   |     
|Other operating expenses             |  |                        | 446    |      |   | 426   |  |   | 514  
|Equity in net income of subsidiaries |  |                        | 13,802 |      |   | 9,155 |  |   | 6,678
|                                     |  |                        |        |      |   |       |  |   |      
|Income before income tax provision   |  |                        | 11,749 |      |   | 7,810 |  |   | 5,343
|Income tax benefit                   |  |                        | 847    |      |   | 556   |  |   | 553  
|                                     |  |                        |        |      |   |       |  |   |      
|NET INCOME                           |  | $                      | 12,596 |      | $ | 8,366 |  | $ | 5,896
|                                     |  |                        |        |      |   |       |  |   |      

Community Bancorp Inc. (Parent company only)

CONDENSED STATEMENTS OF CASH FLOWS

For the years ended December 31,



|                                                                          |  |      |                        |   |      |   |        |      |  |   |         |  
|------------------------------------------------------------------------- |  | ---- | ---------------------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                          |  | 2005 |                        |   | 2004 |   |        | 2003 | 
|                                                                          |  |      | (dollars in thousands) |  
|Cash flows from operating activities:                                     |  |      |                        |   |      |   |        |      |  |   |         |  
|Net income                                                                |  | $    | 12,596                 |   |      | $ | 8,366  |      |  | $ | 5,896   |  
|Adjustments to reconcile net income to cash used in operating activities: |  |      |                        |   |      |   |        |      |  |   |         |  
|Unrealized (gain) loss on interest rate swap agreement                    |  |      | (147                   | ) |      |   | 153    |      |  |   | 303     |  
|Unrealized hedging (gain) loss on long term debt                          |  |      | 147                    |   |      |   | (153   | )    |  |   | (303    | )
|Decrease (increase) in accrued interest and other assets                  |  |      | (224                   | ) |      |   | 177    |      |  |   | (148    | )
|Increase (decrease) in accounts payable and other liabilities             |  |      | 794                    |   |      |   | (543   | )    |  |   | (253    | )
|Equity in net income of subsidiaries                                      |  |      | (13,802                | ) |      |   | (9,155 | )    |  |   | (6,678  | )
|                                                                          |  |      |                        |   |      |   |        |      |  |   |         |  
|Net cash used in operating activities                                     |  |      | (636                   | ) |      |   | (1,155 | )    |  |   | (1,183  | )
|                                                                          |  |      |                        |   |      |   |        |      |  |   |         |  
|Cash flows from investing activities:                                     |  |      |                        |   |      |   |        |      |  |   |         |  
|Net change in interest bearing deposits at other financial institutions   |  |      | (500                   | ) |      |   |       |      |  |   | 170     |  
|Capital contributions to subsidiaries                                     |  |      | (4,400                 | ) |      |   |       |      |  |   | (12,405 | )
|                                                                          |  |      |                        |   |      |   |        |      |  |   |         |  
|Net cash used in investing activities                                     |  |      | (4,900                 | ) |      |   |       |      |  |   | (12,235 | )
|                                                                          |  |      |                        |   |      |   |        |      |  |   |         |  
|Cash flows from financing activities:                                     |  |      |                        |   |      |   |        |      |  |   |         |  
|Net proceeds from other borrowings                                        |  |      |                       |   |      |   |       |      |  |   | 5,154   |  
|Repayment of other borrowings                                             |  |      |                       |   |      |   |       |      |  |   | (2,000  | )
|Cash dividends received from subsidiary                                   |  |      | 500                    |   |      |   | 8,250  |      |  |   | 300     |  
|Proceeds from sale of unallocated ESOP shares                             |  |      |                       |   |      |   |       |      |  |   |        |  
|Cash dividends paid                                                       |  |      | (2,238                 | ) |      |   | (917   | )    |  |   |        |  
|Cash paid for merger                                                      |  |      | (13,312                | ) |      |   | (7,464 | )    |  |   |         |  
|Net proceeds from issuance of common stock                                |  |      |                       |   |      |   |       |      |  |   | 10,068  |  
|Exercise of stock options                                                 |  |      | 932                    |   |      |   | 1,235  |      |  |   | 619     |  
|Issuance of long term debt                                                |  |      | 20,000                 |   |      |   |       |      |  |   |        |  
|                                                                          |  |      |                        |   |      |   |        |      |  |   |         |  
|Net cash provided by financing activities                                 |  |      | 5,882                  |   |      |   | 1,104  |      |  |   | 14,141  |  
|                                                                          |  |      |                        |   |      |   |        |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                      |  |      | 346                    |   |      |   | (51    | )    |  |   | 723     |  
|Cash and cash equivalents at beginning of year                            |  |      | 875                    |   |      |   | 926    |      |  |   | 203     |  
|                                                                          |  |      |                        |   |      |   |        |      |  |   |         |  
|Cash and cash equivalents at end of year                                  |  | $    | 1,221                  |   |      | $ | 875    |      |  | $ | 926     |  
|                                                                          |  |      |                        |   |      |   |        |      |  |   |         |  



