##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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



For the quarterly period ended September 30, 2004



| ̈ | 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.

(Name of issuer in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0859334                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|900 Canterbury Place, Suite 300, CA                            |  | 92025                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Issuers
telephone number: (760) 432-1100



(Former
Address)

(Former name, former address and former fiscal year, if changed since last report)



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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  x    No ̈



Check whether or not the Company is an accelerated filer as defined in Exchange Rule Act
12b-2.    Yes ̈No  x



Number of shares of common stock outstanding as of September 30, 2004:
4,422,689



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##### Table of Contents

COMMUNITY BANCORP INC.

2004 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



|                                                                                              |  |     
|--------------------------------------------------------------------------------------------- |  | ----
|                                                                                              |  | Page
|PART I 
FINANCIAL INFORMATION                                                                |  |     
|                                                                                              | 
|ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)                                                      |  | 3   
|                                                                                              | 
|ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 14  
|                                                                                              | 
|ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 38  
|                                                                                              | 
|ITEM 4.
CONTROLS AND PROCEDURES                                                               |  | 41  
|                                                                                              | 
|PART II 
OTHER INFORMATION                                                                   |  |     
|                                                                                              | 
|ITEM 1.
LEGAL PROCEEDINGS                                                                     |  | 42  
|                                                                                              | 
|ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS                                             |  | 42  
|                                                                                              | 
|ITEM 3.
DEFAULTS UPON SENIOR SECURITIES                                                       |  | 42  
|                                                                                              | 
|ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 42  
|                                                                                              | 
|ITEM 5.
OTHER INFORMATION                                                                     |  | 42  
|                                                                                              | 
|ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K                                                      |  | 42  
|                                                                                              | 
|SIGNATURES                                                                                    |  | 43  
|                                                                                              | 
|CERTIFICATIONS                                                                                |  |     



2



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##### Table of Contents

PART 1: FINANCIAL INFORMATION



ITEM 1: FINANCIAL STATEMENTS



COMMUNITY BANCORP
INC.

CONSOLIDATED BALANCE SHEET



|                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|(September 30, 2004 unaudited)(dollars in thousands, except per share data)                                                                              |  | September 30,2004 |         |   | December 31,2003 |  
|ASSETS:                                                                                                                                                  |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                |  | $                 | 18,162  |   |                  | $ | 17,940  |  
|Interest bearing deposits in financial institutions                                                                                                      |  |                   | 581     |   |                  |   |        |  
|Federal funds sold                                                                                                                                       |  |                   | 31,170  |   |                  |   | 17,925  |  
|Investments:                                                                                                                                             |  |                   |         |   |                  |   |         |  
|Trading securities, at fair value                                                                                                                        |  |                   |        |   |                  |   |        |  
|Held-to-maturity at amortized cost; pledged $2,366 (2004) and $4,809 (2003), estimated fair value of $4,581 (2004) and $7,807
(2003)                     |  |                   | 4,497   |   |                  |   | 7,687   |  
|Available-for-sale, at estimated fair value; pledged $8,392 (2004) and $2,849 (2003)                                                                     |  |                   | 12,605  |   |                  |   | 15,921  |  
|Federal Reserve Bank & Federal Home Loan Bank stock, at cost                                                                                             |  |                   | 2,788   |   |                  |   | 1,999   |  
|Loans held for investment                                                                                                                                |  |                   | 354,000 |   |                  |   | 330,302 |  
|Less allowance for loan losses                                                                                                                           |  |                   | (6,029  | ) |                  |   | (5,210  | )
|                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Net loans held for investment                                                                                                                            |  |                   | 347,971 |   |                  |   | 325,092 |  
|Loans held for sale                                                                                                                                      |  |                   | 101,247 |   |                  |   | 69,120  |  
|Premises and equipment, net                                                                                                                              |  |                   | 3,951   |   |                  |   | 3,653   |  
|Other real estate owned and repossessed assets                                                                                                           |  |                   | 39      |   |                  |   | 458     |  
|Affordable housing investments                                                                                                                           |  |                   | 1,481   |   |                  |   | 1,499   |  
|Accrued interest                                                                                                                                         |  |                   | 1,599   |   |                  |   | 1,587   |  
|Other assets                                                                                                                                             |  |                   | 5,508   |   |                  |   | 6,136   |  
|Income tax receivable                                                                                                                                    |  |                   | 335     |   |                  |   |        |  
|Deferred tax asset, net                                                                                                                                  |  |                   | 3,524   |   |                  |   | 3,569   |  
|Servicing assets, net                                                                                                                                    |  |                   | 3,698   |   |                  |   | 3,247   |  
|Interest-only strips, at fair value                                                                                                                      |  |                   | 1,454   |   |                  |   | 865     |  
|                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                             |  | $                 | 540,610 |   |                  | $ | 476,698 |  
|                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                     |  |                   |         |   |                  |   |         |  
|Deposits                                                                                                                                                 |  |                   |         |   |                  |   |         |  
|Interest bearing                                                                                                                                         |  | $                 | 372,119 |   |                  | $ | 324,466 |  
|Non-interest bearing                                                                                                                                     |  |                   | 83,668  |   |                  |   | 68,660  |  
|                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Total deposits                                                                                                                                           |  |                   | 455,787 |   |                  |   | 393,126 |  
|Short term borrowing                                                                                                                                     |  |                   | 20,000  |   |                  |   | 25,000  |  
|Long term debt                                                                                                                                           |  |                   | 14,862  |   |                  |   | 14,697  |  
|Accrued expenses and other liabilities                                                                                                                   |  |                   | 7,118   |   |                  |   | 6,794   |  
|                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                        |  |                   | 497,767 |   |                  |   | 439,617 |  
|                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Commitments and Contingencies (Note 7)                                                                                                                   |  |                   |         |   |                  |   |         |  
|Stockholders equity                                                                                                                                     |  |                   |         |   |                  |   |         |  
|Common stock, $0.625 par value; authorized 10,000,000 shares, issued and outstanding; 4,422,689 at September 30, 2004 and 4,364,942 at
December 31, 2003 |  |                   | 2,764   |   |                  |   | 2,728   |  
|Additional paid-in capital                                                                                                                               |  |                   | 21,351  |   |                  |   | 20,907  |  
|Accumulated other Comprehensive Loss, Net of Taxes of $8 (2004) and $53 (2003)                                                                           |  |                   | (11     | ) |                  |   | (75     | )
|Retained earnings                                                                                                                                        |  |                   | 18,739  |   |                  |   | 13,521  |  
|                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                               |  |                   | 42,843  |   |                  |   | 37,081  |  
|                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                               |  | $                 | 540,610 |   |                  | $ | 476,698 |  
|                                                                                                                                                         |  |                   |         |   |                  |   |         |  



See accompanying notes to unaudited
consolidated financial statements.



3



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##### Table of Contents

COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---- | --------------------------------------- | --------- | ---- | -------------------------------------- | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|(unaudited)(dollars in thousands, except per share data)                                                                                                                       |      | For the three months endedSeptember 30, |           |      | For the nine months endedSeptember 30, |  
|                                                                                                                                                                               | 2004 |                                         |           | 2003 |                                        |   | 2004      |   |  | 2003 |          
|Interest Income:                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Interest on loans                                                                                                                                                              |      | $                                       | 7,522     |      |                                        | $ | 6,428     |   |  | $    | 21,585    |   |  | $ | 18,841    |  
|Interest on fed funds sold                                                                                                                                                     |      |                                         | 52        |      |                                        |   | 53        |   |  |      | 124       |   |  |   | 111       |  
|Interest on interest bearing deposits in financial institutions                                                                                                                |      |                                         | 1         |      |                                        |   | 1         |   |  |      | 3         |   |  |   | 5         |  
|Interest on trading securities                                                                                                                                                 |      |                                         |          |      |                                        |   | 43        |   |  |      |          |   |  |   | 132       |  
|Interest on other investments                                                                                                                                                  |      |                                         | 232       |      |                                        |   | 178       |   |  |      | 726       |   |  |   | 665       |  
|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Total interest income                                                                                                                                                          |      |                                         | 7,807     |      |                                        |   | 6,703     |   |  |      | 22,438    |   |  |   | 19,754    |  
|                                                                                                                                                                               |      |                                         |           |     
|Interest Expense:                                                                                                                                                              |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Deposits                                                                                                                                                                       |      |                                         | 1,126     |      |                                        |   | 1,185     |   |  |      | 3,166     |   |  |   | 4,033     |  
|Short term borrowing                                                                                                                                                           |      |                                         | 32        |      |                                        |   | 69        |   |  |      | 107       |   |  |   | 285       |  
|Long term debt                                                                                                                                                                 |      |                                         | 235       |      |                                        |   | 192       |   |  |      | 687       |   |  |   | 534       |  
|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Total interest expense                                                                                                                                                         |      |                                         | 1,393     |      |                                        |   | 1,446     |   |  |      | 3,960     |   |  |   | 4,852     |  
|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Net interest income before provision for loan losses                                                                                                                           |      |                                         | 6,414     |      |                                        |   | 5,257     |   |  |      | 18,478    |   |  |   | 14,902    |  
|                                                                                                                                                                               |      |                                         |           |     
|Provision for loan losses                                                                                                                                                      |      |                                         | 325       |      |                                        |   | 474       |   |  |      | 838       |   |  |   | 1,195     |  
|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Net interest income after provision for loan losses                                                                                                                            |      |                                         | 6,089     |      |                                        |   | 4,783     |   |  |      | 17,640    |   |  |   | 13,707    |  
|                                                                                                                                                                               |      |                                         |           |     
|Other operating income:                                                                                                                                                        |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Net gain on sale of loans                                                                                                                                                      |      |                                         | 1,952     |      |                                        |   | 1,352     |   |  |      | 4,938     |   |  |   | 3,723     |  
|Loan servicing fees, net                                                                                                                                                       |      |                                         | 221       |      |                                        |   | 166       |   |  |      | 614       |   |  |   | 481       |  
|Customer service charges                                                                                                                                                       |      |                                         | 185       |      |                                        |   | 180       |   |  |      | 569       |   |  |   | 548       |  
|Gain/ (loss) on repossessed assets                                                                                                                                             |      |                                         | (160      | )    |                                        |   |          |   |  |      | (160      | ) |  |   |          |  
|Other fee income                                                                                                                                                               |      |                                         | 335       |      |                                        |   | 313       |   |  |      | 956       |   |  |   | 825       |  
|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Total other operating income                                                                                                                                                   |      |                                         | 2,533     |      |                                        |   | 2,011     |   |  |      | 6,917     |   |  |   | 5,577     |  
|                                                                                                                                                                               |      |                                         |           |     
|Other operating expenses:                                                                                                                                                      |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Salaries and employee benefits                                                                                                                                                 |      |                                         | 2,916     |      |                                        |   | 2,473     |   |  |      | 8,134     |   |  |   | 7,194     |  
|Occupancy                                                                                                                                                                      |      |                                         | 340       |      |                                        |   | 335       |   |  |      | 1,033     |   |  |   | 974       |  
|Professional services                                                                                                                                                          |      |                                         | 818       |      |                                        |   | 256       |   |  |      | 1,902     |   |  |   | 861       |  
|Depreciation and amortization                                                                                                                                                  |      |                                         | 190       |      |                                        |   | 199       |   |  |      | 566       |   |  |   | 613       |  
|Data processing                                                                                                                                                                |      |                                         | 194       |      |                                        |   | 181       |   |  |      | 611       |   |  |   | 515       |  
|Office expenses                                                                                                                                                                |      |                                         | 155       |      |                                        |   | 168       |   |  |      | 483       |   |  |   | 484       |  
|Other expenses                                                                                                                                                                 |      |                                         | 723       |      |                                        |   | 756       |   |  |      | 2,378     |   |  |   | 2,084     |  
|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Total other operating expenses                                                                                                                                                 |      |                                         | 5,336     |      |                                        |   | 4,368     |   |  |      | 15,107    |   |  |   | 12,725    |  
|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Income before taxes                                                                                                                                                            |      |                                         | 3,286     |      |                                        |   | 2,426     |   |  |      | 9,450     |   |  |   | 6,559     |  
|                                                                                                                                                                               |      |                                         |           |     
|Income taxes                                                                                                                                                                   |      |                                         | 1,256     |      |                                        |   | 919       |   |  |      | 3,573     |   |  |   | 2,565     |  
|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Net income                                                                                                                                                                     |      |                                         | 2,030     |      |                                        |   | 1,507     |   |  |      | 5,877     |   |  |   | 3,994     |  
|Other comprehensive income - unrealized gain on available for sale securities, net of income taxes of $92 (3Q 2004) and $43 (YTD 2004) and
($27) (3Q 2003) and ($9) (YTD 2003) |      |                                         | 136       |      |                                        |   | (39       | ) |  |      | 63        |   |  |   | (13       | )
|Comprehensive income                                                                                                                                                           |      | $                                       | 2,166     |      |                                        | $ | 1,468     |   |  | $    | 5,940     |   |  | $ | 3,981     |  
|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Basic earnings per share                                                                                                                                                       |      | $                                       | 0.46      |      |                                        | $ | 0.37      |   |  | $    | 1.34      |   |  | $ | 1.07      |  
|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Diluted earnings per share                                                                                                                                                     |      | $                                       | 0.43      |      |                                        | $ | 0.35      |   |  | $    | 1.25      |   |  | $ | 1.01      |  
|                                                                                                                                                                               |      |                                         |           |      |                                        |   |           |   |  |      |           |   |  |   |           |  
|Average shares outstanding for basic earnings per share                                                                                                                        |      |                                         | 4,402,605 |      |                                        |   | 4,058,348 |   |  |      | 4,385,565 |   |  |   | 3,742,727 |  
|Average shares outstanding for diluted earnings per share                                                                                                                      |      |                                         | 4,705,546 |      |                                        |   | 4,318,863 |   |  |      | 4,685,097 |   |  |   | 3,969,567 |  



See accompanying notes to unaudited
consolidated financial statements.



4



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##### Table of Contents

COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)



|                                                                                               |  |                                         |          |   |      |   |          |  
|---------------------------------------------------------------------------------------------- |  | --------------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                               |  | For the nine months ended September 30, |         
|                                                                                               |  | 2004                                    |          |   | 2003 |  
|Cash flows from operating activities:                                                          |  |                                         |          |   |      |   |          |  
|Net income                                                                                     |  | $                                       | 5,877    |   |      | $ | 3,994    |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities:    |  |                                         |          |   |      |   |          |  
|Depreciation and amortization                                                                  |  |                                         | 566      |   |      |   | 613      |  
|Provision for loan losses                                                                      |  |                                         | 838      |   |      |   | 1,195    |  
|Net amortization (accretion) of premiums (discounts) on investment securities                  |  |                                         | 81       |   |      |   | 179      |  
|Amortization of affordable housing investment                                                  |  |                                         | 140      |   |      |   | 54       |  
|Loan origination fees and gains on loan sales deferred, net of loan origination costs deferred |  |                                         | 668      |   |      |   | 526      |  
|Gain on sale of loans                                                                          |  |                                         | (3,944   | ) |      |   | (3,479   | )
|Loss (gain) on sale of other repossessed assets                                                |  |                                         | 160      |   |      |   |         |  
|Change in unrealized gain on interest-only strips                                              |  |                                         | (762     | ) |      |   | 127      |  
|Capitalization of interest-only strips                                                         |  |                                         | 173      |   |      |   | (328     | )
|Capitalization of servicing asset                                                              |  |                                         | (759     | ) |      |   | (716     | )
|Amortization of servicing asset                                                                |  |                                         | 318      |   |      |   | 268      |  
|Change in valuation allowance for servicing asset                                              |  |                                         | (10      | ) |      |   | (11      | )
|Loss on trading securities                                                                     |  |                                         |         |   |      |   | 62       |  
|Unrealized (gain) loss on interest rate swap agreement                                         |  |                                         | 137      |   |      |   | (38      | )
|Unrealized hedging gain on long term debt                                                      |  |                                         | (137     | ) |      |   | 38       |  
|Origination of loans held for sale                                                             |  |                                         | (96,654  | ) |      |   | (60,374  | )
|Proceeds from sale of loans held for sale                                                      |  |                                         | 57,636   |   |      |   | 60,909   |  
|Decrease in restricted cash                                                                    |  |                                         |         |   |      |   | 1,152    |  
|Decrease (increase) in income tax receivable                                                   |  |                                         | (681     | ) |      |   | 290      |  
|Increase (decrease) in income tax payable                                                      |  |                                         | 186      |   |      |   |         |  
|Decrease (increase) in accrued interest and other assets                                       |  |                                         | 1,842    |   |      |   | (1,218   | )
|Decrease in accrued expenses and other liabilities                                             |  |                                         | (1,878   | ) |      |   | 205      |  
|                                                                                               |  |                                         |          |   |      |   |          |  
|Net cash provided by operating activities                                                      |  |                                         | (36,203  | ) |      |   | 3,448    |  
|                                                                                               |  |                                         |          |   |      |   |          |  
|Cash flows from investing activities:                                                          |  |                                         |          |   |      |   |          |  
|Origination of loans held for investment                                                       |  |                                         | (216,366 | ) |      |   | (168,672 | )
|Proceeds from principal paid on loans held for investment                                      |  |                                         | 203,502  |   |      |   | 127,765  |  
|Net change in interest bearing deposits in financial institutions                              |  |                                         | 582      |   |      |   |         |  
|Purchase of trading securities                                                                 |  |                                         |         |   |      |   | (37,132  | )
|Sale of trading securities                                                                     |  |                                         |         |   |      |   | 43,200   |  
|Purchases of investments held-to-maturity                                                      |  |                                         |         |   |      |   | (2,233   | )
|Maturities of investments held-to-maturity                                                     |  |                                         | 3,190    |   |      |   | 11,581   |  
|Purchase of available-for-sale investments                                                     |  |                                         |         |   |      |   | (4,078   | )
|Maturities of available-for-sale investments                                                   |  |                                         | 3,344    |   |      |   | 935      |  
|Purchases of Federal Reserve & Federal Home Loan Bank stocks                                   |  |                                         | (789     | ) |      |   | (921     | )
|Sales of Federal Home Loan Bank stock                                                          |  |                                         |         |   |      |   | 486      |  
|Other repossessed assets acquired in foreclosure                                               |  |                                         | (31      | ) |      |   |         |  
|Proceeds from sale of OREO and repossessed assets                                              |  |                                         | 290      |   |      |   |         |  
|Increase in Affordable Housing Investment                                                      |  |                                         | (282     | ) |      |   |         |  
|Purchases of premises and equipment                                                            |  |                                         | (865     | ) |      |   | (161     | )
|Net (increase) decrease in Federal Funds sold                                                  |  |                                         | (13,245  | ) |      |   |         |  
|                                                                                               |  |                                         |          |   |      |   |          |  
|Net cash used in investing activities                                                          |  |                                         | (20,670  | ) |      |   | (29,230  | )
|                                                                                               |  |                                         |          |   |      |   |          |  



|                                                                          |  |            |  
|------------------------------------------------------------------------- |  | ---------- | -
|See accompanying notes to the unaudited consolidated financial statements |  | (continued | )



