##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   Form 10-Q   þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the quarterly period ended March 31, 2005 o
    
    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  51044   COMMUNITY BANCORP (Name of issuer in its charter)
   Nevada
    
    33-0668846(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)400 S. 4thStreet,, Suite 215, Las Vegas, NV
    
    89101(Address of principal executive offices)
    
    (Zip Code)
 Issuers telephone number: (702) 878-0700   (Former Address)
(Former name, former address and former fiscal year, if changed since last report)   Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or 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 þ No o Check whether or not the Company is an accelerated filer as defined in Exchange Rule Act 12b-2.
Yes o No þ Number of shares of common stock outstanding as of May 12, 2005: 6,750,257 
   1




---



##### Table of Contents



COMMUNITY BANCORP Quarterly Report on Form 10-Q Index
    
    PagePart I.
    
    Financial InformationItem 1 
    
    Financial Statements (unaudited)Consolidated Balance Sheets March 31, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Income Three months ended March 31, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows Three months ended March 31, 2005 and
2004
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2 
    
    Managements Discussion and Analysis of Financial Condition And Results of
Operations
    
    
    15Item 3 
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4 
    
    Controls and Procedures
    
    
    26Part II.
    
    Other InformationItem 1 
    
    Legal Proceedings
    
    
    27Item 2 
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3 
    
    Defaults Upon Senior Securities
    
    
    27Item 4 
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Item 5 
    
    Other Information
    
    
    27Item 6 
    
    Exhibits
    
    
    27Signatures
    
    
    
    
    28Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 906EX-31.1EX-31.2EX-32
 2




---



##### Table of Contents



Community Bancorp and Subsidiary 
 Consolidated Balance Sheets
March 31, 2005 and December 31, 2004 (Unaudited) March 31,
    
    
    December 31,2005
    
    
    2004(dollars in thousands)AssetsCash and due from banks
    
    $
    16,592
    
    
    $
    5,328Federal funds sold
    
    
    97,654
    
    
    
    61,926Cash and cash equivalents
    
    
    114,246
    
    
    
    67,254Securities available for sale
    
    
    90,540
    
    
    
    82,083Securities held to maturity (fair market value approximates $1,974
and $2,041)
    
    
    1,915
    
    
    
    1,958Investment in Federal Home Loan Bank (FHLB), Federal Reserve Bank
(FRB)
and Pacific Coast Bankers Bank (PCBB) stock
    
    
    2,264
    
    
    
    2,219Loans, net of allowance for loan losses of $6,156 and $6,133
    
    
    401,389
    
    
    
    395,011Premises and equipment, net
    
    
    8,493
    
    
    
    8,243Other real estate owned
    
    
    
    
    
    
    2,191Accrued interest receivable
    
    
    2,233
    
    
    
    2,003Deferred tax assets, net
    
    
    2,468
    
    
    
    2,112Bank owned life insurance
    
    
    9,318
    
    
    
    9,194Other assets
    
    
    1,535
    
    
    
    1,693Total assets
    
    $
    634,401
    
    
    $
    573,961Liabilities and Stockholders EquityDeposits:Non-interest bearing demand
    
    $
    131,650
    
    
    $
    122,148Interest bearing:Demand
    
    
    277,517
    
    
    
    221,542Savings
    
    
    5,367
    
    
    
    5,829Time, $100,000 or more
    
    
    57,830
    
    
    
    60,822Other time
    
    
    62,748
    
    
    
    65,911Total deposits
    
    
    535,112
    
    
    
    476,252Short term borrowings
    
    
    
    
    
    
    350Accrued stock appreciation rights
    
    
    2,086
    
    
    
    2,414Accrued interest payable and other liabilities
    
    
    2,432
    
    
    
    1,928Junior subordinated debt
    
    
    15,464
    
    
    
    15,46419,982
    
    
    
    20,156Commitments and Contingencies (Note 5)Stockholders EquityCommon stock, par value: $0.001; shares authorized: 10,000,000shares issued: 2005: 6,784,632; 2004: 6,782,048;
    
    
    7
    
    
    
    7Additional paid-in capital
    
    
    51,261
    
    
    
    51,245Retained earnings
    
    
    29,080
    
    
    
    26,698Accumulated other comprehensive income (loss)
    
    
    (576
    )
    
    
    17479,772
    
    
    
    78,124Less cost of treasury stock, 34,375 shares
    
    
    (285
    )
    
    
    (285
    )Less notes receivable arising from the exercise of common stock
options
    
    
    (180
    )
    
    
    (286
    )Total stockholders equity
    
    
    79,307
    
    
    
    77,553Total liabilities and stockholders equity
    
    $
    634,401
    
    
    $
    573,961
 See Notes to Unaudited Consolidated Financial Statements. 3




---



##### Table of Contents



Community Bancorp and Subsidiary 
 Consolidated Statements of Income and Comprehensive Income
For the three months ended March 31, 2005 and 2004 (Unaudited) 2005
    
    
    2004(dollars in thousands, except per share information)Interest and dividend income:Loans, including fees
    
    $
    7,355
    
    
    $
    6,397Securities:Taxable
    
    
    597
    
    
    
    371Non-Taxable
    
    
    212
    
    
    
    220Federal funds sold
    
    
    533
    
    
    
    58Dividends
    
    
    9
    
    
    
    13Total interest and dividend income
    
    
    8,706
    
    
    
    7,059Interest expense on:Deposits
    
    
    1,942
    
    
    
    1,413Short term borrowings
    
    
    5
    
    
    
    30Junior subordinated debt
    
    
    229
    
    
    
    1792,176
    
    
    
    1,622Net interest income
    
    
    6,530
    
    
    
    5,437Provision for loan losses
    
    
    
    
    
    
    222Net interest income after provision for loan losses
    
    
    6,530
    
    
    
    5,215Other income:Service charges and other income
    
    
    242
    
    
    
    266Loan brokerage and referral fees
    
    
    
    
    
    
    94Income from bank owned life insurance
    
    
    124
    
    
    
    Net gain on sales of loans
    
    
    10
    
    
    
    9376
    
    
    
    369Other expenses:Salaries, wages and employee benefits
    
    
    2,488
    
    
    
    2,105Stock appreciation rights
    
    
    (328
    )
    
    
    65Occupancy, equipment & depreciation
    
    
    360
    
    
    
    354Data processing
    
    
    151
    
    
    
    132Advertising and public relations
    
    
    76
    
    
    
    81Professional fees
    
    
    280
    
    
    
    65Telephone and postage
    
    
    50
    
    
    
    56Stationery and supplies
    
    
    73
    
    
    
    59Insurance
    
    
    59
    
    
    
    52Loan related
    
    
    32
    
    
    
    38Director fees
    
    
    89
    
    
    
    74Foreclosed assets, net
    
    
    (193
    )
    
    
    115Software maintenance
    
    
    25
    
    
    
    27Other
    
    
    261
    
    
    
    1993,423
    
    
    
    3,422Income before income taxes
    
    
    3,483
    
    
    
    2,162Income tax expense
    
    
    1,101
    
    
    
    713Net income
    
    $
    2,382
    
    
    $
    1,449Other comprehensive income (loss)Unrealized gain (loss) on securities available for sale
    
    
    (750
    )
    