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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A. CONTROLS | AND PROCEDURES
|----------------- | --------------



| | (a) | The Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures are effective.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | During the quarter ended December 31, 2005, there have been no changes in the Companys internal controls over financial reporting that has materially affected, or are
reasonably likely to materially affect, these controls.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Managements Report about the Effectiveness of the Internal Control Over Financial Reporting

March 13, 2006

To the Stockholders:

Management is responsible for establishing and maintaining effective internal control over financial reporting, including safeguarding of assets, for
financial presentations in conformity with accounting principles generally accepted in the United States of America. The Companys internal control over financial reporting includes monitoring mechanisms, and actions are taken to correct
deficiencies identified.

There are inherent limitations in the effectiveness of any internal control, including the possibility of human
error and the circumvention or overriding of controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in
conditions, the effectiveness of internal control may vary over time.

Management assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2005. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control  Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting, including safeguarding of assets, as of December 31, 2005.

Managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been
audited by Deloitte & Touche, LLP, an independent registered public accounting firm, as stated in their report which is included at page 106.



|                                    |  |                                                
|----------------------------------- |  | -----------------------------------------------
|/s/    MICHAEL J. PERDUE            |  | /s/    L. BRUCE MILLS, JR.                     
|President & Chief Executive Officer |  | Senior Vice President & Chief Financial Officer
|March 13, 2006                      |  | March 13, 2006                                 



105



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Community Bancorp Inc.

Escondido, California

We have audited
managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that Community Bancorp Inc. and subsidiaries (the Company) maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.

We
conducted our audit 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 effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive
and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override
of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the
criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2005 of the Company and our report dated March 13, 2006 expressed an unqualified opinion on those financial statements.



|                            
|----------------------------
|/s/    DELOITTE & TOUCHE LLP
|Costa Mesa, California      
|March 13, 2006              



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|ITEM 9B. OTHER | INFORMATION
|-------------- | -----------

None

PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------

The Company has adopted a Code of Conduct which complies with the Code of Ethics requirements of the Securities and Exchange Commission. A copy of the Code of Conduct is posted on the Companys website.

Except for information regarding our executive officers set forth below, the information required by Item 10  Directors and Executive
Officers of the Registrant is included in the Companys definitive Proxy Statement under the caption Continuing Directors and Executive Officers and Compliance with Section 16(a) of the Securities and Exchange
Act of 1934, to be filed with the Commission within 120 days after the end of fiscal year 2005 pursuant to Regulation 14A, which information is incorporated herein by reference.



|                    |  |     |  |                                                          
|------------------- |  | --- |  | ---------------------------------------------------------
|Name                |  | Age |  | Position(s) Held                                         
|Gary W. Deems       |  | 59  |  | Chairman of the Board                                    
|Michael J. Perdue   |  | 51  |  | President and Chief Executive Officer                    
|Gary M. Youmans     |  | 54  |  | Director and Executive Vice President                    
|L. Bruce Mills, Jr. |  | 49  |  | Senior Vice President and Chief Financial Officer        
|Donald W. Murray    |  | 48  |  | Executive Vice President and Chief Credit Officer        
|Richard M. Sanborn  |  | 43  |  | Executive Vice President and Chief Administrative Officer