5



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##### Table of Contents

COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)



|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                        |  | For the nine monthsended September 30, |       
|                                                                                                                                                                        |  | 2004                                   |        |   | 2003 |  
|Cash flows from financing activities:                                                                                                                                   |  |                                        |        |   |      |   |        |  
|Net increase/(decrease) in deposits:                                                                                                                                    |  |                                        |        |   |      |   |        |  
|Interest bearing                                                                                                                                                        |  | $                                      | 39,258 |   |      | $ | 1,791  |  
|Non-interest bearing                                                                                                                                                    |  |                                        | 21,726 |   |      |   | 15,446 |  
|Proceeds from exercise of stock options                                                                                                                                 |  |                                        | 482    |   |      |   | 420    |  
|Cash dividends paid                                                                                                                                                     |  |                                        | (659   | ) |      |   |       |  
|Increase in obligation to affordable housing investment                                                                                                                 |  |                                        | 1,288  |   |      |   |       |  
|Proceeds from stock offering, net of expenses                                                                                                                           |  |                                        |       |   |      |   | 10,054 |  
|Proceeds from the issuance of long term debt                                                                                                                            |  |                                        |       |   |      |   | 4,910  |  
|Net (decrease) increase in short term borrowing                                                                                                                         |  |                                        | (5,000 | ) |      |   | 8,500  |  
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Net cash provided by financing activities                                                                                                                               |  |                                        | 57,095 |   |      |   | 41,121 |  
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                                                                                                    |  |                                        | 222    |   |      |   | 15,339 |  
|                                                                                                                                                                        |  |                                       
|Cash and cash equivalents at beginning of period                                                                                                                        |  |                                        | 17,940 |   |      |   | 21,504 |  
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                                                                                              |  | $                                      | 18,162 |   |      | $ | 36,843 |  
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Supplemental disclosure of cash flow information:                                                                                                                       |  |                                        |        |   |      |   |        |  
|Cash paid during the period for:                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Interest on time deposits                                                                                                                                               |  |                                        | 3,038  |   |      |   | 4,668  |  
|Interest on other borrowings                                                                                                                                            |  |                                        | 793    |   |      |   | 1,075  |  
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Total interest paid                                                                                                                                                     |  | $                                      | 3,831  |   |      | $ | 5,743  |  
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Income Taxes                                                                                                                                                            |  | $                                      | 4,055  |   |      | $ | 2,275  |  
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Supplemental disclosure of non-cash investing activities:                                                                                                               |  |                                        |        |   |      |   |        |  
|Loans transferred to repossessed assets                                                                                                                                 |  | $                                      | 39     |   |      | $ | 475    |  
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Loans transferred to other real estate owned                                                                                                                            |  | $                                      |       |   |      | $ | 724    |  
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Loans held for sale transferred to held for investment                                                                                                                  |  | $                                      | 689    |   |      | $ | 1,493  |  
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Loans held for investment transferred to held for sale                                                                                                                  |  | $                                      | 1,314  |   |      | $ | 5,102  |  
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  
|Change in unrealized gains on available-for-sale securities net of income tax benefit of ($49) and expense of $18, respectively, recorded in
Other Comprehensive Income |  | $                                      | 63     |   |      | $ | (13    | )
|                                                                                                                                                                        |  |                                        |        |   |      |   |        |  



See accompanying notes to unaudited
consolidated financial statements.



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##### Table of Contents

COMMUNITY BANCORP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(unaudited)



Note 1 Basis of Presentation:



The interim financial statements included herein have been prepared by Community Bancorp Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC). The interim financial statements include the accounts of Community Bancorp Inc. and its wholly owned subsidiary Community National Bank (the Bank), (collectively, the
Company) as consolidated with the elimination of all intercompany transactions. We also have two unconsolidated subsidiaries, Community (CA) Capital Trust I (Trust I) and Community (CA) Capital Statutory Trust II (Trust
II). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such
SEC rules and regulations. Nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and
notes thereto included in the Companys latest Annual Report as found on Form 10-K. In the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of the Company with
respect to the interim financial statements and the results of its operations for the interim period ended September 30, 2004, have been included. Certain reclassifications may have been made to prior year amounts to conform to the 2004
presentation. The results of operations for interim periods are not necessarily indicative of results for the full year.



The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the Unites States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the end of 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 valuation of loan servicing rights, interest only strips and the allowance for estimated loan losses



Certain prior year amounts, including segment information, have been
reclassified to conform to the current periods presentation.



Note 2
Private Placement of Common Stock



On August 7, 2003 the
Company completed a private placement of 725,000 shares of common stock at a price of $15.00 per share to certain accredited investors including certain directors and officers of the Company and the Bank and their related interests. The
directors, officers and their related interests purchased less than 5% of the total offering.



Gross proceeds from the offering were $10,875,000, and offering expenses totaled $807,000, including placement agent fees. Of the $10,068,000 net proceeds of the offering, the Company used $1.8 million to repay debt,
and $7.5 million of the proceeds were invested as equity capital in the Bank. The remaining net proceeds were retained by the Company as working capital.



The sale of the common stock is exempt from the registration provisions of the Securities Act of 1933 by virtues of Section 4(2) of such Act and
Regulation D promulgated pursuant thereto inasmuch as the sale was limited to 25 investors of which all were accredited investors within the meaning of Regulation D. The Company has filed an S-3 registration statement with the SEC for
purposes of registering the shares from the private placement.



Note 3
Issuance of Trust Preferred Securities



On September 17,
2003, the Companys wholly owned subsidiary, Community (CA) Statutory Capital Trust II (Trust II), a Connecticut business trust, issued $5 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



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##### Table of Contents

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 $4.75 million was contributed to the Bank to increase its capital. The $5 million is included in long term debt on the books of
the Company, while the net $4.9 million is in cash and cash equivalents.



Note 4 Stock Option Plans



At September 30,
2004, the Company had three stock option plans, which are described more fully in Note 12 in the Companys 2003 Annual Report on Form 10-K. The Company accounts for stock options using the intrinsic value method under the provisions of
Accounting Principles Board (APB) Opinion No. 25 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 Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, had been applied. 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 amounts indicated below for the three months and nine months ended September 30:



|                                                                                                                                                |  |                                                  |       |   |                                        |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ----- | - | -------------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                                                                |  | For the three months endedSeptember 30,          |       |   | For the nine months endedSeptember 30, |  
|                                                                                                                                                |  | 2004                                             |       |   | 2003                                   |   |       | 2004 |  |   | 2003  |  
|                                                                                                                                                |  | (dollars in thousands, except per share amounts) |      
|Net income, as reported                                                                                                                         |  | $                                                | 2,030 |   |                                        | $ | 1,507 |      |  | $ | 5,877 |   |  | $ | 3,994 |  
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                                                  | (65   | ) |                                        |   | (38   | )    |  |   | (181  | ) |  |   | (118  | )
|                                                                                                                                                |  |                                                  |       |   |                                        |   |       |      |  |   |       |   |  |   |       |  
|Proforma net income                                                                                                                             |  | $                                                | 1,965 |   |                                        | $ | 1,469 |      |  | $ | 5,696 |   |  | $ | 3,876 |  
|                                                                                                                                                |  |                                                  |       |   |                                        |   |       |      |  |   |       |   |  |   |       |  
|Basic income per share, as reported                                                                                                             |  | $                                                | 0.46  |   |                                        | $ | 0.37  |      |  | $ | 1.34  |   |  | $ | 1.07  |  
|Proforma basic income per share                                                                                                                 |  | $                                                | 0.45  |   |                                        | $ | 0.36  |      |  | $ | 1.30  |   |  | $ | 1.04  |  
|                                                                                                                                                |  |                                                  |       |  
|Diluted income per share, as reported                                                                                                           |  | $                                                | 0.43  |   |                                        | $ | 0.35  |      |  | $ | 1.25  |   |  | $ | 1.01  |  
|Proforma diluted income per share                                                                                                               |  | $                                                | 0.42  |   |                                        | $ | 0.34  |      |  | $ | 1.22  |   |  | $ | 0.98  |  



The per share weighted
average fair value of stock options granted under the plans during the three months ended September 30, 2004 was $10.42 compared to $5.27 for the three months ended September 30, 2003. The fair value of the options were estimated at grant date using
a Black-Scholes single option pricing model with the following weighted average assumptions: Three months ended September 30, 2004 - expected dividend yield of 0.90%, a weighted average risk free interest rate of 3.41%, an expected life of 5.0 years
and a volatility of 46.09%; Three months ended September 30, 2003 - no expected dividend yield, a risk free interest rate of 1.14%, an expected life of 5.0 years and a volatility of 39.89%.



The per share weighted average fair value of stock options granted under the
plans during the nine months ended September 30, 2004 was $9.92 compared to $4.73 for the nine months ended September 30, 2003. The fair value of the options were estimated at grant date using a Black-Scholes single option pricing model with the
following weighted average assumptions: Nine months ended September 30, 2004 - expected dividend yield of 0.97%, a weighted average risk free interest rate of 3.40%, an expected life of 5.0 years and a volatility of 46.68%; Nine months ended
September 30, 2003 - no expected dividend yield, a risk free interest rate of 1.27%, an expected life of 5.0 years and a volatility of 40.23%.



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##### Table of Contents

Note 5 Loans and Related Allowance for Loan Losses:



A summary of loans is as follows:



|                                                       |  |                        |         |   |                         |   |         |            |  |   |                    |   |  |                         |        |   |            |   |         |   |  |   |         |  
|------------------------------------------------------ |  | ---------------------- | ------- | - | ----------------------- | - | ------- | ---------- |  | - | ------------------ | - |  | ----------------------- | ------ | - | ---------- | - | ------- | - |  | - | ------- | -
|                                                       |  | September 30, 2004     |         |   | December 31, 2003       |  
|                                                       |  | Loans Heldfor Sale     |         |   | Loans HeldforInvestment |   |         | TotalLoans |  |   | Loans Heldfor Sale |   |  | Loans HeldforInvestment |        |   | TotalLoans |  
|                                                       |  | (dollars in thousands) |        
|Construction loans                                     |  | $                      |        |   |                         | $ | 65,949  |            |  | $ | 65,949             |   |  | $                       |       |   |            | $ | 66,957  |   |  | $ | 66,957  |  
|Real estate one- to four-family                        |  |                        |        |   |                         |   | 7,635   |            |  |   | 7,635              |   |  |                         |       |   |            |   | 9,671   |   |  |   | 9,671   |  
|Real estate commercial                                 |  |                        | 101,007 |   |                         |   | 227,795 |            |  |   | 328,802            |   |  |                         | 69,148 |   |            |   | 201,219 |   |  |   | 270,367 |  
|Consumer home equity lines of credit                   |  |                        |        |   |                         |   | 1,977   |            |  |   | 1,977              |   |  |                         |       |   |            |   | 1,933   |   |  |   | 1,933   |  
|Other consumer                                         |  |                        |        |   |                         |   | 1,553   |            |  |   | 1,553              |   |  |                         |       |   |            |   | 2,085   |   |  |   | 2,085   |  
|Commercial                                             |  |                        |        |   |                         |   | 23,069  |            |  |   | 23,069             |   |  |                         |       |   |            |   | 20,590  |   |  |   | 20,590  |  
|Aircraft                                               |  |                        |        |   |                         |   | 28,657  |            |  |   | 28,657             |   |  |                         |       |   |            |   | 30,368  |   |  |   | 30,368  |  
|                                                       |  |                        |         |   |                         |   |         |            |  |   |                    |   |  |                         |        |   |            |   |         |   |  |   |         |  
|Total gross loans                                      |  |                        | 101,007 |   |                         |   | 356,635 |            |  |   | 457,642            |   |  |                         | 69,148 |   |            |   | 332,823 |   |  |   | 401,971 |  
|                                                       |  |                        |         |   |                         |  
|Deferred loan origination costs (fees)                 |  |                        | 418     |   |                         |   | (927    | )          |  |   | (509               | ) |  |                         | 181    |   |            |   | (781    | ) |  |   | (600    | )
|Discount on unguaranteed portion of SBA loans retained |  |                        | (178    | ) |                         |   | (1,708  | )          |  |   | (1,886             | ) |  |                         | (209   | ) |            |   | (1,740  | ) |  |   | (1,949  | )
|Allowance for loan losses                              |  |                        |        |   |                         |   | (6,029  | )          |  |   | (6,029             | ) |  |                         |       |   |            |   | (5,210  | ) |  |   | (5,210  | )
|                                                       |  |                        |         |   |                         |   |         |            |  |   |                    |   |  |                         |        |   |            |   |         |   |  |   |         |  
|Net loans                                              |  | $                      | 101,247 |   |                         | $ | 347,971 |            |  | $ | 449,218            |   |  | $                       | 69,120 |   |            | $ | 325,092 |   |  | $ | 394,212 |  
|                                                       |  |                        |         |   |                         |   |         |            |  |   |                    |   |  |                         |        |   |            |   |         |   |  |   |         |  



The Companys
lending activities are concentrated primarily in 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, real estate and
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, to a significant degree, concentrated in those industries. 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.



Note 6 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 70% 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 FAS 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. 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 recent prepayment speeds, as well as current interest rate levels, market forecasts and other economic conditions.



If the fair value of the servicing assets 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. As of September 30, 2004 and December
31, 2003, the valuation allowance for the servicing assets was $25,000 and $35,000, respectively. In estimating fair values at September 30, 2004, the Company utilized a weighted average prepayment assumption of approximately 8.71% and a discount
rate of 10.00%. In estimating fair values at December 31, 2003, the Company utilized a weighted average prepayment assumption of approximately 7.36% and a discount rate of 10.00%.



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Rights to future servicing income from serviced loans that exceed contractually specified servicing fees
are classified as interest-only strips. The interest-only strips are recorded at fair value with any unrealized gains or losses recorded in earnings in the period of change of fair value. Unrealized gains or losses on interest-only strips were not
material during the three and nine months ended September 30, 2004 and 2003. At September 30, 2004, the fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 8.71% and a discount rate of
10.00%. At December 31, 2003, the fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 7.36% and a discount rate of 10.00%.



Note 7 Commitments and Contingencies:



In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. 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 $27,771,000 and $37,470,000 were
outstanding at September 30, 2004 and December 31, 2003, 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 $123,065,000 and $100,014,000 as of September 30, 2004 and December 31, 2003, 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 $2,243,000 and $1,512,000 were outstanding at September 30, 2004 and December 31, 2003, 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.



Undisbursed lines of credit amounting to $25,733,000 and $25,845,000 were outstanding at September 30, 2004 and December 31,
2003, respectively. Undisbursed lines of credit are revolving lines of credit whereby customers can repay principal and advance principal during the term of the loan in their discretion and may expire between one and eighteen months.



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 has a reserve for losses on
commitments to extend credit totaling $203,000 as of September 30, 2004 and December 31, 2003.



As of September 30, 2004 and December 31, 2003, the Company had no non-mandatory commitments to sell loans.