    
    427Comprehensive income
    
    $
    1,632
    
    
    $
    1,876Earnings per share:Basic
    
    $
    0.35
    
    
    $
    0.31Diluted
    
    $
    0.35
    
    
    $
    0.31
 See Notes to Unaudited Consolidated Financial Statements. 4




---



##### Table of Contents



Community Bancorp and Subsidiary 
 Consolidated Statements of Cash Flows
For the three months ended March 31, 2005 and 2004 (Unaudited) 2005
    
    
    2004(dollars in thousands)Cash Flows from Operating Activities:Net income
    
    $
    2,382
    
    
    $
    1,449Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of premises and equipment
    
    
    170
    
    
    
    176(Gain) loss on foreclosed assets
    
    
    (214
    )
    
    
    110(Income) from bank owned life insurance
    
    
    (124
    )
    
    
    Realized (gains) on sales of loans
    
    
    (10
    )
    
    
    (9
    )Proceeds from sales of loans held for sale
    
    
    139
    
    
    
    132Originations of loans held for sale
    
    
    (129
    )
    
    
    (123
    )Deferred taxes
    
    
    31
    
    
    
    Provision for loan losses
    
    
    
    
    
    
    222Net amortization of investment premium and discount
    
    
    160
    
    
    
    142(Increase) in accrued interest receivable
    
    
    (230
    )
    
    
    (171
    )(Increase) decrease in other assets
    
    
    158
    
    
    
    (5
    )Increase in accrued interest payable and other liabilities
    
    
    176
    
    
    
    388Net cash provided by operating activities
    
    
    2,509
    
    
    
    2,311Cash Flows from Investing Activities:Proceeds from maturities of and principal paydowns on
securities held to maturity
    
    
    43
    
    
    
    43Purchase of securities available for sale
    
    
    (12,451
    )
    
    
    (11,000
    )Proceeds from maturities of and principal paydowns on
securities available for sale
    
    
    2,697
    
    
    
    5,508Investment in FHLB, FRB and PCBB stock
    
    
    (45
    )
    
    
    (4
    )Purchase of premises and equipment
    
    
    (420
    )
    
    
    (23
    )Proceeds from sale of foreclosed assets
    
    
    2,405
    
    
    
    Net (increase) in loans
    
    
    (6,378
    )
    
    
    (1,025
    )Net cash (used in) investing activities
    
    
    (14,149
    )
    
    
    (6,501
    )Cash Flows from Financing Activities:Cash dividends paid for fractional shares
    
    
    
    
    
    
    (4
    )Net increase (decrease) in short term borrowings
    
    
    (350
    )
    
    
    Net increase in deposits
    
    
    58,860
    
    
    
    15,129Proceeds from exercise of common stock options
    
    
    122
    
    
    
    8Net cash provided by financing activities
    
    
    58,632
    
    
    
    15,133Increase in cash and cash equivalents
    
    
    46,992
    
    
    
    10,943Cash and cash equivalents, beginning of period
    
    
    67,254
    
    
    
    36,005Cash and cash equivalents, end of period
    
    $
    114,246
    
    
    $
    46,948
 See Notes to Unaudited Consolidated Financial Statements. 5




---



##### Table of Contents



Community Bancorp and Subsidiary 
 Notes to Unaudited Consolidated Financial Statements
 
 Note 1. Nature of Business and Summary of Significant Accounting Policies Nature of business Community Bancorp (the Company) is a holding company whose subsidiary, Community Bank of Nevada, is
a Nevada state chartered bank that provides a full range of banking services to commercial and
consumer customers through five branches located in the Las Vegas Metropolitan area. The Companys
business is concentrated in southern Nevada and is subject to the general economic conditions of
this area. Segment information is not presented since all of the Companys revenues are
attributable to one operating segment. The accounting and reporting policies of the Company
conform to accounting principles generally accepted in the United States of America and general
industry practice. A summary of the significant accounting policies used by the Bancorp and its subsidiary are as
follows: Principles of Consolidation The consolidated financial statements include the accounts of Community Bancorp and its wholly
owned subsidiary, Community Bank of Nevada (the Bank), collectively referred to herein as the
Company. Significant intercompany accounts and transactions are eliminated in consolidation. Use of estimates The preparation of financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. A
material estimate that is particularly susceptible to significant change in the near term relates
to the determination of the allowance for loan losses . Interim financial information The accompanying unaudited consolidated financial statements as of March 31, 2005 and 2004 have
been prepared in condensed format, and therefore do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements. The information furnished in these interim statements reflects all adjustments which are, in the
opinion of management, necessary for a fair statement of the results for each respective period
presented. Such adjustments are of a normal recurring nature. The results of operation in the
interim statements are not necessarily indicative of the results that may be expected for any other
quarter or for the full year. The interim financial information should be read in conjunction with
the Companys Annual Report on Form 10-K. Condensed financial information as of December 31, 2004
has been presented next to the interim consolidated balance sheet for informational purposes. A consolidated statement of stockholders equity is not included as part of these interim financial
statements since there have been no material changes in the capital structure of the Company during
the three months ended March 31, 2005. 6




---



##### Table of Contents



Community Bancorp and Subsidiary Notes to Unaudited Consolidated Financial Statements
 Note 1. Nature of Business and Summary of Significant Accounting Policies (continued) Reclassifications Certain amounts in the March 31, 2004 consolidated income statement were reclassified to conform to
the 2005 presentation, with no effect on previously reported net income or stockholders equity. Employee Stock Plans At March 31, 2005, the Company has a stock-based compensation plan, which is described more fully
in Note 9 of the annual report. The Company accounts for the plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,and related
interpretations. Accordingly, no stock-based employee compensation cost has been recognized, as
all options granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates the effect on net
income and earnings per share had compensation cost for all of the stock-based compensation plans
been determined based on the minimum value approach: Three Months Ended March 31,2005
    
    
    2004(dollars in thousands, except per share data)Net income:As reported
    
    $
    2,382
    
    
    $
    1,449Deduct total stock-based employee compensation expense
determined under minimum value method for all awards,
net of related tax effects
    
    
    (21
    )
    
    
    (8
    )Proforma
    
    $
    2,361
    
    
    $
    1,441Earnings per share:As reportedBasic
    
    $
    0.35
    
    
    $
    0.31Diluted
    
    $
    0.35
    
    
    $
    0.31Proforma:Basic
    
    $
    0.35
    
    
    $
    0.31Diluted
    
    $
    0.34
    
    
    $
    0.31
 7




---



##### Table of Contents



Community Bancorp and Subsidiary Notes to Unaudited Consolidated Financial Statements
 Note 2. Earnings Per Share Basic earnings per share (EPS) represents income available to common stockholders divided by the
weighted-average number of common shares outstanding during the period. Diluted EPS reflects
additional common shares that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from assumed issuance.
Potential common shares that may be issued by the Company relate solely to outstanding options, and
are determined using the treasury stock method. Earnings per common share have been computed based on the following: Three Months Ended March 31,2005
    
    
    2004(dollars in thousands, except per share data)Net income
    
    $
    2,382
    
    
    $
    1,449Average number of common shares outstanding
    
    
    6,749,250
    
    
    
    4,604,873Effect of dilutive options
    
    
    122,011
    
    
    
    115,870Average number of common shares outstanding
used to calculate diluted earnings per common share
    
    

    6,871,261
    
    
    