| |  |  | Gary W. Deems, Chairman of the Board of Community Bancorp and the Bank, joined us in 2000. Mr. Deems has over 31 years of banking experience. Prior to his
involvement with us, Mr. Deems was most recently Executive Vice President, Chief Administrative Officer and a director of Escondido-based FP Bancorp Inc. from 1993 to 1998.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Michael J. Perdue, President and Chief Executive Officer of both Community Bancorp and the Bank, joined us in July 2003 as President and Chief Operating Officer
and became Chief Executive Officer and a member of our Board on December 17, 2003. Mr. Perdue has been involved in banking and finance for over 27 years both in Oregon and Southern California. He has held senior management positions with
several local financial institutions, including five years as Executive Vice President and Chief Operating Officer and a director of Escondido-based FP Bancorp Inc., parent of First Pacific National Bank, which was acquired by Zions Bancorporation
in 1998.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gary M. Youmans, Executive Vice President in charge of the SBA operation and director of both Community Bancorp and the Bank has 36 years of banking experience
and joined us in 1991.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | L. Bruce Mills, Jr., Senior Vice President and Chief Financial Officer of both Community Bancorp and the Bank, has 25 years of banking and financial experience and
joined us in 1998.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Donald W. Murray, Executive Vice President and Chief Credit Officer of the Bank has 23 years of banking experience and joined us in 1994.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Richard M. Sanborn, Executive Vice President and Chief Administrative Officer, has 21 years of banking and financial experience and joined us in June 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The information required by
Item 11  Executive Compensation is included in the Companys definitive Proxy Statement to be filed with the Commission within 120 days after the end of fiscal year 2005 pursuant to Regulation 14A, which information is
incorporated herein by reference.



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|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The information required by Item 12  Security ownership of Certain Beneficial Owners and Management and Related Stockholder Matters is
included below and in the Companys definitive Proxy Statement to be filed with the Commission within 120 days after the end of fiscal year 2005 pursuant to Regulation 14A, which information is incorporated herein by reference.



|                                                           |  |                                                          |  |                                                       |       |                                                            |        
|---------------------------------------------------------- |  | -------------------------------------------------------- |  | ----------------------------------------------------- | ----- | ---------------------------------------------------------- | -------
|Plan category                                              |  | Number of securities to beissued upon exercise ofoptions |  | Weighted average exerciseprice of outstanding options |       | Number of securitiesremaining available for futureissuance
|Equity compensation plans approved by security holders     |  | 640,067                                                  |  | $                                                     | 12.15 |                                                            | 264,875
|Equity compensation plans not approved by security holders |  |                                                         |  |                                                       |      |                                                            |       
|                                                           |  |                                                          |  |                                                       |       |                                                            |        
|Total                                                      |  | 640,067                                                  |  | $                                                     | 12.15 |                                                            | 264,875
|                                                           |  |                                                          |  |                                                       |       |                                                            |        



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------

The
information required by Item 13  Certain Relationships and Related Transactions is included in the Companys definitive Proxy Statement to be filed with the Commission within 120 days after the end of fiscal year 2005 pursuant
to Regulation 14A, which information is incorporated herein by reference.



|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------

The
information required by Item 14  Principal Accounting Fees and Services is included in the Companys definitive Proxy Statement to be filed with the Commission within 120 days after the end of fiscal year 2005 pursuant to
Regulation 14A, which information is incorporated herein by reference.



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



|      |  |                                                                                                                                                             
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|(1)   |  | Financial Statements. The following financial statements are incorporated by reference from Item 8  Financial Statements and Supplementary Data hereto:

|      | 
|      |  |  Report of Independent Registered Public Accounting Firm                                                                                                   
|      | 
|      |  |  Consolidated Balance Sheets as of December 31, 2005 and 2004                                                                                              
|      | 
|      |  |  Consolidated Statements of Income and Comprehensive Income for the years ended
         December 31, 2005, 2004 and 2003                                  
|      | 
|      |  |  Consolidated Statements of Stockholders Equity for the years ended December 31, 2005, 2004
         and 2003                                             
|      | 
|      |  |  Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                                                                
|      | 
|      |  |  Notes to Consolidated Financial Statements                                                                                                                
|      | 
|(2)   |  | Financial Statement Schedules. All schedules are omitted as the information is not applicable.                                                              
|      | 
|(3)   |  | Exhibits.                                                                                                                                                   
|      | 
|3.1   |  | Certificate of Incorporation, as amended, of Community Bancorp Inc, as filed with the Companys 10-QSB for the quarter ended June 30, 1999.                 
|      | 
|3.1.1 |  | Amendment to Certificate of Incorporation, as filed with the Companys 10-K for the year ended December 31, 2002.                                           
|      | 
|3.2   |  | Bylaws of Community Bancorp Inc., as filed with the Companys 10-QSB for the quarter ended June 30, 1999.                                                   
|      | 
|4.1   |  | Specimen Share Certificate for Common Stock, as filed with the Companys 10-KSB for the year ended December 31, 1999.                                       
|      | 
|4.2   |  | Stock Purchase Agreement, as filed with the Companys 8-K on August 2, 2001.                                                                                
|      | 
|4.3   |  | Registration Rights Agreement, as filed with the Companys 8-K on August 2, 2001.                                                                           
|      | 
|10.2  |  | 1993 Stock Option Plan, as filed with the Companys S-8 Registration Statement (File No. 333-88473).                                                        
|      | 
|10.3  |  | Form of stock option agreement for use pursuant to 1993 Stock Option Plan, as filed with the Companys S-8 Registration Statement (File No. 333-88473).     
|      | 
|10.4  |  | Head Office Extension Leases, as filed with the Companys 10-KSB for the year ended December 31, 1999.                                                      
|      | 
|10.5  |  | Temecula Branch Office Lease, as filed with the Companys 10-KSB for the year ended December 31, 1999.                                                      
|      | 
|10.6  |  | Vista Branch Lease, as filed with the Companys 10-KSB for the year ended December 31, 1999.                                                                
|      | 
|10.7  |  | Fallbrook National Bank 401(k) Profit Sharing Plan, as filed with the Companys S-8 Registration Statement (File No. 333-88457).                            
|      | 
|10.8  |  | Director Indexed Fee Continuation Program, as filed with the Companys 10-KSB for the year ended December 31, 1999.                                         
|      | 
|10.10 |  | Employment Agreement with Gary M. Youmans, as filed with the Companys 10-KSB for the year ended December 31, 1999.                                         



109



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|      |  |                                                                                                                                                                                                         
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.11 |  | Employment Agreement with L. Bruce Mills, Jr., as filed with the Companys 10-KSB for the year ended December 31, 1999.                                                                                 
|      | 
|10.12 |  | Employment Agreement with Donald W. Murray, as filed with the Companys 10-KSB for the year ended December 31, 1999.                                                                                    
|      | 
|10.16 |  | Lease on Corporate Headquarters in Escondido, as filed with the Companys 10-K for the year ended December 31, 2001.                                                                                    
|      | 
|10.17 |  | Promissory note for Pacific Coast Bankers Bank, as filed with the Companys 10-K for the year ended December 31, 2001.                                                                                 
|      | 
|10.18 |  | 2003 Stock Option Plan, as filed with the Companys 10-Q for the quarter ended September 30, 2003.                                                                                                      
|      | 
|10.19 |  | Employment Agreement of Michael J. Perdue, as filed with the Companys 10-Q for the quarter ended September 30, 2003.                                                                                   
|      | 
|10.20 |  | Contract with FISERV SOLUTIONS INC., as filed with the Companys 10-Q for the quarter ended March 31, 2004.                                                                                             
|      | 
|10.21 |  | Employment Agreement with Richard M. Sanborn, as filed with the Companys 10-Q for the quarter ended September 30, 2003.                                                                                
|      | 
|10.22 |  | Lease on Santee branch, as filed with the Companys 10-K for the year ended December 31, 2004.                                                                                                          
|      | 
|10.23 |  | Lease on La Mesa branch, as filed with the Companys 10-K for the year ended December 31, 2004.                                                                                                         
|      | 
|10.24 |  | Lease on Data Processing Center, as filed with the Companys 10-K for the year ended December 31, 2004.                                                                                                 
|      | 
|10.25 |  | The Executive Nonqualified Excess Plan                                                                                                                                                                 
|      | 
|10.26 |  | 2005 Equity Based Compensation Plan, as filed as part of the Companys Definitive Proxy Materials for the 2005 annual meeting and as incorporated by reference into the Companys 8-K
filed May 25, 2005
|      | 
|14.1  |  | Code of Conduct, as filed with the Companys 10-K for the year ended December 31, 2003.                                                                                                                 
|      | 
|23.1  |  | Consent of Deloitte & Touche LLP                                                                                                                                                                       
|      | 
|31.1  |  | Rule 13a-14(a) Certification by Chief Executive Officer                                                                                                                                                
|      | 
|31.2  |  | Rule 13a-14(a) Certification by Chief Financial Officer                                                                                                                                                
|      | 
|32.1  |  | Section 1350 Certifications                                                                                                                                                                            