In December 2002, the Company entered into an interest rate swap agreement with a third party. The terms of the agreement include, amongst other things, a
collateral requirement which would offset any credit risk between the Company and the third party. The collateral requirement is the greater of the mark-to-market value of the interest



10



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##### Table of Contents

rate swap agreement or $945,000. As of September 30, 2004, the collateral requirement was $1.0 million. Should interest
rates increase, it is probable that the mark-to-market value of the interest rate swap will exceed the minimum requirement of $945,000, which would require additional securities or other collateral to be pledged. As of September 30, 2004 and
December 31, 2003, the Company pledged one agency mortgage backed security classified as available for sale as collateral with a market value of $1.6 million and $1.5 million, respectively. The unrealized loss on the interest rate swap was
($138,000) and ($203,000) as of September 30, 2004 and December 31, 2003, respectively. The unrealized gains or losses on the interest rate swap are recorded as other assets or liabilities with the corresponding change in the amount of liability for
the Trust Preferred Security. The change in unrealized gains or losses on the interest rate swap is offset by the corresponding changes in the unrealized gains or losses on the Trust Preferred Securities in the accompanying consolidated income
statements.



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 liquidity.



During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include certain agreements with the
Companys officers and directors under which the Company may be required to indemnify such persons for liabilities arising out of their relationships. The duration of these indemnities and guarantees varies, and in certain cases, is indefinite.
The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make.



In connection with the $15.0 million in outstanding long-term debt securities reflecting the issuance of trust preferred
securities, the Company issued the full and unconditional payment guarantee of certain accrued distributions.



Historically, the Company has not been obligated to make significant payments for these obligations and no liabilities have been recorded for these
indemnities and guarantees in the accompanying balance sheets.



Note 8
Subsequent Events:



On October 1st2004, the Company acquired all of the assets and assumed the liabilities of Cuyamaca Bank, N.A. (OTCBB:CUYA), a
commercial bank, with assets of approximately $115 million. 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 is valued at $27.3 million, or $26.68 per share, including the fair value of options outstanding (the exchange ratio for stock consideration is 1.0439 shares of Community common stock for each
Cuyamaca share). The total consideration will be paid in 679,067 of CMBC stock and $7.4 million in cash, in accordance with the provisions of the Merger Agreement. Cuyamaca Bank operates 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. At October 1st, 2004, Cuyamaca had $115 million in total assets. The combined institution
will have approximately $670 million in total assets based on September 30, 2004 data, and 10 full service branches in San Diego and Riverside counties.



The acquisition of Cuyamaca Bank was accounted for under the purchase method of accounting and accordingly, all assets and liabilities were adjusted to
and recorded at their estimated fair values as of the acquisition date. Goodwill and other intangible assets represent the excess of the purchase price over fair value of the net assets acquired by the Company. In accordance with SFAS No. 141, the
Company recorded goodwill for a purchase business combination to the extent that the purchase price of the acquisition exceeded the net identifiable assets and intangible assets of the acquired company.



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The intangible assets as of October 1st2004 were comprised of Core deposit intangibles for /savings and checking accounts which was valued at $2,275,000 with a terminal economic life of 8.56 years.
Amortization will approximate $267,000 on an annual basis.



Note 9 Earnings
per share



The following tables are a reconciliation of
the numerators and denominators of the basic and diluted EPS computations for the net earnings for the Company (dollars in thousands, except share data):



|                                                                               |  |                                          |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  
|------------------------------------------------------------------------------ |  | ---------------------------------------- | ----- | ------------------- | --------- | --------------- | - | ----- | ------------------- |  | ------------------- | ----- | --------------- | --------- |  | - | ----- | -
|                                                                               |  | For the nine months ended September 30,  |      
|                                                                               |  | 2004                                     |       |                     | 2003      |                
|                                                                               |  | Earnings(Numerator)                      |       | Shares(Denominator) |           | Per ShareAmount |   |       | Earnings(Numerator) |  | Shares(Denominator) |       | Per ShareAmount |          
|Net Earnings                                                                   |  | $                                        | 5,877 |                     |           |                 |   |       |                     |  | $                   | 3,994 |                 |           |  |   |       |  
|                                                                               |  |                                          |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  
|Basis EPS Earnings available to common shareholders                            |  | $                                        | 5,877 |                     | 4,385,565 |                 | $ | 1.34  |                     |  | $                   | 3,994 |                 | 3,742,727 |  | $ | 1.07  |  
|Effect of Dilutive Securities Options                                          |  |                                          |      |                     | 299,532   |                 |   | (0.09 | )                   |  |                     |      |                 | 226,840   |  |   | (0.06 | )
|                                                                               |  |                                          |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  
|Diluted EPS Earnings Available to common Shareholders plus assumed Conversions |  | $                                        | 5,877 |                     | 4,685,097 |                 | $ | 1.25  |                     |  | $                   | 3,994 |                 | 3,969,567 |  | $ | 1.01  |  
|                                                                               |  |                                          |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  
|                                                                               | 
|                                                                               |  | For the three months ended September 30, |      
|                                                                               |  | 2004                                     |       |                     | 2003      |                
|                                                                               |  | Earnings(Numerator)                      |       | Shares(Denominator) |           | Per ShareAmount |   |       | Earnings(Numerator) |  | Shares(Denominator) |       | Per ShareAmount |          
|Net Earnings                                                                   |  | $                                        | 2,030 |                     |           |                 |   |       |                     |  | $                   | 1,507 |                 |           |  |   |       |  
|                                                                               |  |                                          |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  
|Basis EPS Earnings available to common shareholders                            |  | $                                        | 2,030 |                     | 4,402,605 |                 | $ | 0.46  |                     |  | $                   | 1,507 |                 | 4,058,348 |  | $ | 0.37  |  
|Effect of Dilutive Securities Options                                          |  |                                          |      |                     | 302,941   |                 |   | (0.03 | )                   |  |                     |      |                 | 260,515   |  |   | (0.02 | )
|                                                                               |  |                                          |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  
|Diluted EPS Earnings Available to common Shareholders plus assumed Conversions |  | $                                        | 2,030 |                     | 4,705,546 |                 | $ | 0.43  |                     |  | $                   | 1,507 |                 | 4,318,863 |  | $ | 0.35  |  
|                                                                               |  |                                          |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  



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Note 10 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 Small Business Administration (SBA 7a) Division. The Company determines
operating results of each segment based on an internal management system that allocates certain expenses to each.



|                                     |  |                                          |         |   |                |   |        |              |  |   |                 |   |  |                |         |   |              |   |        |   |  |   |         |  
|------------------------------------ |  | ---------------------------------------- | ------- | - | -------------- | - | ------ | ------------ |  | - | --------------- | - |  | -------------- | ------- | - | ------------ | - | ------ | - |  | - | ------- | -
|                                     |  | For the nine months ended September 30,  |        
|                                     |  | 2004                                     |         |   | 2003           |  
|                                     |  | BankingDivision                          |         |   | SBA 7aDivision |   |        | TotalCompany |  |   | BankingDivision |   |  | SBA 7aDivision |         |   | TotalCompany |  
|                                     |  | (dollars in thousands)                   |        
|Interest income                      |  | $                                        | 18,806  |   |                | $ | 3,632  |              |  | $ | 22,438          |   |  | $              | 16,884  |   |              | $ | 2,870  |   |  | $ | 19,754  |  
|Interest expense                     |  |                                          | (2,944  | ) |                |   | (1,016 | )            |  |   | (3,960          | ) |  |                | (3,498  | ) |              |   | (1,354 | ) |  |   | (4,852  | )
|                                     |  |                                          |         |   |                |   |        |              |  |   |                 |   |  |                |         |   |              |   |        |   |  |   |         |  
|Net interest income before provision |  |                                          | 15,862  |   |                |   | 2,616  |              |  |   | 18,478          |   |  |                | 13,386  |   |              |   | 1,516  |   |  |   | 14,902  |  
|Provision for loan losses            |  |                                          | (747    | ) |                |   | (91    | )            |  |   | (838            | ) |  |                | (683    | ) |              |   | (512   | ) |  |   | (1,195  | )
|Other income                         |  |                                          | 1,938   |   |                |   | 4,979  |              |  |   | 6,917           |   |  |                | 2,045   |   |              |   | 3,532  |   |  |   | 5,577   |  
|Other expenses                       |  |                                          | (12,405 | ) |                |   | (2,702 | )            |  |   | (15,107         | ) |  |                | (10,445 | ) |              |   | (2,280 | ) |  |   | (12,725 | )
|                                     |  |                                          |         |   |                |   |        |              |  |   |                 |   |  |                |         |   |              |   |        |   |  |   |         |  
|Income before income taxes           |  |                                          | 4,648   |   |                |   | 4,802  |              |  |   | 9,450           |   |  |                | 4,303   |   |              |   | 2,256  |   |  |   | 6,559   |  
|Income taxes                         |  |                                          | (1,580  | ) |                |   | (1,993 | )            |  |   | (3,573          | ) |  |                | (1,640  | ) |              |   | (925   | ) |  |   | (2,565  | )
|                                     |  |                                          |         |   |                |   |        |              |  |   |                 |   |  |                |         |   |              |   |        |   |  |   |         |  
|Net income                           |  | $                                        | 3,068   |   |                | $ | 2,809  |              |  | $ | 5,877           |   |  | $              | 2,663   |   |              | $ | 1,331  |   |  | $ | 3,994   |  
|                                     |  |                                          |         |   |                |   |        |              |  |   |                 |   |  |                |         |   |              |   |        |   |  |   |         |  
|Assets employed at quarter end       |  | $                                        | 456,130 |   |                | $ | 84,480 |              |  | $ | 540,610         |   |  | $              | 390,085 |   |              | $ | 71,015 |   |  | $ | 461,100 |  
|                                     |  |                                          |         |   |                |   |        |              |  |   |                 |   |  |                |         |   |              |   |        |   |  |   |         |  
|                                     | 
|                                     |  | For the three months ended September 30, |        
|                                     |  | 2004                                     |         |   | 2003           |  
|                                     |  | BankingDivision                          |         |   | SBADivision    |   |        | TotalCompany |  |   | BankingDivision |   |  | SBADivision    |         |   | TotalCompany |  
|                                     |  | (dollars in thousands)                   |        
|Interest income                      |  | $                                        | 6,459   |   |                | $ | 1,348  |              |  | $ | 7,807           |   |  | $              | 5,743   |   |              | $ | 960    |   |  | $ | 6,703   |  
|Interest expense                     |  |                                          | (1,005  | ) |                |   | (388   | )            |  |   | (1,393          | ) |  |                | (829    | ) |              |   | (617   | ) |  |   | (1,446  | )
|                                     |  |                                          |         |   |                |   |        |              |  |   |                 |   |  |                |         |   |              |   |        |   |  |   |         |  
|Net interest income before provision |  |                                          | 5,454   |   |                |   | 960    |              |  |   | 6,414           |   |  |                | 4,914   |   |              |   | 343    |   |  |   | 5,257   |  
|Provision for loan losses            |  |                                          | (297    | ) |                |   | (28    | )            |  |   | (325            | ) |  |                | (160    | ) |              |   | (314   | ) |  |   | (474    | )
|Other income                         |  |                                          | 364     |   |                |   | 2,169  |              |  |   | 2,533           |   |  |                | 490     |   |              |   | 1,521  |   |  |   | 2,011   |  
|Other expenses                       |  |                                          | (4,428  | ) |                |   | (908   | )            |  |   | (5,336          | ) |  |                | (3,557  | ) |              |   | (811   | ) |  |   | (4,368  | )
|                                     |  |                                          |         |   |                |   |        |              |  |   |                 |   |  |                |         |   |              |   |        |   |  |   |         |  
|Income before income taxes           |  |                                          | 1,093   |   |                |   | 2,193  |              |  |   | 3,286           |   |  |                | 1,687   |   |              |   | 739    |   |  |   | 2,426   |  
|Income taxes                         |  |                                          | (333    | ) |                |   | (923   | )            |  |   | (1,256          | ) |  |                | (625    | ) |              |   | (294   | ) |  |   | (919    | )
|                                     |  |                                          |         |   |                |   |        |              |  |   |                 |   |  |                |         |   |              |   |        |   |  |   |         |  
|Net income                           |  | $                                        | 760     |   |                | $ | 1,270  |              |  | $ | 2,030           |   |  | $              | 1,062   |   |              | $ | 445    |   |  | $ | 1,507   |  
|                                     |  |                                          |         |   |                |   |        |              |  |   |                 |   |  |                |         |   |              |   |        |   |  |   |         |  
|Asset employed at quarter end        |  | $                                        | 456,130 |   |                | $ | 84,480 |              |  | $ | 540,610         |   |  | $              | 390,085 |   |              | $ | 71,015 |   |  | $ | 461,100 |  
|                                     |  |                                          |         |   |                |   |        |              |  |   |                 |   |  |                |         |   |              |   |        |   |  |   |         |  



Note 11 Recent Accounting
Developments:



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.



On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities and is effective for hedging relationships entered into or modified after September 30, 2003.



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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, 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 September 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 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. This new guidance for determining whether impairment is other-than-temporary is effective for reporting periods beginning after June 15, 2004. Adoption of this standard may
cause the Corporation to recognize impairment losses in the Consolidated Statements of Operations which would not have been recognized under the current guidance or to recognize such losses in earlier periods. Since fluctuations in the fair value
for available-for-sale securities are already recorded in Accumulated Other Comprehensive Income (Loss), adoption of this standard is not expected to have a significant impact on stockholders equity. In September 2004 the FASB staff issued a
proposed Board-directed FASB Staff Position, FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1. The proposed FSP would provide implementation guidance with respect to debt securities that are
impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of Issue 03-1. The Board also issued FSP EITF Issue 03-1-b, which delays the effective date for the measurement and
recognition guidance contained in paragraphs 10-20 of EITF 03-1. The delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature.



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following is managements discussion and analysis of the major factors that influenced our financial performance for the three months and nine
months ended September 30, 2004. This analysis should be read in conjunction with our 2003 Annual Report as filed on Form 10-K and with the unaudited financial statements and notes as set forth in this report. Unless the context requires
otherwise, the terms Company, us, we, and our refers to Community Bancorp Inc. on a consolidated basis.



Certain statements contained in this Quarterly Report on Form 10-Q (Report), including, without limitation, statements containing the words
believes, anticipates, intends, expects, and words of similar import, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section



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21E of the Securities Exchange Act of 1934. Such forward looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business conditions in those areas in which we operate, demographic changes, competition, fluctuations in interest rates, changes in business strategy or development plans, changes in
governmental regulation, credit quality, the availability of capital to fund the expansion of our business, economic, political and global changes arising from the war on terrorism, the conflict with Iraq and its aftermath, and other factors
referenced in our 2003 Annual Report as filed on form 10-K, including in Item 1. Business - Factors That May Affect Future Results of Operations. When relying on forward-looking statements to make decisions with respect to our Company,
investors and others are cautioned to consider these and other risks and uncertainties. We disclaim any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.



This
discussion should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this report.



Community Bancorp



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 along the I-15 corridor in northern San Diego County and southwest Riverside County. San Diego and Riverside Counties, according to U.S. census data, were among the top ten fastest growing
counties in the United States measured by numerical population growth from April 1, 2000 to July 1, 2003.



At September 30, 2004, we had total assets of $541 million, total deposits of $456 million and stockholders equity of $43 million. We have five full
service branches serving the communities of Bonsall, Escondido, Fallbrook, Temecula and Vista and additional SBA loan production offices that originate loans in California, Arizona, Nevada and Oregon. According to the June 30, 2004 FDIC data, our
five branches have an 8.3% combined deposit market share within the five cities we serve, which would rank us first among community banks and fourth among all banks and thrifts in these cities.



Community National Bank



The Bank commenced operations in September 1985 as a national banking association. As a national banking association, the
Bank is subject to primary supervision, examination and regulation by the Comptroller of the Currency. The Banks deposits are insured by the Federal Deposit Insurance Corporation up to the applicable limits thereof, and like all national
banks, the Bank is a member of the Federal Reserve System.



The
Bank is comprised of two divisions, Banking and SBA. The Banking Division serves its customers out of the branch offices and is focused on more traditional aspects of commercial banking, including building long term relationships and
servicing the entire banking relationship. The SBA Division focuses on the origination and servicing of SBA loans that we may retain in the Banks loan portfolio or sell to third party investors.



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 non-interest income;
| | - | -------------------------------------------------------------------------------------------



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



| |  | Asset growth; and
| | - | -----------------



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



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Return to Our Stockholders.Our return to our stockholders is measured in the form of
return on average equity (ROE), and the potential valuation of the stock price relative to our returns and earnings per share (EPS). Our net income for the nine months ended September 30, 2004 increased 47% to $5.9 million
compared to $4.0 million for the nine months ended September 30, 2003. Net income increased due to an increase in net interest income and non-interest income, partially offset by an increase in operating expenses. Basic EPS increased to $1.34 for
the nine months ended September 30, 2004 compared to $1.07 for the nine months ended September 30, 2003. Diluted EPS increased to $1.25 for the nine months ended September 30, 2004 compared to $1.01 for the nine months ended September 30, 2003. Our
ROE was 19.64% for the nine months ended September 30, 2004 compared to 21.51% for the nine months ended September 30, 2003. 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 common equity offering during the third quarter of 2003. The decrease in ROE is due to the increase in average equity outstanding as a result of the common equity private placement in August 2003, partially offset by the increase in
net income.