    4,720,743Basic EPS
    
    $
    0.35
    
    
    $
    0.31Diluted EPS
    
    $
    0.35
    
    
    $
    0.31
 8




---



##### Table of Contents



Community Bancorp and Subsidiary Notes to Unaudited Consolidated Financial Statements
 Note 3. Current Accounting Developments In December 2004, the Financial Accounting Standards Board (FASB) published FASB Statement No.
123 (revised 2004), Share-Based Payment (FAS 123R
or the Statement). FAS 123R requires
that the compensation cost relating to share-based payment transactions, including grants of
employee stock options, be recognized in financial statements. That cost will be measured based on
the fair value of the equity or liability instruments issued. FAS 123R permits entities to use
any option-pricing model that meets the fair value objective in the Statement. The Statement is effective at the beginning of the first quarter of 2006 for the Company. As of
the effective date, the Company will apply the Statement using a modified version of prospective
application. Under that transition method, compensation cost will be recognized for (1) all awards
granted after the required effective date and to awards modified, cancelled, or repurchased after
that date and (2) the portion of awards granted subsequent to the completion of the Companys IPO
and prior to the effective date for which the requisite service has not yet been rendered, based on
the grant-date fair value of those awards calculated for pro forma disclosures under SFAS 123. The impact of this Statement on the Company in 2006 and beyond will depend upon various factors,
among them being the Companys future compensation strategy. The pro forma compensation costs
presented in these and prior financial statements of the Company have been calculated using a
minimum value method and may not be indicative of amounts which should be expected in future
periods. 9




---



##### Table of Contents



Community Bancorp and Subsidiary Notes to Unaudited Consolidated Financial Statements
 Note 4. Loans The composition of the Companys loan portfolio as of March 31, 2005 and December 31, 2004 is as
follows: March 31, 2005
    
    
    December 31, 2004(dollars in thousands)Commercial and industrial
    
    $
    59,065
    
    
    $
    59,820Real estate:Commercial
    
    
    152,387
    
    
    
    148,411Residential
    
    
    21,263
    
    
    
    24,097Construction and land development, including raw land of
approximately $52,262 for 2005 and $50,157 for 2004
    
    
    174,027
    
    
    
    167,154Consumer and other
    
    
    3,090
    
    
    
    3,788409,832
    
    
    
    403,270Less:Allowance for loan losses
    
    
    6,156
    
    
    
    6,133Net unearned loan fees and discounts
    
    
    2,287
    
    
    
    2,126$
    401,389
    
    
    $
    395,011
 Impaired and nonaccrual loans were $1,250,000 and $914,000 as of March 31, 2005 and $916,000 and
$966,000 as of December 31, 2004, respectively. Net charge-offs (recoveries) were ($23) and $8 for
the three months ended March 31, 2005 and 2004, respectively. 10




---



##### Table of Contents



Community Bancorp and
Subsidiary Notes to Unaudited Consolidated Financial Statements
 Note 5. Commitments and Contingencies Financial instruments with off-balance-sheet risk The Company is party to financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. They involve, to varying degrees,
elements of credit risk in excess of amounts recognized in the balance sheets. The Companys exposure to credit loss in the event of nonperformance by the other parties to the
financial instruments for these commitments is represented by the contractual amounts of those
instruments. The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. A summary of the contract amount of the Companys exposure to off-balance-sheet risk as of March
31, 2005 and December 31, 2004 is as follows: March 31, 2005
    
    
    December 31, 2004(dollars in thousands)Commitments to extend credit, including unsecured commitments
of $16,266 for 2005 and $17,136 for 2004
    
    $
    144,319
    
    
    $
    126,550Credit card commitments, including unsecured amounts of
$1,433 for 2005 and $1,441 for 2004
    
    
    1,443
    
    
    
    1,471Standby letters of credit, including unsecured commitments of
$605 for 2005 and $1,122 for 2004
    
    
    1,586
    
    
    
    1,583$
    147,348
    
    
    $
    129,604
 Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customers creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on managements credit evaluation of the party. Collateral held
varies, but may include accounts receivable, inventory, property and equipment, residential real
estate and income-producing commercial properties. As of March 31, 2005 the Company has
approximately $444,000 reflected in other liabilities for off-balance sheet risk associated with
commitments to extend credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to customers. Collateral
held varies as specified above and is required as the Company deems necessary. Essentially all
letters of credit issued have expiration dates within one year. Upon entering into letters of
credit, the Company records the related liability at fair value pursuant to FASB Interpretation 45
(FIN 45). Thereafter, the liability is evaluated pursuant to FASB Statement No. 5 Accounting for
Contingencies. As of March 31, 2005 the amount of the liability related to guarantees was
approximately $6,000.   11




---



##### Table of Contents



Community Bancorp and Subsidiary Notes to Unaudited Consolidated Financial Statements
 Note 5. Commitments and Contingencies (continued) In connection with standby letters of credit, the Company recognizes the related commitment fee
received from the third party as a liability at the inception of the guarantee arrangement pursuant
to FASB Interpretation 45 (FIN 45). Commitment fees where the likelihood of exercise of the
commitment is remote, are generally recognized as service fee income on a straight line basis over
the commitment period. All other commitment fees are deferred over the entire commitment period
and are not recognized as service fee income until the expiration of the commitment period. Financial instruments with concentrations of credit risk The Company makes commercial, commercial real estate, residential real estate and consumer loans to
customers primarily in southern Nevada. At March 31, 2005, real estate loans accounted for
approximately 85% of total loans. Substantially all of these loans are secured by first liens with
an initial loan to value ratio of generally not more than 75%. The Companys policy for requiring
collateral is to obtain collateral whenever it is available or desirable, depending upon the degree
of risk the Company is willing to take. In addition, approximately 4% of total loans are
unsecured. The Companys loans are expected to be repaid from cash flow or from proceeds from the
sale of selected assets of the borrowers. A substantial portion of the Companys customers ability to honor their contracts is dependent on
the economy in the area. The Companys goal is to continue to maintain a diversified loan
portfolio that requires the loans to be well collateralized and supported by cash flows. Lease Commitments During March of 2005, the Company entered into a month to month sublease agreement for its San
Diego loan production office. This is an operating lease with an unrelated third party with
initial base rent of $1,400 per month. The lease may be terminated by either party on not less
than thirty days prior written notice. 12




---



##### Table of Contents



Community Bancorp and Subsidiary Notes to Unaudited Consolidated Financial Statements
 Note 6. Stock Options and Stock Appreciation Rights Stock options There were no stock options granted or other material activity relating to stock options during the
three months ended March 31, 2005. Stock appreciation rights The Company accounts for stock appreciation rights pursuant to FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.The
(income) expense related to the Companys SAR plan was approximately ($328,000) and $65,000 for the
three months ended March 31, 2005 and 2004 respectively. The total amount in accrued expenses was
$2,086,000 at March 31, 2005. There were no grants of stock appreciation rights or other activity relating to SARs during the
three months ended March 31, 2005. 13




---



##### Table of Contents



Community Bancorp and Subsidiary Notes to Unaudited Consolidated Financial Statements
 Note 7. Quarterly Data (Unaudited) (dollars
in thousands, except per share data)2005
    
    
    2004First
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterInterest and dividend income
    
    $
    8,706
    
    
    $
    8,171
    
    
    $
    7,553
    
    
    $
    7,255
    
    
    $
    7,059Interest Expense
    
    
    2,176
    
    
    