---

| | Included in this Report
|- | -----------------------



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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 INC.
|                       | 
|By:                    |  | /S/    MICHAEL J. PERDUE             
|                       |  | MICHAEL J. PERDUE                    
|                       |  | President and Chief Executive Officer



|Dated: | March 13, 2006
|------ | --------------



|    |  |                                                  
|--- |  | -------------------------------------------------
|    | 
|By: |  | /S/    L. BRUCE MILLS,
JR.                       
|    |  | L. BRUCE MILLS, Jr.                              
|    |  | Senior Vice President and Chief Financial Officer



|Dated: | March 13, 2006
|------ | --------------



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Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the
following persons on behalf of the registrant and in the capacities and as of the dates indicated.



|                                                        |  |                       |  |                  
|------------------------------------------------------- |  | --------------------- |  | -----------------
|                                                        |  |                       |  | Dated:           
|/S/    GARY W. DEEMS GARY W. DEEMS                      |  | Chairman of the Board |  | February 24, 2006
|                                                        |  |                      
|/S/    COREY A. SEALE COREY A. SEALE                    |  | Vice Chairman         |  | February 24, 2006
|                                                        |  |                      
|/S/    MARK N. BAKER MARK N. BAKER                      |  | Director              |  | February 24, 2006
|                                                        |  |                      
|/S/    G. BRUCE DUNN G. BRUCE DUNN                      |  | Director              |  | February 24, 2006
|                                                        |  |                      
|/S/    ROBERT H. S. KIRKPATRICK ROBERT H.S. KIRKPATRICK |  | Director              |  | February 24, 2006
|                                                        |  |                      
|/S/    PHILIP D. OBERHANSLEY PHILIP D. OBERHANSLEY      |  | Director              |  | February 24, 2006
|                                                        |  |                      
|/S/    THOMAS A. PAGE THOMAS A. PAGE                    |  | Director              |  | February 24, 2006
|                                                        |  |                      
|/S/    M. FAYE WILSON M. FAYE WILSON                    |  | Director              |  | February 24, 2006
|                                                        |  |                      
|/S/    MICHAEL J. PERDUE MICHAEL J. PERDUE              |  | Director              |  | February 24, 2006
|                                                        |  |                      
|/S/    THOMAS E. SWANSON THOMAS E. SWANSON              |  | Director              |  | February 24, 2006
|                                                        |  |                      
|/S/    GARY M. YOUMANS GARY M. YOUMANS                  |  | Director              |  | February 24, 2006



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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                               |  | 
|------------- |  | ------------------------------------------------------------------------------------------------------------- |  | 
|ExhibitNumber |  | Description                                                                                                   |  | 
|              |  |                                                                                                              
|10.25         |  | The Executive Nonqualified Excess Plan, as filed with the Companys 10-K for the year ended December 31, 2005 |  | 
|              |  |                                                                                                              
|23.1          |  | Consent of Deloitte & Touche LLP                                                                              |  | 
|              |  |                                                                                                              
|31.1          |  | Rule 13a-14(a) Certification by Chief Executive Officer                                                       |  | 
|              |  |                                                                                                              
|31.2          |  | Rule 13a-14(a) Certification by Chief Financial Officer                                                       |  | 
|              |  |                                                                                                              
|32.1          |  | Section 1350 Certifications                                                                                   |  | 



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