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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 June 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 jurisdictionof incorporation or organization) |  | (I.R.S. EmployerIdentification 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 June 30, 2004: 4,385,257



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PART 1: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

COMMUNITY BANCORP INC.

CONSOLIDATED BALANCE SHEET

(June 30, 2004 unaudited)(dollars in
thousands, except per share data)



|                                                                                                                                                    |  |              |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                    |  | June 30,2004 |         |   | December 31,2003 |  
|ASSETS:                                                                                                                                             |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                           |  | $            | 17,716  |   |                  | $ | 17,940  |  
|Interest bearing deposits in financial institutions                                                                                                 |  |              | 201     |   |                  |   |        |  
|Federal funds sold                                                                                                                                  |  |              | 28,990  |   |                  |   | 17,925  |  
|Investments:                                                                                                                                        |  |              |         |   |                  |   |         |  
|Held-to-maturity at amortized cost; pledged $4,951 (2004) and $4,809 (2003), estimated fair value of $4,967 (2004) and $7,807
(2003)                |  |              | 4,951   |   |                  |   | 7,687   |  
|Available-for-sale, at estimated fair value; pledged $13,364 (2004) and $2,849 (2003)                                                               |  |              | 13,364  |   |                  |   | 15,921  |  
|Federal Reserve Bank & Federal Home Loan Bank stock, at cost                                                                                        |  |              | 2,767   |   |                  |   | 1,999   |  
|Loans held for investment                                                                                                                           |  |              | 354,230 |   |                  |   | 330,302 |  
|Less allowance for loan losses                                                                                                                      |  |              | (5,715  | ) |                  |   | (5,210  | )
|                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Net loans held for investment                                                                                                                       |  |              | 348,515 |   |                  |   | 325,092 |  
|Loans held for sale                                                                                                                                 |  |              | 92,815  |   |                  |   | 69,120  |  
|Premises and equipment, net                                                                                                                         |  |              | 3,684   |   |                  |   | 3,653   |  
|Other real estate owned and repossessed assets                                                                                                      |  |              | 450     |   |                  |   | 458     |  
|Affordable housing investments                                                                                                                      |  |              | 1,475   |   |                  |   | 1,499   |  
|Accrued interest                                                                                                                                    |  |              | 1,664   |   |                  |   | 1,587   |  
|Other assets                                                                                                                                        |  |              | 6,543   |   |                  |   | 6,136   |  
|Income tax receivable                                                                                                                               |  |              | 288     |   |                  |   |        |  
|Deferred tax asset, net                                                                                                                             |  |              | 3,618   |   |                  |   | 3,569   |  
|Servicing assets, net                                                                                                                               |  |              | 3,499   |   |                  |   | 3,247   |  
|Interest-only strips, at fair value                                                                                                                 |  |              | 1,312   |   |                  |   | 865     |  
|                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Total assets                                                                                                                                        |  | $            | 531,852 |   |                  | $ | 476,698 |  
|                                                                                                                                                    |  |              |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                |  |              |         |   |                  |   |         |  
|Deposits                                                                                                                                            |  |              |         |   |                  |   |         |  
|Interest bearing                                                                                                                                    |  | $            | 363,676 |   |                  | $ | 324,466 |  
|Non-interest bearing                                                                                                                                |  |              | 82,441  |   |                  |   | 68,660  |  
|                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Total deposits                                                                                                                                      |  |              | 446,117 |   |                  |   | 393,126 |  
|Short term borrowing                                                                                                                                |  |              | 24,000  |   |                  |   | 25,000  |  
|Long term debt                                                                                                                                      |  |              | 14,406  |   |                  |   | 14,697  |  
|Accrued expenses and other liabilities                                                                                                              |  |              | 6,804   |   |                  |   | 6,794   |  
|                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                                                   |  |              | 491,327 |   |                  |   | 439,617 |  
|                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Commitments and Contingencies (Note 7)                                                                                                              |  |              |         |   |                  |   |         |  
|Stockholders equity                                                                                                                                |  |              |         |   |                  |   |         |  
|Common stock, $0.625 par value; authorized 10,000,000 shares, issued and outstanding; 4,385,257 at June 30, 2004 and 4,364,942 at December 31,
2003 |  |              | 2,741   |   |                  |   | 2,728   |  
|Additional paid-in capital                                                                                                                          |  |              | 21,001  |   |                  |   | 20,907  |  
|Accumulated other Comprehensive Loss, Net of Taxes of $102 (2004) and $53 (2003)                                                                    |  |              | (147    | ) |                  |   | (75     | )
|Retained earnings                                                                                                                                   |  |              | 16,930  |   |                  |   | 13,521  |  
|                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                          |  |              | 40,525  |   |                  |   | 37,081  |  
|                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                          |  | $            | 531,852 |   |                  | $ | 476,698 |  
|                                                                                                                                                    |  |              |         |   |                  |   |         |  



See
accompanying notes to unaudited consolidated financial statements.