    1,815
    
    
    
    1,681
    
    
    
    1,744
    
    
    
    1,622Net Interest Income
    
    
    6,530
    
    
    
    6,356
    
    
    
    5,872
    
    
    
    5,511
    
    
    
    5,437Provision for loan losses
    
    
    
    
    
    
    340
    
    
    
    360
    
    
    
    
    
    
    
    222Net interest income, after
provision for loan losses
    
    
    6,530
    
    
    
    6,016
    
    
    
    5,512
    
    
    
    5,511
    
    
    
    5,215Noninterest income
    
    
    376
    
    
    
    392
    
    
    
    378
    
    
    
    350
    
    
    
    369Noninterest expenses (1)
    
    
    3,423
    
    
    
    5,424
    
    
    
    3,671
    
    
    
    3,429
    
    
    
    3,422Income before income taxes
    
    
    3,483
    
    
    
    984
    
    
    
    2,219
    
    
    
    2,432
    
    
    
    2,162Provision for income taxes
    
    
    1,101
    
    
    
    141
    
    
    
    714
    
    
    
    808
    
    
    
    713Net Income
    
    $
    2,382
    
    
    $
    843
    
    
    $
    1,505
    
    
    $
    1,624
    
    
    $
    1,449Earnings per common share:Basic
    
    $
    0.35
    
    
    $
    0.16
    
    
    $
    0.32
    
    
    $
    0.35
    
    
    $
    0.31Diluted
    
    $
    0.35
    
    
    $
    0.16
    
    
    $
    0.31
    
    
    $
    0.34
    
    
    $
    0.31
   (1)
    
    Fourth quarter of 2004 includes approximately $1.9 million of expense relating to stock appreciation
rights. See Note 9 of the annual report. 14




---



##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Companys Annual Report
on Form 10-K for the year ended December 31, 2004, including the audited financial statements
contained therein, filed with the Securities and Exchange Commission. Unless the context requires
otherwise, the terms Company, us, we, and our refers to Community Bancorp on a consolidated
basis. FORWARD-LOOKING INFORMATION Certain statements contained in this document, including, without limitation, statements
containing the words believes, anticipates,
intends, expects, should and words of similar import,
constitute forward-looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Such forward looking statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such factors include, among
others, the following: general economic and business conditions in those areas in which we operate,
demographic changes, competition, fluctuations in interest rates, changes in business strategy or
development plans, changes in governmental regulation, credit quality, the availability of capital
to fund the expansion of our business, and other factors referenced in this Report. 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. EXECUTIVE OVERVIEW During the first quarter of 2005, the Company remained focused on improving internal
efficiency and generating additional revenue through sales initiatives and pricing opportunities.
The Company reported net income of $2.4 million, or $0.35 per diluted share, for the quarter ended
March 31, 2005 as compared to $1.4 million, or $0.31 per diluted share, for the same period in
2004. This increase in earnings is primarily due to higher net interest income, primarily the
result of an increase in interest earning assets, and no addition to the provision for loan losses
in the current quarter. Noninterest income for the quarter ended March 31, 2005 increased 1.9%
from the same period in the prior year primarily due to a $124 thousand increase in cash surrender
value of bank owned life insurance purchased in July, 2004. Noninterest expense for the quarter
ended March 31, 2005 increased 6.3% from the same period in the prior year primarily due to
increases in salary and benefits expense and professional fees partially offset by a $328 thousand
adjustment to the accrual for stock appreciation rights based on the fair value of the Companys
stock as of March 31, 2005. Loan growth was 1.6% during the first quarter, primarily in
construction and commercial real estate, and deposits grew 12.4% during the same period. 15




---



##### Table of Contents



COMMUNITY BANCORPSelected Consolidated Financial Highlights(In thousands, except per share data and ratios; unaudited)1st Qtr
    
    
    
    1st Qtr
    
    
    
    %Balance Sheet Data (at period end)
    
    
    2005
    
    
    
    2004
    
    
    
    ChangeInvestment securities
    
    
    $
    94,719
    
    
    
    $
    76,050
    
    
    
    
    24.55
    %Loans, gross
    
    
    
    409,832
    
    
    
    
    351,273
    
    
    
    
    16.67
    %Allowance for loan losses
    
    
    
    6,156
    
    
    
    
    5,624
    
    
    
    
    9.46
    %Total assets
    
    
    
    634,401
    
    
    
    
    480,364
    
    
    
    
    32.07
    %Total deposits
    
    
    
    535,112
    
    
    
    
    418,842
    
    
    
    
    27.76
    %Non-interest bearing deposits
    
    
    
    131,650
    
    
    
    
    114,416
    
    
    
    
    15.06
    %Core Deposits (1)
    
    
    
    477,282
    
    
    
    
    362,318
    
    
    
    
    31.73
    %Total shareholders equity
    
    
    
    79,307
    
    
    
    
    34,081
    
    
    
    
    132.70
    %Income Statement DataInterest and dividend income
    
    
    $
    8,706
    
    
    
    $
    7,059
    
    
    
    
    23.33
    %Interest expense
    
    
    
    2,176
    
    
    
    
    1,622
    
    
    
    
    34.16
    %Net interest income
    
    
    
    6,530
    
    
    
    
    5,437
    
    
    
    
    20.10
    %Loan loss provision
    
    
    
    0
    
    
    
    
    222
    
    
    
    
    -100.00
    %Net interest income after loan loss provision
    
    
    
    6,530
    
    
    
    
    5,215
    
    
    
    
    25.22
    %Noninterest income
    
    
    
    376
    
    
    
    
    369
    
    
    
    
    1.90
    %Noninterest expense
    
    
    
    3,423
    
    
    
    
    3,422
    
    
    
    
    0.00
    %Income before income taxes
    
    
    
    3,483
    
    
    
    
    2,162
    
    
    
    
    61.10
    %Provision for income taxes
    
    
    
    1,101
    
    
    
    
    713
    
    
    
    
    54.42
    %Net income
    
    
    $
    2,382
    
    
    
    $
    1,449
    
    
    
    
    64.39
    %Share Data (2)Basic earnings per common share
    
    
    $
    0.35
    
    
    
    $
    0.31
    
    
    
    
    12.90
    %Diluted earnings per common share
    
    
    $
    0.35
    
    
    
    $
    0.31
    
    
    
    
    12.90
    %Book value per common share
    
    
    $
    11.72
    
    
    
    $
    7.21
    
    
    
    
    62.55
    %Basic average shares outstanding
    
    
    
    6,749,250
    
    
    
    
    4,604,873
    
    
    
    
    46.57
    %Fully Diluted average shares outstanding
    
    
    
    6,871,261
    
    
    
    
    4,720,743
    
    
    
    
    45.55
    %Key RatiosReturn on average total shareholders equity
    
    
    
    12.09
    %
    
    
    
    17.33
    %
    
    
    
    -30.23
    %Return on average total assets
    
    
    
    1.55
    %
    
    
    
    1.24
    %
    
    
    
    25.15
    %Net interest spread
    
    
    
    3.80
    %
    
    
    
    4.34
    %
    
    
    
    -12.44
    %Net interest margin (3)
    
    
    
    4.49
    %
    
    
    
    4.88
    %
    
    
    
    -7.95
    %Total revenue (net int inc + non int inc)
    
    
    $
    7,120
    
    
    
    $
    5,806
    
    
    