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 nine months ended September 30, 2004 increased to 1.56% compared to
1.23% for the nine months ended September 30, 2003. 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 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 and retention and improved net interest margin by focusing on core deposit growth and the use of interest rate floors on new loans being originated,
combined with improved borrowing costs through the use of an interest rate swap. As a result, our net interest income before provision for loan losses increased 24% to $18.5 million for the nine months ended September 30, 2004 compared to $14.9
million for the nine months ended September 30, 2003. Our net interest margin has also improved to 5.29% for the nine months ended September 30, 2004 compared to 4.90% for the nine months ended September 30, 2003.



We have also improved our non-interest income. Non-interest income for the
nine months ended September 30, 2004 was $6.9 million compared to $5.6 million for the nine months ended September 30, 2003. Gain on sale of loans increased to $4.9 million for the nine months ended September 30, 2004 compared to $3.7 million for
the nine months ended September 30, 2003. Loan servicing fees increased 28% to $614,000 for the nine months ended September 2004 compared to $481,000 for the nine months ended September of 2003. The increase in loan servicing fees is the result of
the increase in loans serviced for others.



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.



Customer service charges have increased to $569,000 for the first nine months of 2004 compared to $548,000 for the same
period in 2003 due to an increase in average transaction accounts. Other fee income increased to $956,000 for the first nine months of 2004 compared to $825,000 for the same period last year. The increase is due to an increase in income from the
brokering of loans sold to other financial institutions.



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 percentage of total loans and
total assets, and is a key element in estimating the future earnings of a company. Non-performing loans totaled $4.7 million as of September 30, 2004 compared to $961,000 as of December 31, 2003. Of the $4.7 million in non-performing loans as of
September 30, 2004, $3.2 million are current. Management maintains certain loans that have



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been brought current by the borrower (less than 30 days delinquent) on non-accrual status until such time as management
has determined that the loans are likely to remain current in future periods. Non-performing loans as a percentage of gross loans increased to 1.03% as of September 30, 2004 compared to 0.24% as of December 31, 2003. Net of government guarantees,
non-performing loans totaled $2,801,000, or 0.62% of total loans as of September 30, 2004 compared to $271,000, or 0.07%, as of December 31, 2003. Non-performing assets were $4.7 million as of September 30, 2004 compared to $1.4 million as of
December 31, 2003. Net of government guarantees, non-performing assets as a percent of total assets were 0.53% as of September 30, 2004 compared to 0.15% as of December 31, 2003.



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 in increasing net income and therefore ROE 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 18% (annualized) during the first nine months of 2004 from $476.7 million as of December 31, 2003 to $540.6 million as of September 30, 2004. Total gross loans increased 14% (annualized) to
$457.6 million as of September 30, 2004 compared to $402.0 million as of December 31, 2003. Total deposits increased 21% (annualized) to $455.8 million as of September 30, 2004 compared to $393.1 million as of December 31, 2003.



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 to 59.12% for the first nine months of 2004 compared to 62.14%
for the first nine months of 2003. The improvement in the efficiency ratio is due to the increase in revenues exceeding the increase in operating expenses. Net interest income before provision plus non-interest income increased 24% to $25.4 million
for the nine months ended September 30, 2004, while operating expenses increased 19% to $15.1 million for the same period.



Critical Accounting Policies and Estimates



The Managements Discussion and Analysis of Financial Condition and Results of Operations, as well as disclosures found elsewhere in this
Form 10-Q, 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. 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 and the valuation of repossessed assets. Actual results could differ from those estimates.



| |  | 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 assesses 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.



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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.



The reserve for losses on commitments to extend credit is determined based on the historical losses on the underlying
collateral of the commitment. The majority of these commitments are on construction loans. Our management and Directors Loan Committee also establish a reserve 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.



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.



| |  | Servicing assets and interest-only strips. In accordance with FAS 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. 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 recent prepayment speeds, as well as current interest rate levels, market
forecasts and other economic conditions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We
periodically evaluate 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 asset for a stratum
exceeds its fair value. In estimating fair values at September 30, 2004, we utilized a weighted average prepayment assumption of approximately 8.71% and a discount rate of 10.00%. In estimating fair values at December 31, 2003, we utilized a
weighted average prepayment assumption of approximately 7.36% and a discount rate of 10.00%.



Rights to future servicing income from serviced loans that exceed contractually specified servicing fees are classified as interest-only strips. The interest-only strips are recorded at fair value with any unrealized
gains or losses recorded in earnings in the period of change of fair value. Unrealized gains or losses on interest-only strips were not material during the three months and nine months ended September 30, 2004 and 2003. At September 30, 2004, the
fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 8.71% and a discount rate of 10.00%. At December 31, 2003, the fair value of interest-only strips was estimated using a weighted average
prepayment assumption of approximately 7.36% and a discount rate of 10.00%.



Changes in these assumptions and economic factors may result in increases or decreases in the valuation of our servicing assets and interest-only strips.



| |  | Real Estate Owned and Repossessed Assets. Real estate or other assets acquired through foreclosure, deed-in-lieu of foreclosure or repossession are initially recorded at the
lower of cost or fair value less estimated costs to sell through a charge to the allowance for estimated loan losses. Subsequent declines in value are charged to operations. There were no real estate or other assets acquired through foreclosure as
of September 30, 2004 or December 31, 2003. As of September 30, 2004 and December 31, 2003, we had one aircraft acquired through repossession. Valuation was done using the collateral method based on a recent appraisal of the underlying collateral.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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RESULTS OF OPERATIONS



Banking Division - Net Income



The Banking Division generates revenues through net interest income and non-interest income and consists of all banking operations, excluding SBA 7a
lending. Net income for the Banking division increased to $3.1 million for the nine months ended September 30, 2004 compared to $2.7 million for the nine months ended September 30, 2003. The increase in net income for the Banking division was
primarily driven by increases in net interest income, and was partially offset by an increase in non-interest expense. Net interest income for the Banking division increased from $13.4 million for the nine months ended September 30, 2003 to $15.9
million for the nine months ended September 30, 2004. This increase is primarily due to an 11% increase in interest income from $16.9 million for the nine months ended September 30, 2003 to $18.8 million for the nine months ended September 30, 2004,
combined with an 18% decrease in interest expense from $3.5 million for the nine months ended September 30, 2003 to $2.9 million for the nine months ended September 30, 2004. The increase in interest income is due to the growth in interest earning
assets, and the reduction in interest expense is the result of changes in the market rates for time deposits combined with an increase in the average balance of transaction accounts (demand deposits plus interest bearing checking, savings and money
market accounts) for the nine months ended September 30, 2004 when compared to the same period in 2003. Average transaction accounts increased 27% to $202.7 million for the nine months ended September 30, 2004 compared to $159.3 million for the nine
months ended September 30, 2003. As a result of the increase in transaction accounts noted above, customer service charges increased to $569,000 for the nine months ended September 30, 2004 compared to $548,000 for the nine months ended September
30, 2003.



For the quarters ended September 30, 2004 and 2003,
net income for the Banking division was $760,000 and $1,062,000 respectively. Net income declined when comparing the third quarters of 2003 and 2004 due to the increase in operating expenses exceeding the increase in net interest income. Operating
expenses for the Banking division increased to $4.4 million for the quarter ended September 30, 2004 compared to $3.6 million for the quarter ended September 30, 2003. The increase in operating expenses is a result of the normal expansion of the
company, combined with the cost of implementing the requirements of the Sarbanes-Oxley Act of 2002. Net interest income for the Banking division increased from $4.9 million for the three months ended September 30, 2003 to $5.5 million for the three
months ended September 30, 2004. This increase is primarily due to the 12% increase in interest income from $5.7 million for the three months ended September 30, 2003 to $6.5 million for the three months ended September 30, 2004. Average transaction
accounts increased 20% to $213.4 million for the three months ended September 30, 2004 compared to $178.5 million for the three months ended September 30, 2003. As a result of the increase in transaction accounts noted above, customer service
charges increased to $185,000 for the three months ended September 30, 2004 compared to $180,000 for the three months ended September 30, 2003.



In addition to net interest income and customer service charges, the Banking division generates non-interest income through a variety of sources,
including gains on sale of SBA 504 commercial real estate loans and brokering of loans related to the origination of SBA 504 commercial real estate loans. The Bank created a separate SBA 504 unit in late 2002 in order to expand the origination of
this type of commercial real estate loan. The unit has increased production 38% when comparing the first nine months of 2004 with the same period in 2003. During the nine months ended September 30, 2004 the Banking division originated $313.0 million
in loans, including $78.3 million in SBA 504 loans, compared to $226.7 million during the nine months ended September 30, 2003, including $28.3 million in SBA 504 loans. We sold $16.0 million in SBA 504 loans during the nine months ended September
30, 2004 compared to $12.7 million in SBA 504 loans during the nine months ended September 30, 2003. As a result of the change in premiums in the secondary market, the net gain on sale of SBA 504 loans for the Banking division decreased to $610,000
for the nine months ended September 30, 2004 compared to $622,000 for the nine months ended September 30, 2003. Fees from the brokering of commercial loans decreased from $365,000 for the nine months ended September 30, 2003 to $260,000 for the nine
months ended September 30, 2004 as a result of shifting demand for the product.



During the three months ended September 30, 2004 the Banking division originated $86.2 million in loans, including $15.3 million in SBA 504 loans, compared to $51.6 million during the three months ended September 30,



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##### Table of Contents

2003, including $8.3 million in 504 loans. We sold $2.6 million in SBA 504 loans during the three months ended September
30, 2004 compared to $1.4 million in SBA 504 loans during the three months ended September 30, 2003. As a result of the change in premiums in the secondary market, for the quarter ended September 30, 2004, net gain on sale of loans increased to
$89,000 compared to $40,000 for the quarter ended September 30, 2003. Fees from the brokering of commercial loans decreased from $238,000 for the three months ended September 30, 2003 to $49,000 for the three months ended September 30, 2004 as a
result of shifting demand for the product.



SBA Division - Net Income



The SBA division originates SBA 7a loans for both
investment and for sale. The SBA division generates income from three sources: 1) net interest income from the loans held for investment and for sale, 2) gain on sale of loans sold in the secondary market, and 3), servicing of loans purchased by
other investors. Net income for the SBA division increased to $2.8 million for the nine months ended September 30, 2004 compared to $1.3 million for the nine months ended September 30, 2003. The increase in net income for the SBA division was
primarily driven by increases in net interest income and non-interest income and a decrease in the provision for loan losses, partially offset by an increase in operating expenses. Net interest income for the SBA division increased from $1.5 million
for the nine months ended September 30, 2003 to $2.6 million for the nine months ended September 30, 2004. The increase in net interest income is primarily due to the increase in interest earning assets for the SBA division combined with the reduced
cost of deposits as a result of the current interest rate environment. See Interest Income and Expense of this section for further discussion of net interest income. Non-interest income increased from $3.5 million for the nine months
ended September 30, 2003 to $5.0 million for the nine months ended September 30, 2004, as a result of increases in gain on sale of loans and loan servicing income.



Net income for the SBA division increased to $1.3 million for the three months ended September 30, 2004 compared to $445,000
for the three months ended September 30, 2003. The increase in net income for the SBA division was primarily driven by increases in net interest income, non-interest income and a decrease in the provision for loan losses, partially offset by an
increase in operating expenses. Net interest income for the SBA division increased from $343,000 for the three months ended September 30, 2003 to $960,000 for the three months ended September 30, 2004. The increase in net interest income is
primarily due to the increase in interest earning assets for the SBA division combined with the reduced cost of deposits as a result of the current interest rate environment. See Interest Income and Expense of this section for further
discussion of net interest income. Non-interest income increased from $1.5 million for the three months ended September 30, 2003 to $2.2 million for the three months ended September 30, 2004, as a result of increases in gain on sale of loans and
loan servicing income.



Net gain on sale of loans for the SBA
division increased to $4.3 million for the nine months ended September 30, 2004 compared to $3.1 million for the nine months ended September 30, 2003. During the nine months ended September 30, 2004 we originated $43.3 million in SBA 7a loans
compared to $37.0 million during the nine months ended September 30, 2003. We sold $37.6 million in SBA 7a loans during the nine months ended September 30, 2004 compared to $36.6 million in SBA 7a loans during the nine months ended September 30,
2003. The dollar amount of sales increased and the gain on sale of loans increased to $4.3 million due to an increase in the premiums received from the secondary market in 2004 when compared with 2003.



For the quarter ended September 30, 2004, net gain on sale of loans increased
to $1.9 million compared to $1.3 million for the quarter ended September 30, 2003. During the three months ended September 30, 2004 we originated $19.2 million in SBA 7a loans compared to $12.9 million during the three months ended September 30,
2003. We sold $16.1million in SBA 7a loans during the three months ended September 30, 2004 compared to $13.2 million in SBA 7a loans during the three months ended September 30, 2003. While the dollar amount of sales increased 48%, the gain on sale
of loans increased 43% to $2.0 million.



Loan servicing income
increased to $221,000 for the three months ended September 30, 2004 compared to $166,000 for the three months ended September 30, 2003. For the nine months ended September 30, 2004, loan servicing income increased to $614,000 compared to $481,000
for the nine months ended September 30, 2003. Loan servicing income is the result of the spread between the interest rate paid by borrowers and the interest rate paid to third party investors, multiplied by the total volume of loans sold, net of the
amortization of the servicing asset. The increase in loan servicing income is a result of the increase in loans serviced for others. As of September 30, 2004, SBA loans serviced for others increased to $153.6 million compared to $131.4 million as of
September 30, 2003. The increase in loans serviced for others is a result of the loans sold in 2003 and the first nine months of 2004, net of principal repayments.



20



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##### Table of Contents

Operating expenses for the nine months ended September 30, 2004 increased to $2.7 million compared to
$2.3 million for the nine months ended September 30, 2003. During the three months ended September 30, 2004, operating expenses have increased to $908,000 for the SBA division compared to $811,000 for the three months ended September 30, 2003.
Operating expenses for the three months and nine months ended September 30, 2004 increased due to normal increases in operating expenses combined with expenses relating to the Sarbanes-Oxley Act of 2002 and the use of consultants for the purpose of
creating greater efficiencies within the SBA 7a department. For the first nine months of 2004, the expense for efficiency consultants totaled $138,000 compared to none during the first nine months of 2003. This expense is not expected to continue in
future periods as the project has been completed.



Net Income - Consolidated



Net income increased to $2.0 million for the three months
ended September 30, 2004 compared to $1.5 million for the three months ended September 30, 2003. Basic earnings per share were $0.46 and $0.37 for the three months ended September 30, 2004 and 2003, respectively. Diluted earnings per share were
$0.43 and $0.35 for the three months ended September 30, 2004 and 2003, respectively. ROE was 19.76% for the three months ended September 30, 2004 compared to 19.93% for the three months ended September 30, 2003. The ROA for the three months ended
September 30, 2004 was 1.57% compared to 1.33% for the three months ended September 30, 2003.



Net income increased to $5.9 million for the nine months ended September 30, 2004 compared to $4.0 million for the nine months ended September 30, 2003. Basic earnings per share were $1.34 and $1.07 for the nine
months ended September 30, 2004 and 2003, respectively. Diluted earnings per share were $1.25 and $1.01 for the nine months ended September 30, 2004 and 2003, respectively. ROE was 19.64% for the nine months ended September 30, 2004 compared to
21.51% for the nine months ended September 30, 2003. The ROA for the nine months ended September 30, 2004 was 1.56% compared to 1.23% for the nine months ended September 30, 2003.



The increase in net income and profitability for the three months and nine months ended September 30, 2004 was mainly due to
the increases in net interest income and non-interest income, partially offset by an increase in non-interest expense. 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 loan servicing fees and fees from the brokerage of SBA related loans. Operating expenses increased as a result of the Companys expansion and increased loan production, combined with
an increase in professional expenses as a result of the Sarbanes-Oxley Act of 2002, particularly compliance with Part 404.



Interest Income and Expense



Net interest income is the most significant component of our 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.