2



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited)(dollars in thousands, except per share data)



|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | --------- | -------------------------------- | ---- | - | --------- |  | - | --------- | - |  | - | ---------
|                                                                                                                                                                                   |  | For the threemonths ended June 30, |           | For the sixmonths ended June 30,
|                                                                                                                                                                                   |  | 2004                               |           |                                  | 2003 |   | 2004      |  |   | 2003     
|Interest Income:                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Interest on loans                                                                                                                                                                  |  | $                                  | 7,195     |                                  |      | $ | 6,344     |  | $ | 14,063    |   |  | $ | 12,413   
|Interest on fed funds sold                                                                                                                                                         |  |                                    | 36        |                                  |      |   | 32        |  |   | 72        |   |  |   | 58       
|Interest on interest bearing deposits in financial institutions                                                                                                                    |  |                                    | 1         |                                  |      |   | 1         |  |   | 2         |   |  |   | 4        
|Interest on trading securities                                                                                                                                                     |  |                                    |          |                                  |      |   | 31        |  |   |          |   |  |   | 89       
|Interest on other investments                                                                                                                                                      |  |                                    | 228       |                                  |      |   | 228       |  |   | 494       |   |  |   | 487      
|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Total interest income                                                                                                                                                              |  |                                    | 7,460     |                                  |      |   | 6,636     |  |   | 14,631    |   |  |   | 13,051   
|Interest Expense:                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Deposits                                                                                                                                                                           |  |                                    | 1,012     |                                  |      |   | 1,362     |  |   | 2,040     |   |  |   | 2,848    
|Short term borrowing                                                                                                                                                               |  |                                    | 30        |                                  |      |   | 62        |  |   | 75        |   |  |   | 137      
|Long term debt                                                                                                                                                                     |  |                                    | 227       |                                  |      |   | 210       |  |   | 452       |   |  |   | 421      
|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Total interest expense                                                                                                                                                             |  |                                    | 1,269     |                                  |      |   | 1,634     |  |   | 2,567     |   |  |   | 3,406    
|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Net interest income before provision for loan losses                                                                                                                               |  |                                    | 6,191     |                                  |      |   | 5,002     |  |   | 12,064    |   |  |   | 9,645    
|Provision for loan losses                                                                                                                                                          |  |                                    | 285       |                                  |      |   | 340       |  |   | 513       |   |  |   | 721      
|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Net interest income after provision for loan losses                                                                                                                                |  |                                    | 5,906     |                                  |      |   | 4,662     |  |   | 11,551    |   |  |   | 8,924    
|Other operating income:                                                                                                                                                            |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Net gain on sale of loans                                                                                                                                                          |  |                                    | 1,847     |                                  |      |   | 1,234     |  |   | 2,986     |   |  |   | 2,371    
|Loan servicing fees, net                                                                                                                                                           |  |                                    | 195       |                                  |      |   | 163       |  |   | 393       |   |  |   | 315      
|Customer service charges                                                                                                                                                           |  |                                    | 190       |                                  |      |   | 181       |  |   | 384       |   |  |   | 368      
|Other fee income                                                                                                                                                                   |  |                                    | 294       |                                  |      |   | 206       |  |   | 621       |   |  |   | 512      
|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Total other operating income                                                                                                                                                       |  |                                    | 2,526     |                                  |      |   | 1,784     |  |   | 4,384     |   |  |   | 3,566    
|Other operating expenses:                                                                                                                                                          |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Salaries and employee benefits                                                                                                                                                     |  |                                    | 2,755     |                                  |      |   | 2,383     |  |   | 5,218     |   |  |   | 4,721    
|Occupancy                                                                                                                                                                          |  |                                    | 335       |                                  |      |   | 322       |  |   | 693       |   |  |   | 639      
|Professional services                                                                                                                                                              |  |                                    | 654       |                                  |      |   | 288       |  |   | 1,084     |   |  |   | 605      
|Depreciation and amortization                                                                                                                                                      |  |                                    | 186       |                                  |      |   | 204       |  |   | 376       |   |  |   | 414      
|Data processing                                                                                                                                                                    |  |                                    | 236       |                                  |      |   | 174       |  |   | 417       |   |  |   | 334      
|Office expenses                                                                                                                                                                    |  |                                    | 165       |                                  |      |   | 154       |  |   | 328       |   |  |   | 316      
|Other expenses                                                                                                                                                                     |  |                                    | 924       |                                  |      |   | 700       |  |   | 1,655     |   |  |   | 1,328    
|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Total other operating expenses                                                                                                                                                     |  |                                    | 5,255     |                                  |      |   | 4,225     |  |   | 9,771     |   |  |   | 8,357    
|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Income before taxes                                                                                                                                                                |  |                                    | 3,177     |                                  |      |   | 2,221     |  |   | 6,164     |   |  |   | 4,133    
|Income taxes                                                                                                                                                                       |  |                                    | 1,200     |                                  |      |   | 858       |  |   | 2,317     |   |  |   | 1,646    
|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Net income                                                                                                                                                                         |  |                                    | 1,977     |                                  |      |   | 1,363     |  |   | 3,847     |   |  |   | 2,487    
|Other comprehensive income - unrealized gain on available for sale securities, net of income taxes of ($140) (2Q 2004) and ($49) ( YTD 2004)
and $17 (2Q 2003) and $18 ( YTD 2003) |  |                                    | (202      | )                                |      |   | 23        |  |   | (73       | ) |  |   | 26       
|Comprehensive income                                                                                                                                                               |  | $                                  | 1,775     |                                  |      | $ | 1,386     |  | $ | 3,774     |   |  | $ | 2,513    
|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Basic earnings per share                                                                                                                                                           |  | $                                  | 0.45      |                                  |      | $ | 0.38      |  | $ | 0.88      |   |  | $ | 0.69     
|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Diluted earnings per share                                                                                                                                                         |  | $                                  | 0.42      |                                  |      | $ | 0.36      |  | $ | 0.82      |   |  | $ | 0.66     
|                                                                                                                                                                                   |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |          
|Average shares outstanding for basic earnings per share                                                                                                                            |  |                                    | 4,383,815 |                                  |      |   | 3,603,509 |  |   | 4,376,951 |   |  |   | 3,582,301
|Average shares outstanding for diluted earnings per share                                                                                                                          |  |                                    | 4,687,753 |                                  |      |   | 3,821,984 |  |   | 4,674,925 |   |  |   | 3,776,485