    
    22.63
    %Efficiency ratio (4)
    
    
    
    49.57
    %
    
    
    
    58.94
    %
    
    
    
    -15.90
    %Asset Quality RatiosNon-performing loans to total loans (5)
    
    
    
    0.22
    %
    
    
    
    1.11
    %
    
    
    
    -79.82
    %Allowance for loan losses to total loans
    
    
    
    1.50
    %
    
    
    
    1.60
    %
    
    
    
    -6.18
    %Non-performing assets (6)
    
    
    
    914
    
    
    
    
    4,964
    
    
    
    
    -81.59
    %Non-performing assets to total assets
    
    
    
    0.14
    %
    
    
    
    1.03
    %
    
    
    
    -86.06
    %Net charge offs to average loans
    
    
    
    0.00
    %
    
    
    
    0.00
    %
    
    
    
    0.00
    %Capital RatiosAverage shareholders equity to average assets
    
    
    
    12.86
    %
    
    
    
    7.17
    %
    
    
    
    79.36
    %Leverage ratio
    
    
    
    15.49
    %
    
    
    
    9.49
    %
    
    
    
    63.22
    %Total risk-based capital ratio
    
    
    
    20.72
    %
    
    
    
    13.71
    %
    
    
    
    51.13
    %
 Notes:   (1)
    
    Core deposits include all demand, interest bearing demand, savings plus time deposits of amounts less than $100,000.(2)
    
    Adjusted to reflect a 5:1 stock split declared in September 2004.(3)
    
    Net interest margin represents net interest income as a percentage of average interest-earning assets.(4)
    
    Efficiency ratio is noninterest expense (excluding loan loss provision) divided by (net interest income + noninterest income).(5)
    
    Nonperforming loans are defined as loans that are past due 90 days or more plus loans placed in non-accrual status and restructured loans.(6)
    
    Nonperforming assets are defined as loans that are past due 90 days or more, nonaccrual loans and other real estate owned. 16




---



##### Table of Contents



Key Factors in Evaluating Financial Condition and Operating Performance As a community bank holding company, we focus on several key factors including:  
    Return to Our Shareholders;
    Return on Average Assets;
    Asset Quality;
    Asset Growth; and
    Operating Efficiency. Return to Our Shareholders.Our return to our shareholders is measured in the form of return
on average equity, or ROE. Our net income increased 64.4%, to $2.4 million for the quarter ended
March 31, 2005 from $1.4 million for the same period 2004. Net income increased due to an increase
in net interest income and a decrease in loan loss provision. Basic and Diluted EPS as of March
31, 2005 was $0.35, up from $0.31 as of March 31, 2004. This increase in EPS was partially due to
an increase in income of $328,000 before taxes for the adjustment to the accrual for stock
appreciation rights based on the fair value of the Companys stock as of March 31, 2005. With the
additional capital from the IPO in December of 2004, our ROE decreased to 12.1% at March 31, 2005
compared to 17.3% for the same period in 2004. Return on Average Assets.Our return on average assets, or ROA, is a measure we use to compare
our performance with other banks and bank holding companies. Our ROA at March 31, 2005 was 1.55%
compared to 1.24% for the same period 2004. Asset Quality.For all banks and bank holding companies, asset quality has a significant
impact on the overall financial condition and results of operations. Asset quality is measured in
terms of non-performing loans and assets as a percentage of total loans and total assets, and net
charge-offs as a percentage of average loans. These measures are key elements in estimating the
future earnings of a company. Non-performing loans totaled $914 thousand as of March 31, 2005
compared to $3.9 million at March 31, 2004. Non-performing loans as a percentage of total loans
decreased to 0.22% as of March 31, 2005 compared to 1.11% at March 31, 2004. Non-performing assets
were $914 thousand as of March 31, 2005 compared to $5 million as of March 31, 2004.
Non-performing assets as a percent of total assets were 0.14% as of March 31, 2005 compared to
1.03% at March 31, 2004. Net charge-offs to average loans were 0% for March 31, 2005 and 2004. Asset Growth.As revenues from both net interest income and non-interest income are a function
of asset size, the continued growth in assets has a direct impact on increasing net income and EPS.
The majority of our assets are loans, and the majority of our liabilities are deposits, and
therefore the ability to generate loans and deposits are fundamental to our asset growth. Total
assets increased 32% to $634 million as of March 31, 2005 from $480 million as of March 31, 2004.
Total deposits increased 28% to $535 million as of March 31, 2005 compared to $419 million as of
March 31, 2004. Gross loans increased 17% to $410 million as of March 31, 2005 compared to $351
million as of March 31, 2004. Operating Efficiency.Operating efficiency is the measure of how efficiently earnings before
taxes are generated as a percentage of revenue. Our efficiency ratio (operating expenses divided
by net interest income plus non-interest income) improved, decreasing to 49.6% for the first
quarter of 2005 compared to 58.9% for the same period in 2004. 17




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES Our accounting policies are integral to understanding the financial results reported. Our most
complex accounting policies require managements judgment to ascertain the valuation of assets,
liabilities, commitments and contingencies. We have established detailed policies and control
procedures that are intended to ensure valuation methods are well controlled and applied
consistently from period to period. In addition, the policies and procedures are intended to ensure
that the process for changing methodologies occurs in an appropriate manner. The following is a
brief description of our current accounting policies involving significant management valuation
judgments. Allowance for Loan Losses.The allowance for loan losses represents our best estimate of the
probable losses inherent in the existing loan portfolio. The allowance for loan losses is increased
by the provision for loan losses charged to expense and reduced by loans charged off, net of
recoveries. We evaluate our allowance for loan losses quarterly. We believe that the allowance for loan
losses, or ALLL, is a critical accounting estimate because it is based upon managements
assessment of various factors affecting the collectibility of the loans, including current economic
conditions, past credit experience, delinquency status, the value of the underlying collateral, if
any, and a continuing review of the portfolio of loans. For a discussion of the allowance and our
methodology, see Financial Condition  Provision/Allowance for Loan Loss. Like all financial institutions, we maintain an ALLL based on a number of quantitative and
qualitative factors, including levels and trends of past due and non-accrual loans, asset
classifications, loan grades, change in volume and mix of loans, collateral value, historical loss
experience, peer group loss experience, size and complexity of individual credits and economic
conditions. Provisions for loan losses are provided on both a specific and general basis. Specific
allowances are provided for impaired credits for which the expected/anticipated loss is measurable.
General valuation allowances are based on a portfolio segmentation based on risk grading, with a
further evaluation of various quantitative and qualitative factors noted above. We incorporate statistics provided through the FDIC regarding loss percentages experienced by
banks in the western United States, as well as an internal five-year loss history to establish
potential risk based on collateral type securing each loan. As an additional comparison, we examine
local peer group banks to determine the nature and scope of their losses to date. Such examination
provides a geographic-and size-specific flavor for trends in the local banking community. Finally,
we closely examine each credit graded Special Mention and below to individually assess the
appropriate loan loss reserve for a particular credit. We periodically review the assumptions and formulae by which additions are made to the
specific and general valuation allowances for losses in an effort to refine such allowances in
light of the current status of the factors described above. Although we believe the level of the allowance as of March 31, 2005 was adequate to absorb
probable losses in the loan portfolio, a decline in local economic, or other factors, could result
in increasing losses that cannot be reasonably predicted at this time. 18