21



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##### Table of Contents

The following table sets forth a summary of average balances with corresponding interest income and
interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances, and non-accrual loans are included as interest earning assets for purposes of this table.



|                                               |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|---------------------------------------------- |  | ---------------------------------------- | ------- | ------------------- | ---- | ----------------- |  | ---- | -------------- |  | ------------------- | ------- | ----------------- | - | ----- |  | ---- | -
|                                               |  | For the three months ended September 30, |        
|                                               |  | 2004                                     |         |                     | 2003 |                  
|                                               |  | AverageBalance                           |         | InterestEarned/Paid |      | AverageRate/Yield |  |      | AverageBalance |  | InterestEarned/Paid |         | AverageRate/Yield |  
|                                               |  | (dollars in thousands)                   |        
|Average assets:                                |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Securities and time deposits at other banks    |  | $                                        | 22,157  |                     | $    | 233               |  | 4.18 | %              |  | $                   | 26,870  |                   | $ | 222   |  | 3.28 | %
|Fed funds sold                                 |  |                                          | 14,477  |                     |      | 52                |  | 1.43 | %              |  |                     | 21,503  |                   |   | 53    |  | 0.98 | %
|Loans:                                         |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Commercial                                     |  |                                          | 168,478 |                     |      | 2,673             |  | 6.31 | %              |  |                     | 109,090 |                   |   | 1,686 |  | 6.13 | %
|Real Estate                                    |  |                                          | 247,205 |                     |      | 4,281             |  | 6.89 | %              |  |                     | 232,856 |                   |   | 4,118 |  | 7.02 | %
|Aircraft                                       |  |                                          | 29,108  |                     |      | 508               |  | 6.94 | %              |  |                     | 29,709  |                   |   | 533   |  | 7.12 | %
|Consumer                                       |  |                                          | 3,040   |                     |      | 60                |  | 7.85 | %              |  |                     | 4,483   |                   |   | 91    |  | 8.05 | %
|                                               |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total loans                                    |  |                                          | 447,831 |                     |      | 7,522             |  | 6.68 | %              |  |                     | 376,138 |                   |   | 6,428 |  | 6.78 | %
|                                               |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total earning assets                           |  |                                          | 484,465 |                     |      | 7,807             |  | 6.41 | %              |  |                     | 424,511 |                   |   | 6,703 |  | 6.26 | %
|Non earning assets                             |  |                                          | 33,899  |                     |      |                   |  |      |                |  |                     | 29,911  |                   |   |       |  |      |  
|                                               |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total average assets                           |  | $                                        | 518,364 |                     |      |                   |  |      |                |  | $                   | 454,422 |                   |   |       |  |      |  
|                                               |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Average liabilities and shareholders equity:  |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Interest bearing deposits:                     |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Savings and interest bearing accounts          |  | $                                        | 134,908 |                     |      | 155               |  | 0.46 | %              |  | $                   | 113,993 |                   |   | 186   |  | 0.65 | %
|Time deposits                                  |  |                                          | 233,611 |                     |      | 971               |  | 1.65 | %              |  |                     | 207,425 |                   |   | 999   |  | 1.91 | %
|                                               |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total interest bearing deposits                |  |                                          | 368,519 |                     |      | 1,126             |  | 1.22 | %              |  |                     | 321,418 |                   |   | 1,185 |  | 1.46 | %
|Short term borrowing                           |  |                                          | 8,470   |                     |      | 32                |  | 1.51 | %              |  |                     | 21,412  |                   |   | 69    |  | 1.28 | %
|Long term debt (1)                             |  |                                          | 14,676  |                     |      | 235               |  | 6.37 | %              |  |                     | 10,415  |                   |   | 192   |  | 7.31 | %
|                                               |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total interest bearing liabilities             |  |                                          | 391,665 |                     |      | 1,393             |  | 1.42 | %              |  |                     | 353,245 |                   |   | 1,446 |  | 1.62 | %
|Demand deposits                                |  |                                          | 78,491  |                     |      |                   |  |      |                |  |                     | 64,568  |                   |   |       |  |      |  
|Accrued expenses and other liabilities         |  |                                          | 7,105   |                     |      |                   |  |      |                |  |                     | 6,366   |                   |   |       |  |      |  
|Net shareholders equity                       |  |                                          | 41,103  |                     |      |                   |  |      |                |  |                     | 30,243  |                   |   |       |  |      |  
|                                               |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total average liabilities shareholders equity |  | $                                        | 518,364 |                     | $    | 6,414             |  |      |                |  | $                   | 454,422 |                   | $ | 5,257 |  |      |  
|                                               |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Net interest spread                            |  |                                          |         |                     |      |                   |  | 4.99 | %              |  |                     |         |                   |   |       |  | 4.64 | %
|                                               |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Net interest margin                            |  |                                          |         |                     |      |                   |  | 5.27 | %              |  |                     |         |                   |   |       |  | 4.91 | %
|                                               |  |                                          |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  

---

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



Interest income for the three months ended September 30, 2004 increased to $7.8 million compared to $6.7 million for the
three months ended September 30, 2003. The increase was due to the 14.12% increase in the average balance of interest earning assets, combined with the increase in the yield on those assets. The use of interest rate floors on our loans has
significantly mitigated the effects of the current interest rate environment. For a further discussion of our interest rate floors, see Item 3 Quantitative and Qualitative Disclosures about Market Risk. Average interest earning assets
increased to $484.5 million for the three months ended September 30, 2004 compared to $424.5 million for the three months ended September 30, 2003. The yield on interest earning assets increased to 6.41% for the three months ended September 30, 2004
compared to 6.26% for the three months ended September 30, 2003. The largest single component of interest earning assets was real estate loans receivable, which had an average balance of $247.2 million with a yield of 6.89% for the three months
ended September 30, 2004 compared to $232.9 million with a yield of 7.02% for the three months ended September 30, 2003.



Interest expense for the three months ended September 30, 2004 decreased to $1.4 million compared to $1.5 million for the three months ended September 30,
2003. This decrease was due to the repricing of maturing certificates of deposit (CDs) following a 4.25% decline in the prime rate since the beginning of 2001 until June 2004, and was partially offset by an increase in average interest
bearing liabilities. Average interest-bearing liabilities increased to $391.7 million for the three months ended September 30, 2004 compared to $353.2 million



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##### Table of Contents

for the three months ended September 30, 2003. Average time deposits, the largest component of interest bearing
liabilities, increased to $233.6 million with a cost of 1.65% for the three months ended September 30, 2004 compared to $207.4 million with a cost of 1.91% for the three months ended September 30, 2003.



Other average borrowings decreased to $23.1 million with a cost of 4.59% for
the three months ended September 30, 2004 compared to $31.8 million with a cost of 3.28% for the three months ended September 30, 2003. During the third quarter of 2003, we issued $5.0 million in long term floating rate debt at a cost of Libor plus
2.95%, and repaid $2.0 million in long term borrowing at a rate of 7.00%. The net increase in long term debt at a lower cost resulted in a reduction of the cost of long term debt from 7.31% for the three months ended September 30, 2003 to 6.37% for
the three months ended September 30, 2004.



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. Average demand deposits increased 22% from an average $64.6 million
for the three months ended September 30, 2003 to $78.5 million for the three months ended September 30, 2004. The cost of deposits, including demand deposits and interest bearing deposits, decreased to 1.00% for the three months ended September 30,
2004 compared to 1.22% for the three months ended September 30, 2003. Average transaction accounts (including interest bearing checking, demand deposits, money market accounts and savings accounts), increased 20% to $213.4 million for the three
months ended September 30, 2004 compared to $178.6 million for the three months ended September 30, 2003. The cost of funds, including interest bearing liabilities and demand deposits, was reduced 19 basis points to 1.18% for the three months ended
September 30, 2004 compared to 1.37% for the three months ended September 30, 2003.



23



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##### Table of Contents

The following table sets forth a summary of average balances with corresponding interest income and
interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances, and non-accrual loans are included as interest earning assets for purposes of this table.



|                                              |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|--------------------------------------------- |  | --------------------------------------- | ------- | ------------------- | ---- | ----------------- |  | ---- | -------------- |  | ------------------- | ------- | ----------------- | - | ------ |  | ---- | -
|                                              |  | For the nine months ended September 30, |        
|                                              |  | 2004                                    |         |                     | 2003 |                  
|                                              |  | AverageBalance                          |         | InterestEarned/Paid |      | AverageRate/Yield |  |      | AverageBalance |  | InterestEarned/Paid |         | AverageRate/Yield |  
|                                              |  | (dollars in thousands)                  |        
|Average assets:                               |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Securities and time deposits at other banks   |  | $                                       | 24,635  |                     | $    | 729               |  | 3.95 | %              |  | $                   | 30,350  |                   | $ | 802    |  | 3.53 | %
|Fed funds sold                                |  |                                         | 14,831  |                     |      | 124               |  | 1.12 | %              |  |                     | 13,798  |                   |   | 111    |  | 1.08 | %
|Loans:                                        |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Commercial                                    |  |                                         | 151,433 |                     |      | 7,199             |  | 6.35 | %              |  |                     | 108,063 |                   |   | 5,155  |  | 6.38 | %
|Real Estate                                   |  |                                         | 242,316 |                     |      | 12,623            |  | 6.96 | %              |  |                     | 219,672 |                   |   | 11,725 |  | 7.14 | %
|Aircraft                                      |  |                                         | 29,893  |                     |      | 1,569             |  | 7.01 | %              |  |                     | 29,484  |                   |   | 1,638  |  | 7.43 | %
|Consumer                                      |  |                                         | 3,415   |                     |      | 194               |  | 7.59 | %              |  |                     | 5,519   |                   |   | 323    |  | 7.82 | %
|                                              |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total loans                                   |  |                                         | 427,057 |                     |      | 21,585            |  | 6.75 | %              |  |                     | 362,738 |                   |   | 18,841 |  | 6.94 | %
|                                              |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total earning assets                          |  |                                         | 466,523 |                     |      | 22,438            |  | 6.42 | %              |  |                     | 406,886 |                   |   | 19,754 |  | 6.49 | %
|Non earning assets                            |  |                                         | 34,950  |                     |      |                   |  |      |                |  |                     | 27,496  |                   |   |        |  |      |  
|                                              |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total average assets                          |  | $                                       | 501,473 |                     |      |                   |  |      |                |  | $                   | 434,382 |                   |   |        |  |      |  
|                                              |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Average liabilities and shareholders equity:  |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Interest bearing deposits:                    |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Savings and interest bearing accounts         |  | $                                       | 124,103 |                     |      | 438               |  | 0.47 | %              |  | $                   | 100,312 |                   |   | 563    |  | 0.75 | %
|Time deposits                                 |  |                                         | 225,467 |                     |      | 2,728             |  | 1.62 | %              |  |                     | 211,675 |                   |   | 3,470  |  | 2.19 | %
|                                              |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total interest bearing deposits               |  |                                         | 349,570 |                     |      | 3,166             |  | 1.21 | %              |  |                     | 311,987 |                   |   | 4,033  |  | 1.73 | %
|Short term borrowing                          |  |                                         | 11,866  |                     |      | 107               |  | 1.20 | %              |  |                     | 22,679  |                   |   | 285    |  | 1.68 | %
|Long term debt (1)                            |  |                                         | 14,683  |                     |      | 687               |  | 6.25 | %              |  |                     | 10,138  |                   |   | 534    |  | 7.04 | %
|                                              |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total interest bearing liabilities            |  |                                         | 376,119 |                     |      | 3,960             |  | 1.41 | %              |  |                     | 344,804 |                   |   | 4,852  |  | 1.88 | %
|Demand deposits                               |  |                                         | 78,627  |                     |      |                   |  |      |                |  |                     | 58,958  |                   |   |        |  |      |  
|Accrued expenses and other liabilities        |  |                                         | 6,834   |                     |      |                   |  |      |                |  |                     | 5,864   |                   |   |        |  |      |  
|Net shareholders equity                       |  |                                         | 39,893  |                     |      |                   |  |      |                |  |                     | 24,756  |                   |   |        |  |      |  
|                                              |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total average liabilities shareholders equity |  | $                                       | 501,473 |                     | $    | 18,478            |  |      |                |  | $                   | 434,382 |                   | $ | 14,902 |  |      |  
|                                              |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Net interest spread                           |  |                                         |         |                     |      |                   |  | 5.01 | %              |  |                     |         |                   |   |        |  | 4.61 | %
|                                              |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Net interest margin                           |  |                                         |         |                     |      |                   |  | 5.29 | %              |  |                     |         |                   |   |        |  | 4.90 | %
|                                              |  |                                         |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  

---

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



Net interest income for the nine months ended September 30, 2004 increased to $18.5 million compared to $14.9 million for the nine months ended September
30, 2003. The increase was due to the 14.66% increase in the average balance of interest earning assets, and was partially offset by a decrease in the yield on those assets. Average interest earning assets increased to $466.5 million for the nine
months ended September 30, 2004 compared to $406.9 million for the nine months ended September 30, 2003. The yield on interest earning assets decreased to 6.42% for the nine months ended September 30, 2004 compared to 6.49% for the nine months ended
September 30, 2003. The largest single component of interest earning assets was real estate loans receivable, which had an average balance of $242.3 million with a yield of 6.96% for the nine months ended September 30, 2004 compared to $219.6
million with a yield of 7.14% for the nine months ended September 30, 2003.



Interest expense for the nine months ended September 30, 2004 decreased to $4.0 million compared to $4.9 million for the nine months ended September 30, 2003. This decrease was due to the repricing of maturing
certificates of deposit (CDs) following a 4.25% decline in the prime rate since the beginning of 2001 until September 2004, and was partially offset by an increase in average interest bearing liabilities. Average interest-bearing
liabilities increased to $376.1 million for the nine months ended September 30, 2004 compared to $344.8 million for the nine months ended September 30, 2003. Average time deposits, the largest component of interest bearing liabilities, increased to
$225.5 million with a cost of 1.62% for the nine months ended September 30, 2004 compared to $211.7 million with a cost of 2.19% for the nine months ended September 30, 2003.



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Other average borrowings decreased to $26.5 million with a cost of 3.99% for the nine months ended
September 30, 2004 compared to $32.8 million with a cost of 3.33% for the nine months ended September 30, 2003. During the third quarter of 2003, we issued $5.0 million in long term floating rate debt at a cost of Libor plus 2.95%, and repaid $2.0
million in long term borrowing at a rate of 7.00%. The net increase in long term debt at a lower cost resulted in a reduction of the cost of long term debt from 7.04% for the nine months ended September 30, 2003 to 6.25% for the nine months ended
September 30, 2004.



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. Average demand deposits increased 33% from an average $58.9 million for the nine months
ended September 30, 2003 to $78.6 million for the nine months ended September 30, 2004. The cost of deposits, including demand deposits and interest bearing deposits, decreased to .99% for the nine months ended September 30, 2004 compared to 1.45%
for the nine months ended September 30, 2003. Average transaction accounts (including interest bearing checking, demand deposits, money market accounts and savings accounts), increased 27% to $202.7 million for the nine months ended September 30,
2004 compared to $159.3 million for the nine months ended September 30, 2003. The cost of funds, including interest bearing liabilities and demand deposits, was reduced 45 basis points to 1.16 % for the nine months ended September 30, 2004 compared
to 1.61% for the nine months ended September 30, 2003.



Net Interest Income
before Provision for Estimated Loan Losses



Net interest
income before provision for estimated loan losses for the three months ended September 30, 2004 was $6.4 million compared to $5.2 million for the three months ended September 30, 2003. This increase was primarily due to the increase in the net
interest margin, combined with an increase in average interest earning assets. Average interest earning assets were $484.5 million for the three months ended September 30, 2004 with a net interest margin of 5.27% compared to $424.5 million with a
net interest margin of 4.91% for the three months ended September 30, 2003.



Net interest income before provision for estimated loan losses for the nine months ended September 30, 2004 was $18.5 million compared to $14.9 million for the nine months ended September 30, 2003. This increase was
primarily due to the increase in the net interest margin, combined with an increase in average interest earning assets. Average interest earning assets were $466.5 million for the nine months ended September 30, 2004 with a net interest margin of
5.29% compared to $406.9 million with a net interest margin of 4.90% for the nine months ended September 30, 2003.



For the three months and nine months ended September 30, 2004, the increase in the net interest margin was primarily due to the decline in cost of
interest bearing liabilities. For a discussion of the repricing of our assets and liabilities, see Item 3 Quantitative and Qualitative Disclosure about Market Risk.



Provision for Estimated Loan Losses



The provision for estimated loan losses was $325,000 for the three months ended September 30, 2004 compared to $474,000 for the three months ended
September 30, 2003. For the nine months ended September 30, 2004, provision for loan losses was $838,000 compared to $1,195,000 for the nine months ended September 30, 2003. For further information, please see the Loans discussion in the
Financial Condition portion of this section.



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 $2.5 million for the three months ended September 30, 2004 compared to $2.0 million for
the three months ended September 30, 2003. For the nine months ended September 30, 2004, other operating income was $6.9 million compared to $5.6 million for the nine months ended September 30, 2003. The increase in other operating income for the
three months and nine months ended September 30, 2004 was primarily due to an increase in gain on sale of loans. For a further discussion of loan servicing fees, see SBA Division - Net Income in this section. For a further discussion of
customer service charges, see Banking Division  Net Income in this section.



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Other fee income increased to $335,000 for the three months ended September 30, 2004 compared to $313,000
for the three months ended September 30, 2003. For the nine months ended September 30, 2004, other fee income totaled $956,000 compared to $825,000 for the nine months ended September 30, 2003. The increase in other fee income for the three and nine
months ended September 30, 2004 is a result of an increase in fees from brokering of loans to other financial institutions which the Company does not directly fund.



Operating Expenses



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 operating expenses. Operating expenses increased to $5.3 million for the three months ended September 30, 2004 compared to
$4.4 million for the three months ended September 30, 2003. For the nine months ended September 30, 2004, operating expenses totaled $15.1 million compared to $12.7 million for the nine months ended September 30, 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 58.59% for the quarter ended September 30, 2004 compared to 60.10% for the quarter ended September 30, 2003. For
the nine months ended September 30, 2004, the efficiency ratio improved to 59.12% compared to 62.14% for the nine months ended September 30, 2003.



Salaries and employee benefits increased to $2.9 million for the quarter ended September 30, 2004 compared to $2.5 million for the quarter ended September
30, 2003. For the nine months ended September 30, 2004, salaries and employee benefits increased to $8.1 million compared to $7.2 for the nine months ended September 30, 2003. The increase in salaries and employee benefits for the three and nine
month periods ended September 30, 2004 can be attributed to normal cost increases for salaries and benefits plus increased incentive based compensation due to increased loan and deposit production and profitability. Incentive based compensation
(based on loan production, deposit generation and profitability), not including tax related expense, totaled $1.0 million for the quarter ended September 30, 2004 compared to $900,000 for the quarter ended September 30, 2003. For the nine months
ended September 30, 2004, incentive based compensation, not including related tax expense, totaled $2.7 million compared to $2.2 million for the nine months ended September 30, 2003.



Occupancy expense increased to $340,000 for the quarter ended September 30, 2004 compared to $335,000 for the quarter ended
September 30, 2003. For the nine months ended September 30, 2004, occupancy expense increased to $1,033,000 compared to $974,000 for the nine months ended September 30, 2003. The increase in occupancy expense for the three and nine months ended
September 30, 2004 was due to normal increases in rent, the addition of two new SBA loan production offices and other occupancy related expenses.



Professional services, including legal, accounting, regulatory and consulting, increased to $818,000 for the quarter ended September 30, 2004 compared to
$256,000 for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, professional services increased to $1.9 million compared to $861,000 for the nine months ended September 30, 2003. The increase in professional services
for the three and nine months ended September 30, 2004 was due to the implementation of the Sarbanes-Oxley Act of 2002 combined with the use of consultants to improve efficiencies in the SBA division. Sarbanes-Oxley related expenses, including 404
compliance and excluding employee expense, have totaled $702,000 for the first nine months of 2004 compared to none during the first nine months of 2003, and have been allocated proportionately between the Banking division and the SBA division. For
the first nine months of 2004, the expense for efficiency consultants totaled $138,000, compared to none during the first nine months of 2003, and has been allocated to the SBA division. This expense is not expected to continue in future periods as
the project has been completed.



Depreciation and amortization
expense declined to $190,000 for the quarter ended September 30, 2004 compared to $199,000 for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, depreciation and amortization expense declined to $566,000 compared to
$613,000 for the nine months ended September 30, 2003. The decline in depreciation and amortization expense for the three and nine months ended



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##### Table of Contents

September 30, 2004 was due to the decrease in the amount of premises and equipment, which declined from an average $4.0
million during the nine months of 2003 to $3.7 million for the first nine months of 2004. The decline is the result of normal amortization of premises and equipment.



Data processing expense increased to $194,000 for the quarter ended September 30, 2004 compared to $181,000 for the quarter
ended September 30, 2003. For the nine months ended September 30, 2004, data processing expense increased to $611,000 compared to $515,000 for the nine months ended September 30, 2003. Data processing expense for the three months and nine months
ended September 30, 2004 increased due to the increase in both deposits and loans as well as normal cost increases.



Office expenses were $155,000 quarter ended September 30, 2004 compared to $168,000 for the quarter ended September 30, 2003. For the nine months ended
September 30, 2004, office expenses totaled $483,000 compared to $484,000 for the nine months ended September 30, 2003.



Increases in other operating expenses are due to the normal expansion of our operations. Other expenses decreased to $723,000 for the quarter ended
September 30, 2004 compared to $756,000 for the quarter ended September 30, 2003. For the nine months ended September 30, 2004, other operating expenses totaled $2.4 million compared to $2.1 million for the nine months ended September 30, 2003.
Total assets increased 17.87% to $540.6 million as of September 30, 2004 compared to $476.7 million as of December 31, 2003.



Provision for Income Taxes



The effective income tax rate was 38.22% for the three months ended September 30, 2004 compared to 37.88% for the three months ended September 30, 2003.
For the nine months ended September 30, 2004, the effective tax rate was 37.81% compared to 39.11% for the nine months ended September 30, 2003. The effective tax rate decline in the nine months ended September 30, 2004 was due to investments which
generate income tax credits. See Financial Condition  Investments section of this discussion for further information. Provisions for income taxes totaled $1.3 million and $919,000 for the three months ended September 30, 2004 and
2003, respectively. For the nine months ended September 30, 2004, provisions for income taxes totaled $3.6 million compared to $2.6 million for the nine months ended September 30, 2003.



FINANCIAL CONDITION



Summary of Changes in Consolidated Balance Sheets

September 30,
2004 compared to December 31, 2003



The demand for our
banking products has led to continued increases in loans and deposits during the first half of 2004. As of September 30, 2004, total assets were $540.6 million, an increase of 17.87% (annualized) compared to $476.7 million as of December 31, 2003.
Total gross loans increased to $457.6 million as of September 30, 2004 compared to $402.0 million as of December 31, 2003. Total deposits increased to $455.8 million as of September 30, 2004 compared to $393.1 million as of December 31, 2003.
Stockholders equity increased to $42.8 million as of September 30, 2004 compared to $37.1 million as of December 31, 2003.



Investments



Our investment portfolio consists primarily of U.S. Treasury and agency securities, mortgage backed securities, SBA pass through securities and overnight
investments in the Federal Funds market. Our held to maturity portfolio declined to $4.5 million as of September 30, 2004 compared to $7.7 million as of December 31, 2003. The decrease in held to maturity securities was due to the maturing or
prepayment of agency bonds and mortgage backed securities. As of September 30, 2004, $2.4 million was held as collateral for public funds, treasury, tax, and loan deposits and for other purposes.



Our available for sale portfolio declined to $12.6 million as of September
30, 2004 compared to $15.9 million as of December 31, 2003. The available for sale portfolio is made up of agency mortgage backed securities that are readily marketable and are marked to market on a monthly basis. The decrease in held to maturity
securities was due



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##### Table of Contents

to the maturing or prepayment of agency bonds and mortgage backed securities. Of the $12.6 million, a single security of
$1.7 million was pledged as additional security for our interest rate swap. The collateral requirement for the interest rate swap is the greater of the mark to market value of the swap or $945,000. Therefore, as interest rates increase, it is
probable that the collateral required will increase. In addition to the security pledged for the swap, the remainder of the portfolio was held as collateral for public funds, treasury, tax and loan deposits and for other purposes at September 30,
2004.



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. The remaining federal tax credits to
be utilized over a multiple-year period are $2.5 million as of September 30, 2004. The Companys usage of tax credits approximated $107,000 and $67,000 during the quarters ended September 30, 2004 and 2003, respectively. The Companys
usage of tax credits approximated $214,000 and $75,000 during the nine months ended September 30, 2004 and 2003, respectively. Investment amortization amounted to $79,000 and $19,000 for the quarters ended September 30, 2004 and 2003, respectively.
Investment amortization amounted to $140,000 and $30,000 for the nine months ended September 30, 2004 and 2003, respectively. As of September 30, 2004 and December 31, 2003, the investment in these partnerships totaled $1.5 million. The Company had
a commitment to fund an additional $1.3 million to these partnerships as of September 30, 2004.



Average Federal Funds sold for the three months ended September 30, 2004 were $14.5 million compared to $21.5 million for the three months ended September
30, 2003. For the nine months ended September 30, 2004, average Federal Funds sold totaled $15.0 million compared to $13.8 million for the nine months ended September 30, 2003.



We held $937,000 in Federal Reserve Bank stock as of September 30, 2004 compared to $569,000 as of December 31, 2003. We
held $1,851,000 in Federal Home Loan Bank stock as of September 30, 2004 compared to $1,430,000 as of December 31, 2003.



The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated:



|                                            |  |                        |        |                      |   |                |  |                      |        |  |   |       
|------------------------------------------- |  | ---------------------- | ------ | -------------------- | - | -------------- |  | -------------------- | ------ |  | - | ------
|                                            |  | At September 30,       |        | At December 31,     
|                                            |  | 2004                   |        | 2003                
|                                            |  | Amortized Cost         |        | Estimated Fair value |   | Amortized Cost |  | Estimated Fair value
|                                            |  |                        |       
|                                            |  | (dollars in thousands)
|Held to maturity                            |  |                        |        |                      |   |                |  |                      |        |  |   |       
|U.S. Government agency and other securities |  | $                      |       |                      | $ |               |  | $                    | 1,501  |  | $ | 1,523 
|Agency mortgage backed securities           |  |                        | 3,573  |                      |   | 3,639          |  |                      | 5,213  |  |   | 5,305 
|SBA pass through securities                 |  |                        | 924    |                      |   | 942            |  |                      | 973    |  |   | 979   
|                                            |  |                        |        |                      |   |                |  |                      |        |  |   |       
|Total held to maturity                      |  | $                      | 4,497  |                      | $ | 4,581          |  | $                    | 7,687  |  | $ | 7,807 
|                                            |  |                        |        |                      |   |                |  |                      |        |  |   |       
|                                            |  |                        |        |                     
|                                            |  | AmortizedCost          |        | Fair value           |   | AmortizedCost  |  | Fair value          
|Available for sale                          |  |                        |        |                      |   |                |  |                      |        |  |   |       
|Agency mortgage backed securities           |  | $                      | 12,624 |                      | $ | 12,605         |  | $                    | 16,048 |  | $ | 15,921
|                                            |  |                        |        |                      |   |                |  |                      |        |  |   |       



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The contractual maturities held to maturity at September 30, 2004 were as follows:



|                                                      |  |                        |       |                     |   |                               |  |      |  
|----------------------------------------------------- |  | ---------------------- | ----- | ------------------- | - | ----------------------------- |  | ---- | -
|Year maturing                                         |  | AmortizedCost          |       | Estimated FairValue |   | WeightedAverage InterestYield | 
|                                                      |  | (dollars in thousands) |      
|Mortgage backed securities                            |  |                        |       |                     |   |                               |  |      |  
|Due greater than one year through five years          |  |                        | 245   |                     |   | 251                           |  | 4.78 | %
|Due greater than five years through ten years         |  |                        | 1,218 |                     |   | 1,260                         |  | 4.97 | %
|Mortgage backed securities due greater than ten years |  |                        | 2,110 |                     |   | 2,128                         |  | 4.38 | %
|                                                      |  |                        |       |                     |   |                               |  |      |  
|Subtotal mortgage backed securities                   |  |                        | 3,573 |                     |   | 3,639                         |  | 4.61 | %
|SBA pass through securities                           |  |                        |       |                     |   |                               |  |      |  
|Due greater than ten years                            |  |                        | 924   |                     |   | 942                           |  | 2.99 | %
|                                                      |  |                        |       |                     |   |                               |  |      |  
|Total                                                 |  | $                      | 4,497 |                     | $ | 4,581                         |  | 4.28 | %
|                                                      |  |                        |       |                     |   |                               |  |      |  



As of September 30,
2004, the Company held investments with unrealized holding losses totaling $21,000, consisting of the following (in thousands):



|                            |  |           |       |                      |   |     |  
|--------------------------- |  | --------- | ----- | -------------------- | - | --- | -
|                            |  | FairValue |       | GrossUnrealized Loss |  
|                            | 
|Mortgage-backed securities: |  |           |       |                      |   |     |  
|FNMA                        |  | $         | 7,573 |                      | $ | (21 | )
|                            |  |           |       |                      |   |     |  



As of September 30,
2004, the unrealized holding losses relate to a total of eight hybrid variable rate mortgage-backed securities. Such unrealized holding losses are the result of an increase in market interest rates in the 3rdQuarter of 2004 and are not the result of credit or principal risk. Based on the nature of the investments and other considerations discussed above,
management concluded that such unrealized losses were not other than temporary as of September 30, 2004.



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##### Table of Contents

Loans



As a result of increased loan origination total gross loans have increased to $457.6 million as of September 30, 2004 compared to $402.0 million as of
December 31, 2003. We service the SBA 7a loans that we sell. Total SBA 7a loans serviced for others increased to $153.6 million as of September 30, 2004 compared to $137.0 million as of December 31, 2003.



Loan Origination and Sale. The following table sets forth our loan
originations by category and purchases, sales and principal repayments of loans for the periods indicated:



|                                 |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|-------------------------------- |  | --------------------------------------------- | ------- | --------------------------------------------- | - | ------- |  | ---- | ------- |  | - | -------
|                                 |  | At or for the nine months ended September 30, |         | At or for the three monthsended September 30,
|                                 |  | 2004                                          |         | 2003                                          |   | 2004    |  | 2003
|                                 |  | (dollars in thousands)                        |         | (dollars in thousands)                       
|Beginning balance                |  | $                                             | 394,212 |                                               | $ | 339,471 |  | $    | 441,330 |  | $ | 368,130
|                                 |  |                                               |         |                                              
|Loans originated for sale:       |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|Real estate:                     |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|One-to four-family               |  |                                               |        |                                               |   | 2,353   |  |      |        |  |   |       
|Commercial                       |  |                                               | 96,654  |                                               |   | 58,021  |  |      | 31,311  |  |   | 23,362 
|                                 |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|Total loans originated for sale  |  |                                               | 96,654  |                                               |   | 60,374  |  |      | 31,311  |  |   | 23,362 
|                                 |  |                                               |         |                                              
|Loans sold:                      |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|Real estate:                     |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|Construction                     |  |                                               |        |                                               |   | 1,725   |  |      |        |  |   |       
|One-to four-family               |  |                                               |        |                                               |   | 6,645   |  |      |        |  |   |       
|Commercial                       |  |                                               | 53,692  |                                               |   | 49,060  |  |      | 18,686  |  |   | 14,613 
|                                 |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|Total loans sold                 |  |                                               | 53,692  |                                               |   | 57,430  |  |      | 18,686  |  |   | 14,613 
|                                 |  |                                               |         |                                              
|Loans originated for investment: |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|Commercial loans                 |  |                                               | 23,949  |                                               |   | 21,307  |  |      | 6,432   |  |   | 5,222  
|Real estate:                     |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|Construction loans               |  |                                               | 96,774  |                                               |   | 83,582  |  |      | 41,612  |  |   | 23,169 
|One-to four-family               |  |                                               | 576     |                                               |   |        |  |      | 201     |  |   |       
|Commercial                       |  |                                               | 92,471  |                                               |   | 62,626  |  |      | 27,082  |  |   | 17,527 
|Consumer                         |  |                                               | 2,595   |                                               |   | 1,157   |  |      | 1,765   |  |   | 356    
|                                 |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|Total loans originated           |  |                                               | 216,365 |                                               |   | 168,672 |  |      | 77,092  |  |   | 46,274 
|                                 |  |                                               |         |                                              
|Less:                            |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|Principal repayments             |  |                                               | 203,502 |                                               |   | 129,556 |  |      | 81,716  |  |   | 42,596 
|Other net charges (1)            |  |                                               | 819     |                                               |   | 1,125   |  |      | 113     |  |   | 151    
|                                 |  |                                               |         |                                               |   |         |  |      |         |  |   |        
|Total Loans                      |  | $                                             | 449,218 |                                               | $ | 380,406 |  | $    | 449,218 |  | $ | 380,406
|                                 |  |                                               |         |                                               |   |         |  |      |         |  |   |        



Loans held for sale
are accounted for 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. As of September 30, 2004, loans held for sale totaled $101.2 million compared to $69.1 million as of December 31, 2003. For the three months and nine months ended September 30, 2004 and 2003, there were no lower of
cost or market adjustments to loans held for sale.