---



##### Table of Contents



Available for Sale Securities.Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, requires that available-for-sale securities
be carried at fair value. We believe this is a critical accounting estimate in that the fair
value of a security is based on quoted market prices or if quoted market prices are not available,
fair values are extrapolated from the quoted prices of similar instruments. Management utilizes the
services of a reputable third party vendor to assist with the determination of estimated fair
values. Adjustments to the available-for-sale securities fair value impact the consolidated
financial statements by increasing or decreasing assets and stockholders equity. RESULTS OF OPERATIONS Net Interest Income.Net interest income, the Companys largest source of operating income, is
derived from interest, dividends and fees received on interest earning assets, less interest
expense incurred on interest bearing liabilities. The most significant impact on the Companys net
interest income between periods is derived from the interaction of changes in the volume of and
rates earned or paid on interest earning assets and interest bearing liabilities (spread). The
volume of loans, investment securities and other interest earning assets, compared to the volume of
interest bearing deposits and indebtedness, combined with the spread, produces changes in the net
interest income between periods. The following table presents, for the periods indicated, condensed average balance sheet
information for the Company, together with interest income and yields earned on average interest
earning assets and interest expense and rates paid on average interest bearing liabilities. 19




---



##### Table of Contents



Three Months ended March 31,2005
    
    
    2004Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield or
    
    
    Average
    
    
    
    
    
    
    Yield orBalance
    
    
    Interest
    
    
    Cost (7)
    
    
    Balance
    
    
    Interest
    
    
    Cost (7)(Dollars in thousands)AssetsInterest -earning assets:Loans (1) (2) (3)
    
    $
    405,272
    
    
    $
    7,355
    
    
    
    7.26
    %
    
    $
    353,012
    
    
    $
    6,397
    
    
    
    7.25
    %Investment
Securities - Taxable
    
    
    63,974
    
    
    
    597
    
    
    
    3.73
    %
    
    
    44,400
    
    
    
    371
    
    
    
    3.34
    %Investment
Securities - Non-taxable (3)
    
    
    22,495
    
    
    
    212
    
    
    
    3.77
    %
    
    
    23,269
    
    
    
    220
    
    
    
    3.78
    %Federal funds sold
    
    
    87,205
    
    
    
    533
    
    
    
    2.44
    %
    
    
    23,875
    
    
    
    58
    
    
    
    0.97
    %Other investments (4)
    
    
    2,712
    
    
    
    9
    
    
    
    1.33
    %
    
    
    1,240
    
    
    
    13
    
    
    
    4.19
    %Total interest-earning assets
    
    
    581,658
    
    
    
    8,706
    
    
    
    5.99
    %
    
    
    445,796
    
    
    
    7,059
    
    
    
    6.33
    %Non-earning assets:Cash and due from banks
    
    
    15,756
    
    
    
    
    
    
    
    
    
    
    
    13,449Unearned loan fees
    
    
    (2,083
    )
    
    
    
    
    
    
    
    
    
    
    (1,528
    )Allowance for loan losses
    
    
    (6,127
    )
    
    
    
    
    
    
    
    
    
    
    (5,499
    )Other assets
    
    
    23,541
    
    
    
    
    
    
    
    
    
    
    
    13,797Total assets
    
    $
    612,745
    
    
    
    
    
    
    
    
    
    
    $
    466,015Liabilities and Stockholders EquityInterest-bearing Liabilities:DepositsInterest-bearing demand
    
    $
    21,692
    
    
    $
    47
    
    
    
    0.87
    %
    
    $
    14,988
    
    
    $
    12
    
    
    
    0.32
    %Money Market
    
    
    232,895
    
    
    
    1,155
    
    
    
    1.98
    %
    
    
    140,283
    
    
    
    442
    
    
    
    1.26
    %Savings
    
    
    5,595
    
    
    
    7
    
    
    
    0.50
    %
    
    
    5,536
    
    
    
    2
    
    
    
    0.14
    %Time certificates of deposit
    
    
    121,482
    
    
    
    733
    
    
    
    2.41
    %
    
    
    139,513
    
    
    
    957
    
    
    
    2.74
    %Total interest-bearing deposits
    
    
    381,664
    
    
    
    1,942
    
    
    
    2.04
    %
    
    
    300,320
    
    
    
    1,413
    
    
    
    1.88
    %Short-term borrowings
    
    
    171
    
    
    
    5
    
    
    
    11.70
    %
    
    
    10,002
    
    
    
    30
    
    
    
    1.20
    %Junior subordinated debt
    
    
    15,464
    
    
    
    229
    
    
    
    5.92
    %
    
    
    15,464
    
    
    
    179
    
    
    
    4.63
    %Total interest-bearing liabilities
    
    
    397,299
    
    
    
    2,176
    
    
    
    2.19
    %
    
    
    325,786
    
    
    
    1,622
    
    
    
    1.99
    %Non-interest-bearing liabilitiesDemand deposits
    
    
    132,606
    
    
    
    
    
    
    
    
    
    
    
    104,993Other liabilities
    
    
    4,025
    
    
    
    
    
    
    
    
    
    
    
    1,786Total liabilities
    
    
    533,930
    
    
    
    
    
    
    
    
    
    
    
    432,565Stockholders equity
    
    
    78,815
    
    
    
    
    
    
    
    
    
    
    
    33,450Total liabilities and stockholders
equity
    
    $
    612,745
    
    
    
    
    
    
    
    
    
    
    $
    466,015Net interest income
    
    
    
    
    
    $
    6,530
    
    
    
    
    
    
    
    
    
    
    $
    5,437Net interest spread (5)
    
    
    
    
    
    
    
    
    
    
    3.80
    %
    
    
    
    
    
    
    
    
    
    
    4.34
    %Net interest margin (6)
    
    
    
    
    
    
    
    
    
    
    4.49
    %
    
    
    
    
    
    
    
    
    
    
    4.88
    %
   (1)
    
    Includes average non-accrual loans of $940 thousand in 2005 and $2.7 million in 2004.(2)
    
    Net loan fees of $786 thousand and $718 thousand are included in the yield computations for
2005 and 2004, respectively.(3)
    
    Yields on loans and securities have not been adjusted to a tax-equivalent basis.(4)
    
    Includes Federal Reserve Bank stock, Federal Home Loan Bank stock and Pacific Coast Bankers
Bank stock.(5)
    
    Net interest spread represents the average yield earned on interest earning assets less the
average rate paid on interest bearing liabilities.(6)
    
    Net interest margin is computed by dividing net interest income by total average earning
assets. 20




---



##### Table of Contents



Net interest income increased $1.1 million, or 20.1%, to $6.5 million for the three
months ended March 31, 2005 as compared to $5.4 million for the same period in 2004. This increase
is primarily due to an increase in the average balance of fed funds and securities, and higher
interest rates on fed funds, securities and loans. Increases in interest income were partially
offset by higher funding costs due to increases in market interest rates. The net interest margin
ratio declined to 4.49% for the three months ended March 31, 2005 as compared to 4.88% for the same
period in the prior year. This decline was due to a larger than normal balance in fed funds for the
quarter retained in anticipation of funding requirements over the short term. The table below sets forth, for the periods indicated, a summary of the changes in interest
income and interest expense and the amount of change attributable to variances in volume, rates and
the combination of volume and rates based on the relative changes of volume and rates. Three months ended March 31,2005 compared with 2004Net Change
    