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##### Table of Contents

Total Loan Portfolio Composition



The following table sets forth information concerning the composition of our loan portfolio at the dates indicated:



|                                                |  |                        |         |   |                     |        |   |        |   |         |         |  |        |  
|----------------------------------------------- |  | ---------------------- | ------- | - | ------------------- | ------ | - | ------ | - | ------- | ------- |  | ------ | -
|                                                |  | At September 30,2004   |         |   | At December 31,2003 |       
|                                                |  | Amount                 |         |   | Percent             |        |   | Amount |   |         | Percent | 
|                                                |  | (dollars in thousands) |        
|Loan portfolio composition:                     |  |                        |         |   |                     |        |   |        |   |         |         |  |        |  
|Commercial loans                                |  | $                      | 23,069  |   |                     | 5.04   | % |        | $ | 20,590  |         |  | 5.12   | %
|Aircraft loans                                  |  |                        | 28,657  |   |                     | 6.26   | % |        |   | 30,368  |         |  | 7.55   | %
|Real estate:                                    |  |                        |         |   |                     |        |   |        |   |         |         |  |        |  
|Construction loans                              |  |                        | 65,949  |   |                     | 14.41  | % |        |   | 66,957  |         |  | 16.66  | %
|Secured by                                      |  |                        |         |   |                     |        |   |        |   |         |         |  |        |  
|One- to four-family                             |  |                        | 7,635   |   |                     | 1.67   | % |        |   | 9,671   |         |  | 2.41   | %
|Commercial                                      |  |                        | 328,802 |   |                     | 71.85  | % |        |   | 270,367 |         |  | 67.26  | %
|Consumer:                                       |  |                        |         |   |                     |        |   |        |   |         |         |  |        |  
|Home equity lines of credit                     |  |                        | 1,977   |   |                     | 0.43   | % |        |   | 1,933   |         |  | 0.48   | %
|Other                                           |  |                        | 1,553   |   |                     | 0.34   | % |        |   | 2,085   |         |  | 0.52   | %
|                                                |  |                        |         |   |                     |        |   |        |   |         |         |  |        |  
|Total Gross loans outstanding                   |  |                        | 457,642 |   |                     | 100.00 | % |        |   | 401,971 |         |  | 100.00 | %
|Deferred loan fees and unamortized gains        |  |                        | (2,395  | ) |                     |        |   |        |   | (2,549  | )       |  |        |  
|Allowance for loan losses                       |  |                        | (6,029  | ) |                     |        |   |        |   | (5,210  | )       |  |        |  
|                                                |  |                        |         |   |                     |        |   |        |   |         |         |  |        |  
|Net loans held for investment and held for sale |  | $                      | 449,218 |   |                     |        |   |        | $ | 394,212 |         |  |        |  
|                                                |  |                        |         |   |                     |        |   |        |   |         |         |  |        |  
|SBA loans serviced for others                   |  | $                      | 153,631 |   |                     |        |   |        | $ | 136,966 |         |  |        |  
|                                                |  |                        |         |   |                     |        |   |        |   |         |         |  |        |  



Loan Maturity



The following table sets forth the contractual maturities of our gross loans at September
30, 2004:



|                                                        |  |                        |         |                           |   |                           |  |                  |        |            |   |         |  |   |        
|------------------------------------------------------- |  | ---------------------- | ------- | ------------------------- | - | ------------------------- |  | ---------------- | ------ | ---------- | - | ------- |  | - | -------
|                                                        |  | One yearor less        |         | Morethan 1year to 3 years |   | Morethan 3years to5 years |  | More than5 years |        | TotalLoans
|                                                        |  | (dollars in thousands)
|Loan portfolio composition:                             |  |                        |         |                           |   |                           |  |                  |        |            |   |         |  |   |        
|Commercial loans                                        |  | $                      | 12,582  |                           | $ | 2,251                     |  | $                | 2,816  |            | $ | 5,420   |  | $ | 23,069 
|Aircraft loans                                          |  |                        | 652     |                           |   | 79                        |  |                  | 360    |            |   | 27,566  |  |   | 28,657 
|Real estate:                                            |  |                        |         |                           |   |                           |  |                  |        |            |   |         |  |   |        
|Construction loans                                      |  |                        | 58,186  |                           |   | 3,637                     |  |                  |       |            |   | 4,126   |  |   | 65,949 
|Secured by one- to four-family residential properties   |  |                        | 2,256   |                           |   | 2,583                     |  |                  | 353    |            |   | 2,443   |  |   | 7,635  
|Secured by commercial properties                        |  |                        | 51,536  |                           |   | 18,497                    |  |                  | 12,218 |            |   | 246,551 |  |   | 328,802
|Consumer:                                               |  |                        |         |                           |   |                           |  |                  |        |            |   |         |  |   |        
|Home equity lines of credit                             |  |                        | 11      |                           |   | 48                        |  |                  | 49     |            |   | 1,869   |  |   | 1,977  
|Other                                                   |  |                        | 465     |                           |   | 474                       |  |                  | 384    |            |   | 230     |  |   | 1,553  
|                                                        |  |                        |         |                           |   |                           |  |                  |        |            |   |         |  |   |        
|Total gross loans held for investment and held for sale |  | $                      | 125,688 |                           | $ | 27,569                    |  | $                | 16,180 |            | $ | 288,205 |  | $ | 457,642
|                                                        |  |                        |         |                           |   |                           |  |                  |        |            |   |         |  |   |        



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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 our 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 following table sets forth our non-performing assets at the dates
indicated:



|                                                                                                                      |  |                        |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                      |  | September 30,2004      |         |   | December 31,2003 |  
|                                                                                                                      |  | (dollars in thousands) |        
|Non-accrual loans                                                                                                     |  | $                      | 4,701   |   |                  | $ | 961     |  
|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                                                                                            |  |                        | 4,701   |   |                  |   | 961     |  
|Repossessed assets                                                                                                    |  |                        | 39      |   |                  |   | 458     |  
|                                                                                                                      |  |                        |         |   |                  |   |         |  
|Total non-performing assets                                                                                           |  | $                      | 4,740   |   |                  | $ | 1,419   |  
|                                                                                                                      |  |                        |         |   |                  |   |         |  
|SUPPLEMENTAL DATA                                                                                                     |  |                        |         |   |                  |   |         |  
|Undisbursed portion of construction and other loans                                                                   |  | $                      | 125,308 |   |                  | $ | 101,526 |  
|Government guaranteed portion of total loans                                                                          |  | $                      | 35,068  |   |                  | $ | 30,360  |  
|Non-performing loans, net of government guarantees                                                                    |  | $                      | 2,801   |   |                  | $ | 271     |  
|                                                                                                                      |  |                       
|Total non-performing loans/gross loans                                                                                |  |                        | 1.03    | % |                  |   | 0.24    | %
|Total non-performing assets/total assets                                                                              |  |                        | 0.88    | % |                  |   | 0.30    | %
|Total non-performing loans, net of guarantees/gross loans                                                             |  |                        | 0.62    | % |                  |   | 0.07    | %
|Total non-performing assets, net of guarantees/total assets                                                           |  |                        | 0.53    | % |                  |   | 0.15    | %
|                                                                                                                      |  |                       
|Allowance for loan losses                                                                                             |  | $                      | 6,029   |   |                  | $ | 5,210   |  
|Loan loss allowance/loans, gross                                                                                      |  |                        | 1.32    | % |                  |   | 1.30    | %
|Loan loss allowance/total gross loans net of guarantees                                                               |  |                        | 1.43    | % |                  |   | 1.40    | %
|Loan loss allowance/loans held for investment                                                                         |  |                        | 1.70    | % |                  |   | 1.58    | %
|Loan loss allowance/non-performing loans                                                                              |  |                        | 128.25  | % |                  |   | 542.14  | %
|Loan loss allowance/total assets                                                                                      |  |                        | 1.12    | % |                  |   | 1.09    | %
|Loan loss allowance/non-performing assets                                                                             |  |                        | 127.19  | % |                  |   | 367.16  | %
|Loan loss allowance/non-performing loans, net of guarantees                                                           |  |                        | 215.24  | % |                  |   | 1922.51 | %
|Loan loss allowance/non-performing assets, net of guarantees                                                          |  |                        | 212.29  | % |                  |   | 714.68  | %



Non-accrual Loans.Non-accrual loans are impaired loans where the original contractual amount may not be fully collectible. We measure our 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 September 30, 2004 and December 31, 2003 all impaired or non-accrual loans were collateral-dependent. We place loans on
non-accrual status that are delinquent 90 days or more or when a reasonable doubt exists as to the collectibility of interest and principal. As of September 30, 2004 we had eight loans on non-accrual status totaling $4.7 million with $1.9 million,
or 40%, guaranteed by the government. As of December 31, 2003, loans on non-accrual status totaled $961,000. Of this total, $690,000, or 72%, was guaranteed by the government. Of the $4.7 million in non-performing loans as of September 30, 2004,
$3.2 million are current. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on non-accrual status until such time as management has determined that the loans are likely to remain current
in future periods.



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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. Each classified loan is monitored monthly. Classified assets, consisting of non-accrual loans, loans graded as substandard or lower, other real estate owned and repossessed
assets, (all net of government guarantees), totaled $5.4 million as of September 30, 2004 compared to $3.4 million as of December 31, 2003.



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
losses inherent 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 reviews 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 monthly 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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The following table sets forth information regarding our allowance for loan losses at the dates and for
the periods indicated:



|                                                    |  |                                              |       |   |                                               |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------------------- |  | -------------------------------------------- | ----- | - | --------------------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                    |  | At or for the nine monthsended September 30, |       |   | At or for the three monthsended September 30, |  
|                                                    |  | 2004                                         |       |   | 2003                                          |   |       | 2004 |  |   | 2003  |  
|                                                    |  | (dollars in thousands)                       |       |   | (dollars in thousands)                        |  
|Balance at beginning of period                      |  | $                                            | 5,210 |   |                                               | $ | 3,945 |      |  | $ | 5,715 |   |  | $ | 4,530 |  
|Chargeoffs:                                         |  |                                              |       |   |                                               |   |       |      |  |   |       |   |  |   |       |  
|Real estate loans:                                  |  |                                              |       |   |                                               |   |       |      |  |   |       |   |  |   |       |  
|One- to four- family                                |  |                                              |      |   |                                               |   | 102   |      |  |   |      |   |  |   | 102   |  
|Commercial                                          |  |                                              | 15    |   |                                               |   | 129   |      |  |   | 15    |   |  |   | 49    |  
|Commercial                                          |  |                                              | 11    |   |                                               |   | 329   |      |  |   |      |   |  |   | 264   |  
|Aircraft                                            |  |                                              |      |   |                                               |   | 48    |      |  |   |      |   |  |   | 48    |  
|Consumer                                            |  |                                              | 10    |   |                                               |   | 34    |      |  |   |      |   |  |   | 28    |  
|                                                    |  |                                              |       |   |                                               |   |       |      |  |   |       |   |  |   |       |  
|Total chargeoffs                                    |  |                                              | 36    |   |                                               |   | 642   |      |  |   | 15    |   |  |   | 491   |  
|Recoveries:                                         |  |                                              |       |   |                                               |   |       |      |  |   |       |   |  |   |       |  
|Real estate loans:                                  |  |                                              |       |   |                                               |   |       |      |  |   |       |   |  |   |       |  
|One- to four-family                                 |  |                                              |      |   |                                               |   | 20    |      |  |   |      |   |  |   |      |  
|Commercial                                          |  |                                              |      |   |                                               |   | 4     |      |  |   |      |   |  |   | 4     |  
|Commercial                                          |  |                                              | 7     |   |                                               |   | 27    |      |  |   | 3     |   |  |   | 16    |  
|Aircraft                                            |  |                                              |      |   |                                               |   |      |      |  |   |      |   |  |   |      |  
|Consumer                                            |  |                                              | 10    |   |                                               |   | 1     |      |  |   | 1     |   |  |   | 1     |  
|                                                    |  |                                              |       |   |                                               |   |       |      |  |   |       |   |  |   |       |  
|Total recoveries                                    |  |                                              | 17    |   |                                               |   | 52    |      |  |   | 4     |   |  |   | 21    |  
|                                                    |  |                                              |       |   |                                               |   |       |      |  |   |       |   |  |   |       |  
|Net chargeoffs                                      |  |                                              | 19    |   |                                               |   | 590   |      |  |   | 11    |   |  |   | 470   |  
|Reserve for losses on commitments to extend credit* |  |                                              |      |   |                                               |   | (5    | )    |  |   |      |   |  |   | 11    |  
|Provision for loan losses                           |  |                                              | 838   |   |                                               |   | 1,195 |      |  |   | 325   |   |  |   | 474   |  
|                                                    |  |                                              |       |   |                                               |   |       |      |  |   |       |   |  |   |       |  
|Balance at end of period                            |  | $                                            | 6,029 |   |                                               | $ | 4,545 |      |  | $ | 6,029 |   |  | $ | 4,545 |  
|                                                    |  |                                              |       |   |                                               |   |       |      |  |   |       |   |  |   |       |  
|Net charge offs to average loans                    |  |                                              | 0.01  | % |                                               |   | 0.22  | %    |  |   | 0.01  | % |  |   | 0.50  | %
|Reserve for losses on commitments to extend credit  |  | $                                            | 203   |   |                                               | $ | 179   |      |  | $ | 203   |   |  | $ | 179   |  

---

|* | During the three months and nine months ended September 30, 2004 and 2003, there have been no charge offs or recoveries on commitments to extend credit.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2004 the balance in the allowance for loans losses was
$6.0 million compared to $5.2 million as of December 31, 2003. In addition, the reserve for losses on commitments to extend credit was $203,000 as of September 30, 2004 and December 31, 2003. The balance of commitments to extend credit on
undisbursed construction and other loans and letters of credit was $125.3 million as of September 30, 2004 compared to $101.5 million as of December 31, 2003. 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 Directors Loan Committee have established 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 September 30, 2004 the allowance was 1.32% of total gross loans compared to 1.30% as of December 31, 2003. As a
percent of loans held for investment, the allowance was 1.70% as of September 30, 2004 compared to 1.58% as of December 31, 2003. During the three months and nine months ended September 30, 2004, there were no major changes in loan concentrations
that affected the allowance for loan losses. There have been no significant changes in estimation methods during the periods presented. 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, or expected trends within different loan portfolios. The allowance for loan losses as a percentage of
non-performing loans was 128.25% as of September 30, 2004 compared to 542.14% as of December 31, 2003, reflecting the increase in non-performing loans. Management believes the allowance at September 30, 2004 is adequate based upon its ongoing
analysis of the loan portfolio, historical loss trends and other factors.



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We perform a migration analysis on a quarterly basis using an eight quarter history of charge offs to
average loans by collateral type. Net charge offs for the three months ended September 30, 2004 totaled $11,000 compared to net charge offs of $470,000 for the three months ended September 30, 2003. Net charge offs for the nine months ended
September 30, 2004 totaled $19,000 compared to $590,000 for the nine months ended September 30, 2003. 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, the 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.



Other real estate owned and repossessed assets.There were no OREOs as
of September 30, 2004 or December 31, 2003. As of September 30, 2004, the repossessed asset in the amount of $39,000 was a small aircraft.



Deposits and Borrowings



Total deposits increased to $455.8 million as of September 30, 2004 compared to $393.1 million as of December 31, 2003. Interest bearing deposits
increased to $372.1 million as of September 30, 2004 compared to $324.5 million as of December 31, 2003. Non-interest bearing deposits increased to $83.7 million as of September 30, 2004 compared to $68.7 million as of December 31, 2003. Total
wholesale deposits were $83.7 million as of September 30, 2004 compared to $59.5 million as of December 31, 2003. Total retail banking deposits increased 20% (annualized) to $370.2 million as of September 30, 2004 compared to $333.6 million as of
December 31, 2003. 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 addition and growth of our retail banking offices. We plan to open an
additional branch on October 4, 2004 in the City of Murrieta, California.



Short term borrowings totaled $20.0 million as of September 30, 2004 compared to $25.0 million as of December 31, 2003. We maintain a line of credit with the FHLB collateralized by commercial loans and government
securities. Funds from the credit line were used to increase our liquidity.



Long term debt, consisting entirely of Trust Preferred Securities, totaled $14.9 million as of September 30, 2004 compared to $14.7 million as of December 31, 2003. The net change in long term debt is a result of the
change in the market value of the interest rate swap hedging the $10.0 million fixed rate Trust Preferred Securities portfolio. See Item 3. Quantitative and Qualitative Disclosures about Market Risk for further information.



Capital



Our stockholders equity increased to $42.8 million as of September 30, 2004 compared to $37.1 million as of December
31, 2003. The increase in stockholders equity is a result of net income of $5.9 million for the nine months ended September 30, 2004 combined with proceeds from the exercise of stock options, less the cash dividends paid during the nine
months.



On August 7, 2003 the Company completed a private
placement of 725,000 shares of common stock at a price of $15.00 per share to certain accredited investors including certain directors and officers of the Company and the Bank and their related interests. The directors, officers and
their related interests purchased less than 5% of the total offering.



Gross proceeds from the offering were $10,875,000, and offering expenses totaled $807,000, including placement agent fees. Of the $10,068,000 net proceeds of the offering, the Company used $1.8 million to repay debt, and $7.5 million of the
proceeds were invested as equity capital in the Bank. The remaining net proceeds were retained by the Company as working capital.



On September 17, 2003, the Companys wholly owned subsidiary, Community (CA) Statutory Capital Trust II (Trust II), a Connecticut
business trust, issued $5 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, pay cash distributions at a per annum
rate and reset quarterly at the three month LIBOR plus 2.95%. The



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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 $4.75 million was contributed to the Bank to increase its capital. The $5 million is included in long term debt on the books of
the Company, while the net $4.9 million is in cash and cash equivalents.



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. On September 1, 2004,
the Company announced the payment of a cash dividend of $0.05 per common share payable on September 30, 2004. 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 $15 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



At September 30,
2004 and December 31, 2003, all capital ratios were above all current Federal capital guidelines for a well capitalized bank. As of September 30, 2004, the Banks regulatory Total Capital to risk-weighted assets ratio was 11.22%
compared to 13.39% as of December 31, 2003. The Banks regulatory Tier 1 Capital to risk-weighted assets ratio was 9.97% as of September 30, 2004 compared to 12.14% as of December 31, 2003. The Banks regulatory Tier 1 Capital to average
assets ratio was 9.35% as of September 30, 2004 compared to 10.90% as of December 31, 2003.



As of September 30, 2004, our regulatory total capital to risk-weighted assets ratio was 13.08% compared to 13.77% as of December 31, 2003. Our regulatory Tier 1 Capital to risk-weighted assets ratio was 11.68% as of
September 30, 2004 compared to 11.88% as of December 31, 2003. Our regulatory Tier 1 Capital to average assets ratio was 10.95% as of September 30, 2004 compared to 10.67% as of December 31, 2003.



Financial Borrowings and Commitments



As of September 30, 2004 the financial borrowings and commitments having an
initial or remaining term of more than one year are as follows:



|           |  |                         |       |                            |   |                  |  |   |       
|---------- |  | ----------------------- | ----- | -------------------------- | - | ---------------- |  | - | ------
|           |  | Gross RentalCommitments |       | Trust Preferred Securities |   | TotalCommitments
|           |  | (dollars in thousands) 
|2004       |  | $                       | 264   |                            | $ |                 |  | $ | 264   
|2005       |  |                         | 1,076 |                            |   |                 |  |   | 1,076 
|2006       |  |                         | 1,102 |                            |   |                 |  |   | 1,102 
|2007       |  |                         | 990   |                            |   |                 |  |   | 990   
|2008       |  |                         | 927   |                            |   |                 |  |   | 927   
|Thereafter |  |                         | 4,435 |                            |   | 15,000           |  |   | 19,435
|           |  |                         |       |                            |   |                  |  |   |       
|Total      |  | $                       | 8,794 |                            | $ | 15,000           |  | $ | 23,794
|           |  |                         |       |                            |   |                  |  |   |       



In addition to the
above, we have commitments to extend credit on undisbursed construction and other loans totaling $125.3 million as of September 30, 2004.



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The Company has a credit line with the FHLB with a limit of $62 million as of September 30, 2004, with a
balance outstanding of $20.0 million. In addition, we have credit lines with other correspondent banks of $15.0 million. There were no advances against these lines as of September 30, 2004. The $20.0 million in advances from the FHLB have a
remaining term of less than one year.



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, originations and purchases of loans, purchases of
investment securities, and payment of operating expenses.



We
experienced net cash outflows from operating activities of $36.2 million during the nine months ended September 30, 2004 compared to net cash inflows of $3.4 million during the nine months ended September 30, 2003. Net cash outflows from operating
activities during the first nine months of 2004 were primarily due to the origination of loans held for sale in excess of proceeds from the sale of loans, partially offset by our net income. Net cash inflows from operating activities during the
first nine months of 2003 were primarily from the proceeds from the sale of loans held for sale in excess of the origination of loans held for sale, combined with our net income. Net cash outflows from investing activities totaled $20.7 million and
$29.2 million during the nine months ended September 30, 2004 and 2003, respectively. Net cash outflows from investing activities for the nine months ended September 30, 2004 can be attributed primarily to the growth in the Banks loan
portfolio in excess of proceeds from principal repayments on loans held for investment, combined with the increase in federal funds sold. Net cash outflows from investing activities for the nine months ended September 30, 2003 can be attributed
primarily to the growth in the Banks loan portfolio in excess of proceeds from principal repayments on loans held for investment, partially offset by the sale of trading securities in excess of the purchase of trading securities. We
experienced net cash inflows from financing activities of $57.1 million and $41.1 million during the nine months ended September 30, 2004 and 2003, respectively. During the nine months ended September 30, 2004, interest bearing and non-interest
bearing deposits increased $60.9 million and $17.1 million, respectively. This increase was partially offset by a net decrease in short term borrowing. During the first nine months of 2003 net cash inflows were primarily from increases in short term
borrowing and non-interest bearing deposits.



As a means of
augmenting our liquidity, we have established federal funds lines with correspondent banks. At September 30, 2004 our available borrowing capacity includes approximately $15.0 million in federal funds line facilities and $42.0 million in unused FHLB
advances. We believe our liquidity sources to be stable and adequate. At September 30, 2004, 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 nine months ended September 30, 2004 there were $8.25 million in dividends by the Bank to
Community Bancorp Inc used primarily to fund the purchase of Cuyamaca Bank, N.A. During the nine months ended September 30, 2003, the Bank paid $300,000 in dividends to Community Bancorp Inc. As of September 30, 2004, approximately $7.6 million of
undivided profits of the Bank were available for dividends to the Company.



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Off-Balance Sheet Arrangements



Off-balance sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the
Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for
such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by the Company in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to
the Company, or engages in leasing, hedging or research and development services with the Company.



In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit,
commercial letter of credit, and standby letter of credit. Such financial instruments are recorded in the financial statement when they are funded or related fees are incurred or received. For a fuller discussion of these financial instruments,
refer to Note 14 of the Companys consolidated financial statements contained in the Companys December 31, 2003 10-K.



In the ordinary course of business, the Company is party to various operating leases. For a fuller discussion of these financial instruments, refer to
Note 13 of the Companys consolidated financial statements contained in the Companys December 31, 2003 10-K.



In connection with the $15 million in debt securities discussed in Capital, the Company issued the full and unconditional payment guarantee of
certain accrued distributions.



In the ordinary course of
business, the Company entered into an interest rate swap to effectively convert the 11% fixed rate interest payments on $10 million of its debt securities to variable payments. For a fuller discussion of this financial instrument, refer to Note 8 of
the Companys consolidated financial statements contained in the Companys December 31, 2003 10-K.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Interest rate risk (IRR) and credit risk constitute the two greatest sources of financial exposure for insured financial institutions. Please
refer to Item 2 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. The volumes and yields on loans, deposits and borrowings are affected by market interest rates. As of September 30, 2004, 85.71% of our loan portfolio was tied to adjustable rate indices. The majority of the loans are
tied to prime and reprice immediately. The exceptions are SBA 7a loans, which reprice on the first day of the subsequent quarter after a change in prime. As of September 30, 2004, 53.34% of our deposits were time deposits with a stated maturity
(generally one year or less) and a fixed rate of interest. As of September 30, 2004, 65.29% of our long term debt was fixed rate with an average remaining term of 26 years. We entered into an interest rate swap in December 2002 which effectively
changes the fixed rate debt to variable rate with a nine month adjustment period. The Gap table on page 39 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 repricing) of the deposits
and borrowings.



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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. The 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 repricing 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 the repricing 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 repricing 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 repricing 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.



GAP ANALYSIS



A traditional, although analytically limited, measure of a financial institutions IRR is the static gap. Static gap is the difference between the amount of assets and liabilities (adjusted for any
off-balance sheet positions) which are expected to mature or reprice 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 September 30, 2004, 53.3% of our
deposits were comprised of certificate of deposit (CD) accounts, the majority of which have original terms averaging twelve months. The remaining weighted average term to maturity for our CD accounts approximated seven months at
September 30, 2004. 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 $129.0 million
in interest bearing transaction accounts (savings, money markets and interest bearing checking) as of September 30, 2004, with rates being paid between 0.15% and 0.90%. 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 will no longer maintain the deposit with us.



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The following table sets forth information concerning repricing opportunities for our interest-earning
assets and interest bearing liabilities as of September 30, 2004. 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 repricing date.



|                                                         |  |                        |         |   |                                  |   |         |                                   |  |   |                                  |   |  |            |         |   |              |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | ---------------------- | ------- | - | -------------------------------- | - | ------- | --------------------------------- |  | - | -------------------------------- | - |  | ---------- | ------- | - | ------------ | - | ------- | - |  | - | ------- | -
|Contractual Static GAP Position as of September 30, 2004 | 
|                                                         |  | 0 - 3 months           |         |   | Greater than3 months to 6 months |   |         | Greater than6 months to 12 months |  |   | Greater than12 months to 5 years |   |  | Thereafter |         |   | Totalbalance |  
|                                                         |  | (dollars in thousands) |        
|Interest sensitive assets:                               |  |                        |         |   |                                  |   |         |                                   |  |   |                                  |   |  |            |         |   |              |   |         |   |  |   |         |  
|Loans receivable:                                        |  |                        |         |   |                                  |   |         |                                   |  |   |                                  |   |  |            |         |   |              |   |         |   |  |   |         |  
|Adjustable rate loans, gross                             |  | $                      | 230,568 |   |                                  | $ | 18,991  |                                   |  | $ | 40,308                           |   |  | $          | 100,409 |   |              | $ | 1,976   |   |  | $ | 392,252 |  
|Fixed rate loans, gross (1)(2)                           |  |                        | 15,934  |   |                                  |   | 5,565   |                                   |  |   | 3,894                            |   |  |            | 12,410  |   |              |   | 27,587  |   |  |   | 65,390  |  
|Investments:                                             |  |                        |         |   |                                  |   |         |                                   |  |   |                                  |   |  |            |         |   |              |   |         |   |  |   |         |  
|Investment securities held-to-maturity                   |  |                        | 924     |   |                                  |   |        |                                   |  |   |                                 |   |  |            | 2,355   |   |              |   | 1,218   |   |  |   | 4,497   |  
|Investment securities available-for-sale                 |  |                        |        |   |                                  |   |        |                                   |  |   |                                 |   |  |            | 12,605  |   |              |   |        |   |  |   | 12,605  |  
|Federal funds sold                                       |  |                        | 31,170  |   |                                  |   |        |                                   |  |   |                                 |   |  |            |        |   |              |   |        |   |  |   | 31,170  |  
|Other investments                                        |  |                        | 1,846   |   |                                  |   | 95      |                                   |  |   | 95                               |   |  |            |        |   |              |   | 2,787   |   |  |   | 4,823   |  
|                                                         |  |                        |         |   |                                  |   |         |                                   |  |   |                                  |   |  |            |         |   |              |   |         |   |  |   |         |  
|Total interest sensitive assets                          |  |                        | 280,442 |   |                                  |   | 24,651  |                                   |  |   | 44,297                           |   |  |            | 127,779 |   |              |   | 33,568  |   |  |   | 510,737 |  
|                                                         |  |                        |         |   |                                  |   |         |                                   |  |   |                                  |   |  |            |         |   |              |   |         |   |  |   |         |  
|Interest sensitive liabilities:                          |  |                        |         |   |                                  |   |         |                                   |  |   |                                  |   |  |            |         |   |              |   |         |   |  |   |         |  
|Deposits:                                                |  |                        |         |   |                                  |   |         |                                   |  |   |                                  |   |  |            |         |   |              |   |         |   |  |   |         |  
|Non-interest bearing                                     |  |                        |        |   |                                  |   |        |                                   |  |   |                                 |   |  |            |        |   |              |   | 92,285  |   |  |   | 92,285  |  
|Interest bearing (1)                                     |  |                        | 208,311 |   |                                  |   | 56,757  |                                   |  |   | 102,979                          |   |  |            | 5,053   |   |              |   |        |   |  |   | 373,100 |  
|Other Borrowings (3)                                     |  |                        | 20,000  |   |                                  |   | 10,000  |                                   |  |   |                                 |   |  |            |        |   |              |   |        |   |  |   | 30,000  |  
|                                                         |  |                        |         |   |                                  |   |         |                                   |  |   |                                  |   |  |            |         |   |              |   |         |   |  |   |         |  
|Total interest sensitive liabilities                     |  | $                      | 228,311 |   |                                  | $ | 66,757  |                                   |  | $ | 102,979                          |   |  | $          | 5,053   |   |              | $ | 92,285  |   |  | $ | 495,385 |  
|                                                         |  |                        |         |   |                                  |   |         |                                   |  |   |                                  |   |  |            |         |   |              |   |         |   |  |   |         |  
|GAP Analysis                                             |  |                        |         |   |                                  |   |         |                                   |  |   |                                  |   |  |            |         |   |              |   |         |   |  |   |         |  
|Interest rate sensitivity gap                            |  | $                      | 52,131  |   |                                  | $ | (42,106 | )                                 |  | $ | (58,682                          | ) |  | $          | 122,726 |   |              | $ | (58,717 | ) |  | $ | 15,352  |  
|GAP as % of total interest sensitive assets              |  |                        | 10.21   | % |                                  |   | -8.24   | %                                 |  |   | -11.49                           | % |  |            | 24.03   | % |              |   | -11.50  | % |  |   | 3.01    | %
|Cumulative interest rate sensitivity gap                 |  | $                      | 52,131  |   |                                  | $ | 10,025  |                                   |  | $ | (48,657                          | ) |  | $          | 74,069  |   |              | $ | 15,352  |   |  | $ | 15,352  |  
|Cumulative gap as % of total interest sensitive assets   |  |                        | 10.21   | % |                                  |   | 1.96    | %                                 |  |   | -9.53                            | % |  |            | 14.50   | % |              |   | 3.01    | % |  |   | 3.01    | %

---

|(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 with a maturity of one year or less 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 repricing 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 repricing and market rate changes (basis risk) is not the same for all products. The majority of our loan portfolio reprices 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. Management expects to experience higher net interest income in the 0-12 month time horizon when rates rise, the opposite of what is indicated
by the static Gap analysis.



INTEREST RATE SIMULATIONS



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 point increases and decreases in interest rates in 100 basis point increments. However, under the current interest
rate environment,



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decreases in interest rates have been simulated at 25, 50 and 100 basis points. 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.



We have been originating loans with interest rate floors on adjustable rate loans for the past several years. As of September 30, 2004, we had $265.6
million of loans with floors outstanding. Of this total, $222.3 million, or 84%, were at their floor and had a weighted average rate of 6.33%. The contractual weighted average margin over prime of this portfolio was 1.23% as of September 30, 2004,
and therefore, based on the current prime rate of 4.75%, the prime rate would have to increase 0.35% before this portfolio would begin to see an increase in yield. The effects of these floors can be seen in the simulation analysis below by looking
at the $1.8 million increase in projected net interest income between the current rates and a 100 basis point increase in rates, compared to the $3.8 million increase in projected net interest income with a 200 basis point increase in rates. The
difference between the 100 basis point increase simulation and the 200 basis point increase simulation is $2.0 million, or $199,000 greater than the difference between the current interest rate simulation and the 100 basis point simulation.



The following table shows the effects of changes in projected
net interest income for the twelve months ending September 30, 2005 under the interest rate shock scenarios stated. The table was prepared as of September 30, 2004, at which time prime was 4.75%.



|                 |  |                             |        |                     |   |       |                       |  |       |  
|---------------- |  | --------------------------- | ------ | ------------------- | - | ----- | --------------------- |  | ----- | -
|Changes in Rates |  | ProjectedNet interestIncome |        | ChangefromBase Case |   |       | % Changefrom BaseCase | 
|                 |  | (dollars in thousands)      |       
|+ 300 bp         |  | $                           | 33,527 |                     | $ | 5,724 |                       |  | 20.59 | %
|+ 200 bp         |  | $                           | 31,548 |                     | $ | 3,745 |                       |  | 13.47 | %
|+ 100 bp         |  | $                           | 29,576 |                     | $ | 1,773 |                       |  | 6.38  | %
|0 bp             |  | $                           | 27,803 |                     |   |       |                       |  |       |  
|-    25 bp       |  | $                           | 27,648 |                     | $ | (155  | )                     |  | -0.56 | %
|-    50 bp       |  | $                           | 27,520 |                     | $ | (283  | )                     |  | -1.02 | %
|-  100 bp        |  | $                           | 27,427 |                     | $ | (376  | )                     |  | -1.35 | %



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.



ITEM 4. CONTROLS AND PROCEDURES



As of the end of the period covered by this report, management, including the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Companys disclosure
controls and procedures with respect to the information generated for use in this Quarterly Report. The evaluation was based in part upon reports provided by a number of executives.Based upon, and as of the date of that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.



There was no change in the Companys internal controls over financial reporting during the quarter ended September 30,
2004 that has materially affected, or is reasonably likely to materially affect, the Companys internal controls 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.



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Part II OTHER INFORMATION



Item 1 Legal Proceedings



None to report.



Item 2 Changes in Securities and Use of Proceeds



None to report.



Item 3 Defaults upon senior securities



None to
report.



Item 4 Submission of matters to a vote of security holders



The following items were submitted to the security holders for approval at the special meeting held on September 22, 2004:



| | 1. | Approval of an amendment to the 2003 Stock Option Plan to increase the amount of options available to be issued from 125,000 to 625,000.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------



The results of the vote were as follows:



|          |  |         |  |        
|--------- |  | ------- |  | -------
|FOR       |  | AGAINST |  | ABSTAIN
|2,523,197 |  | 216,448 |  | 51,467 



Item 5 Other information



None to report.



Item 6 Exhibits and Reports from 8-K



| | (a) | Exhibits
| | --- | --------



| | 31.1 | Rule 13a-14(a) Certification
| | ---- | ----------------------------



| | 31.2 | Rule 13a-14(a) Certification
| | ---- | ----------------------------



| | 32 | Section 1350 Certifications
| | -- | ---------------------------



| | (b) | Reports on Form 8-K
| | --- | -------------------



The Company filed an 8-K report under items 8 and 9 on September 24, 2004 announcing the results of the shareholder approval of the merger between
Cuyamaca Bank, N.A. with and into Community National Bank, the wholly owned subsidiary of Community Bancorp Inc.



The Company filed an 8-K report under items 8 and 9 on September 3, 2004 declaring a quarterly cash dividend payable on September 30, 2004.



The Company filed an 8-K report under items 5, 7 and 9 on July 29, 2004 a
copy of a slide presentation to be utilized in an investor conference sponsored by Keefe, Bruyette and Woods on the same date.



The Company filed an 8-K report under items 7 and 12 on July 23, 2004 a copy of the press release announcing earnings for the 3 months and 9 months ended
June 30, 2004.



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(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 Inc.                     
|                       |  | (Registrant)                               
|                       | 
|Date November 15, 2004 |  | /s/ Michael J. Perdue                      
|                       |  | Michael J. Perdue                          
|                       |  | President and Chief Executive Officer      
|                       | 
|Date November 15, 2004 |  | /s/ L. Bruce Mills, Jr.                    
|                       |  | L. Bruce Mills, Jr.                        
|                       |  | Sr. Vice President, Chief Financial Officer



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EXHIBIT INDEX



|            |  |                             
|----------- |  | ----------------------------
|Exhibit No. |  | Description                 
|31.1        |  | Rule 13a-14(a) Certification
|            | 
|31.2        |  | Rule 13a-14(a) Certification
|            | 
|32          |  | Section 1350 Certifications 



44