    
    Rate
    
    
    Volume
    
    
    Mix(In thousands)Loans
    
    $
    958
    
    
    $
    10
    
    
    $
    947
    
    
    $
    1Investment Securities- Taxable
    
    
    226
    
    
    
    43
    
    
    
    164
    
    
    
    19Investment Securities- Non-taxable
    
    
    (8
    )
    
    
    (1
    )
    
    
    (7
    )
    
    
    0Federal funds sold
    
    
    475
    
    
    
    88
    
    
    
    154
    
    
    
    233Other investments
    
    
    (4
    )
    
    
    (9
    )
    
    
    15
    
    
    
    (11
    )Total interest income
    
    
    1,647
    
    
    
    131
    
    
    
    1,273
    
    
    
    242Interest expense:Interest-bearing demand
    
    
    35
    
    
    
    20
    
    
    
    5
    
    
    
    9Money Market
    
    
    713
    
    
    
    254
    
    
    
    292
    
    
    
    167Savings
    
    
    5
    
    
    
    5
    
    
    
    0
    
    
    
    0Time certificates of deposit
    
    
    (224
    )
    
    
    (115
    )
    
    
    (124
    )
    
    
    15Short-term borrowings
    
    
    (25
    )
    
    
    262
    
    
    
    (29
    )
    
    
    (258
    )Junior subordinated debt
    
    
    50
    
    
    
    50
    
    
    
    0
    
    
    
    0Total interest expense
    
    
    554
    
    
    
    476
    
    
    
    144
    
    
    
    (67
    )Net interest income
    
    $
    1,093
    
    
    $
    (345
    )
    
    $
    1,129
    
    
    $
    309
 Noninterest Income.The Companys principal sources of noninterest income include service
charges and other income, bank owned life insurance (BOLI); and gain/(loss) on sale of assets.
Noninterest income increased $7 thousand, or 1.9%, to $376 thousand for the three months ended
March 31, 2005 as compared to $369 thousand for the same period in 2004. The increase was
primarily due to a $124 thousand increase in cash surrender value which is partially offset by the
decrease in loan brokerage and referral fees. Noninterest Expense.Noninterest expense was $3.4 million for the three months ended March 31,
2005 and 2004. The first quarter of 2005 showed an increase in salary and employee benefit
expense, which can be attributed to an increase in the areas of lending and operations. The number
of Full Time Equivalent employees increased to 111 at March 31, 2005 compared to 104 at March 31,
2004. In addition to general staffing of the various departments, we were successful in recruiting
a Chief Credit Officer in January, 2005. Professional fees increased $215 thousand, or 330.8%, to
$280 thousand for the three months ended March 31, 2005 as compared to $65 thousand for the same
period in 2004. Professional fees related to services rendered by our accountants, legal counsel
and consultants have increased in order to ensure compliance with the laws and regulations that we
are subject to as a public company. The 2005 increase in salaries and benefits and professional
fees was offset by a $328 thousand adjustment to the accrual for stock appreciation rights based on
the fair value of the Companys stock as of March 31, 2005, and a gain on the sale of three
foreclosed properties totaling $214 thousand. 21




---



##### Table of Contents



Income Tax Expense.The Companys effective federal income tax rate was 32% and 33% for the
three months ended March 31, 2005 and 2004, respectively. FINANCIAL CONDITION Loans.Total loans increased $6.6 million, or 1.6%, to $409.8 million as of March 31, 2005
from $403.3 million as of December 31, 2004. With a significant number of loan closings taking
place late in December 2004, the first quarter of 2005 reflected reasonably flat loan growth while
pipelines were again in a generation stage. The second quarter should see outstanding loan
balances more consistent with historical growth as new loans are funded and construction loans
begin to advance into a high percentage of completion. Since December 31, 2004, construction
loans experienced the highest growth within our portfolio, growing from $167 million to $174
million, followed by commercial real estate loans which grew from $148 million to $152 million.
While we continue to focus on our strong real estate lending portfolio, we expect to diversify the
portfolio in future periods. One step toward that diversification was the opening of a new loan production office in the high growth market of San Diego, California
during April of 2005. Investment Securities.The carrying value of our investment securities at March 31, 2005
totaled $92 million, compared to $84 million at December 31, 2004. The increases experienced are a
result of growth in deposits. Our portfolio consists primarily of U.S. Government agencies, agency
mortgage-backed securities and obligations of states and political subdivisions. Deferred Tax Asset. Deferred tax asset of $2.5 million as of March 31, 2005 increased $356
thousand from $2.1 million as of December 31, 2004 primarily due to fluctuations in net unrealized
gains and losses on available-for-sale investment securities. Deposits.Total deposits increased $58.9 million, or 12.4%, to $535.1 million as of March 31,
2005 from $476.3 million as of December 31, 2004 with interest bearing demand showing the largest
increase, growing from $222 million to $278 million followed by an increase in non-interest bearing
demand which grew from $122 million to $132 million. The increase in interest bearing demand is
partially attributed to a new short term deposit of $26 million from one customer, which has been
reduced to approximately $10 million as of April 4, 2005. In an ongoing effort to improve
earnings, the Company continues to focus its attention on attracting lower cost core deposits and
reducing the reliance on more expensive time deposits. Fed Funds Sold. Fed Funds Sold increased to $97.7 million as of March 31, 2005 from $61.9
million as of December 31, 2004 due to anticipated short term funding requirements. 22




---



##### Table of Contents



ASSET QUALITY Non-performing Assets.Non-performing assets include loans past due 90 days or more and still
accruing interest, nonaccrual loans, loans renegotiated in troubled debt restructurings and other
real estate owned (OREO). The following table sets forth information regarding non-performing assets as of the dates
indicated: March 31, 2005
    
    
    December 31, 2004Non-accrual loans, not restructured
    
    
    914
    
    
    
    966Accruing loans past due 90 days or more
    
    
    0
    
    
    
    2Restructured loans
    
    
    0
    
    
    
    0Total non-performing loans (NPLs)
    
    
    914
    
    
    
    968OREO
    
    
    
    
    
    
    2,191Total non-performing assets (NPAs)
    
    
    914
    
    
    
    3,159Selected ratiosNPLs to total loans
    
    
    0.22
    %
    
    
    0.24
    %NPAs to total loans and OREO
    
    
    0.22
    %
    
    
    0.78
    %NPAs to total assets
    
    
    0.14
    %
    
    
    0.55
    %
 Non-performing assets decreased $2.2 million, or 71.1%, to $914 thousand as of March
31, 2005 as compared to $3.2 million as of December 31, 2004 primarily due to the sale of three
OREO properties during the 1st quarter. Provision/Allowance for Loan Losses.The Company performs a quarterly
assessment of the risks inherent in its loan portfolio, as well as a detailed review of each
significant asset with identified weaknesses. Based on the most recent analysis of the allowance
for loan losses and a thorough review by Segmentation, Risk Grading, Peer Group, and Economic
Conditions, and considering the mitigating factors of each method it is believed that the
Segmentation Methodology more accurately reflects embedded risks inherent in the loan portfolio for
the most recent quarter end. In light of this evaluation no provision was taken during the first
quarter 2005. The provision for loan losses was $222 thousand for the three months ended March 31,
2004. The allowance for loan losses was $6.2 million, or 1.50% of total loans, as of March 31, 2005
as compared to $5.6 million, or 1.60% of total loans, at March 31, 2004. 23




---



##### Table of Contents



The following table sets forth information regarding the Companys allowance for loan losses as of
and for the periods indicated. At or for the three monthsended March 31,2005
    
    
    2004Allowance for loan losses:Beginning balance
    
    $
    6,133
    
    
    $
    5,409Loans charged off during period:Commercial
    
    
    0
    
    
    
    0Construction
    
    
    0
    
    
    
    0Commercial real estate
    
    
    0
    
    
    
    0Residential real estate
    
    
    0
    
    
    
    0Consumer and other
    
    
    16
    
    
    
    12Total
    
    
    16
    
    
    
    12Recoveries:Commercial
    
    
    39
    
    
    
    1Construction
    
    
    0
    
    
    
    1Commercial real estate
    
    
    0
    
    
    
    0Residential real estate
    
    
    0
    
    
    
    3Consumer and other
    
    
    0
    
    
    
    0Total
    
    
    39
    
    
    
    5Net loans and leases charged off
    
    
    (23
    )
    
    
    7Provision for loan losses
    
    
    0
    
    
    
    222Ending balance
    
    $
    6,156
    
    
    $
    5,624Gross loans
    
    $
    409,832
    
    
    $
    351,273Average loans
    
    
    405,272
    
    
    
    353,012Non-performing loans
    
    
    914
    
    
    
    3,882Selected ratios:Net charge-offs to average loans
    
    
    -0.01
    %
    
    
    0.00
    %Provision for loan losses to average loans
    
    
    0.00
    %
    
    
    0.06
    %Allowance for loan losses to loans
outstanding at end of period
    
    
    1.50
    %
    
    
    1.60
    %Allowance for loan losses to non-
performing loans
    
    
    673.5
    %
    
    
    144.9
    %
 24




---



##### Table of Contents



CAPITAL RESOURCES The Companys total stockholders equity at March 31, 2005 was $79.3 million, an increase of
$1.8 million from December 31, 2004. The increase resulted from earnings retention partially
offset by unrealized holding losses on available-for-sale investment securities. At March 31, 2005,
the Company and its bank subsidiary each exceeded the well-capitalized requirements issued by the
Federal Reserve Board. LIQUIDITY MANAGEMENT The ability to have readily available funds sufficient to repay fully maturing liabilities is
of primary importance to depositors, creditors and regulators. Our liquidity, represented by cash
and due from banks, federal funds sold and available-for-sale securities, is a result of our
operating, investing and financing activities and related cash flows. In order to ensure funds are
available at all times, we devote resources to projecting on a monthly basis the amount of funds
that will be required and maintain relationships with a diversified customer base so funds are
accessible. Liquidity requirements can also be met through short-term borrowings or the disposition
of short-term assets. We have borrowing lines at correspondent banks totaling $19.0 million. In
addition, loans and securities are pledged to the FHLB totaling $20.0 million as of March 31, 2005
and $7.5 million securities pledged to the FRB Discount window. As of March 31, 2005 we had $70.0
million in securities available to be sold or pledged to the FHLB and/or FRB Discount Window. We have a formal liquidity policy, and in the opinion of management, our liquid assets are
considered adequate to meet our cash flow needs for loan funding and deposit cash withdrawal for
the next 60-90 days. At March 31, 2005, we had $205 million in liquid assets comprised of $114
million in cash and cash equivalents (including fed funds sold of $98 million) and $91 million in
available-for-sale securities. On a long term basis, our liquidity will be met by changing the relative distribution of our
asset portfolios, i.e., reducing investment or loan volumes, or selling or encumbering assets.
Further, we will increase liquidity by soliciting higher levels of deposit accounts through
promotional activities and/or borrowing from our correspondent banks as well as the Federal Home
Loan Bank of San Francisco. At the current time, our long-term liquidity needs primarily relate to
funds required to support loan originations and commitments and deposit withdrawals. All of these
needs can currently be met by cash flows from investment payments and maturities, and investment
sales if the need arises. Our liquidity is comprised of three primary classifications: cash flows from operating
activities; cash flows used in investing activities; and cash flows provided by financing
activities. Net cash provided by operating activities has consisted primarily of net income
adjusted for changes in certain other asset and liability accounts and certain non-cash income and
expense items such as the loan loss provision, investment and other amortizations and depreciation.
At March 31, 2005 net cash provided by operating activities was $2.5 million, compared to net cash
provided by operating activities of $2.3 million for the same period of 2004. Our primary investing activities are the origination of real estate, commercial and consumer
loans and purchase and sale of securities. Our net cash provided by and used in investing
activities has been primarily influenced by our loan activity. Net increases in loans for the
periods ended March 31, 2005 and 2004, were $6 million and $1 million, respectively. 25




---



##### Table of Contents



Net cash used in all investing activities for the periods ended March 31, 2005 and 2004 was
$14 million and $7 million, respectively. At March 31, 2005 we had outstanding loan commitments of
$146 million and outstanding letters of credit of $2 million. We anticipate that we will have
sufficient funds available to meet current loan commitments. Net cash provided by financing activities for the periods ended March 31, 2005 and 2004 was
$59 million and $15 million, respectively. These amounts consisted mainly of a net increase in
deposits for each respective period. The increase for the first quarter of 2005 was partially due
to one large short term deposit of $26 million, which was reduced to $10 million in April of 2005. Item 3. 
 Quantitative and Qualitative Disclosures
About Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The
Companys market risk arises principally from interest rate risk in lending, deposit and borrowing
activities. Management actively monitors and manages its interest rate risk exposure. Management
considers interest rate risk to be a significant market risk, which could have the largest material
effect on the Companys financial condition and results of operations. There has not been any material change in the market risk disclosure contained in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Item. 4 
 Controls and Procedures As of the end of the period covered by this report, the Companys management, including the
Chief Executive Officer and Chief Financial Officer evaluated the Companys disclosure controls and
procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective. There were no
significant changes in the Companys internal controls over financial reporting that occurred
during the quarter ending March 31, 2005 that have materially affected or are reasonably likely to
materially affect the Companys internal control over financial reporting. In designing and evaluating disclosure controls and procedures, the Companys management
recognized that any controls and procedures, no matter how well designed and operated, can provide
only reasonable, not absolute, assurances of achieving the desired control objectives and
management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. 26




---



##### Table of Contents



PART II OTHER INFORMATION 
 Item 1. Legal
Proceedings There have been no material changes in legal proceedings as described in the Companys Annual
Report on Form 10-K for the year ended December 31, 2004. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3. Defaults upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders Not applicable or required. 
 Item 5. Other Information Not applicable or required. 
 Item 6. Exhibits  (a)
    Exhibits 31.1 Section 13a-14(a) Certification 31.2 Section 13a-14(a) Certification 32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the
Sarbanes-Oxley Act of 2002 from the Companys Chief Executive
Officer and Chief Financial Officer (attached as an
exhibit and incorporated herein by reference). 27




---



##### Table of Contents



(SIGNATURES) Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized. Community Bancorp(Registrant)Date : May 12, 2005
    
    /s/ Edward M. JamisonEdward M. JamisonPresident and Chief Executive OfficerDate : May 12, 2005
    
    /s/ Cathy RobinsonCathy RobinsonExecutive Vice President, Chief Financial Officer
 28