See accompanying notes to unaudited
consolidated financial statements.



3



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)



|                                                                                               |  |                                  |          |   |      |   |          |  
|---------------------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                               |  | For the six monthsended June 30, |         
|                                                                                               |  | 2004                             |          |   | 2003 |  
|Cash flows from operating activities:                                                          |  |                                  |          |   |      |   |          |  
|Net income                                                                                     |  | $                                | 3,847    |   |      | $ | 2,487    |  
|Adjustments to reconcile net income to net cash (used in) provided by operating activities:    |  |                                  |          |   |      |   |          |  
|Depreciation and amortization                                                                  |  |                                  | 376      |   |      |   | 414      |  
|Provision for loan losses                                                                      |  |                                  | 513      |   |      |   | 721      |  
|Net amortization (accretion) of premiums (discounts) on investment securities                  |  |                                  | 59       |   |      |   | 127      |  
|Amortization of Affordable Housing Investment                                                  |  |                                  | 140      |   |      |   | 30       |  
|Loan origination fees and gains on loan sales deferred, net of loan origination costs deferred |  |                                  | 202      |   |      |   | 389      |  
|Cash portion of gain on sale of loans                                                          |  |                                  | (2,514   | ) |      |   | (2,266   | )
|Change in unrealized gain on interest-only strips                                              |  |                                  | 101      |   |      |   | 93       |  
|Capitalization of interest-only strips                                                         |  |                                  | (548     | ) |      |   | (138     | )
|Capitalization of servicing asset                                                              |  |                                  | (458     | ) |      |   | (441     | )
|Amortization of servicing asset                                                                |  |                                  | 204      |   |      |   | 172      |  
|Change in valuation allowance for servicing asset                                              |  |                                  | 2        |   |      |   | (15      | )
|Loss on trading securities                                                                     |  |                                  |         |   |      |   | 16       |  
|Unrealized (gain) loss on interest rate swap agreement                                         |  |                                  | 291      |   |      |   | (465     | )
|Unrealized hedging gain on trust preferred securities                                          |  |                                  | (291     | ) |      |   | 465      |  
|Origination of loans held for sale                                                             |  |                                  | (65,343  | ) |      |   | (33,349  | )
|Proceeds from sale of loans held for sale                                                      |  |                                  | 37,520   |   |      |   | 45,083   |  
|Decrease in restricted cash                                                                    |  |                                  |         |   |      |   | 1,152    |  
|Decrease (increase) in income tax receivable                                                   |  |                                  | (288     | ) |      |   | 220      |  
|Decrease in income tax payable                                                                 |  |                                  | (146     | ) |      |   |         |  
|Decrease (increase) in accrued interest and other assets                                       |  |                                  | (474     | ) |      |   | (1,433   | )
|Decrease in accrued expenses and other liabilities                                             |  |                                  | (136     | ) |      |   | (64      | )
|                                                                                               |  |                                  |          |   |      |   |          |  
|Net cash provided by operating activities                                                      |  |                                  | (26,943  | ) |      |   | 13,198   |  
|                                                                                               |  |                                  |          |   |      |   |          |  
|Cash flows from investing activities:                                                          |  |                                  |          |   |      |   |          |  
|Origination of loans held for investment                                                       |  |                                  | (139,274 | ) |      |   | (126,061 | )
|Proceeds from principal paid on loans held for investment                                      |  |                                  | 121,778  |   |      |   | 86,479   |  
|Net change in interest bearing deposits in financial institutions                              |  |                                  | (201     | ) |      |   |         |  
|Purchase of trading securities                                                                 |  |                                  |         |   |      |   | (23,090  | )
|Sale of trading securities                                                                     |  |                                  |         |   |      |   | 36,000   |  
|Purchases of investments held-to-maturity                                                      |  |                                  |         |   |      |   | (1,260   | )
|Maturities of investments held-to-maturity                                                     |  |                                  | 2,723    |   |      |   | 7,671    |  
|Purchase of available-for-sale investments                                                     |  |                                  |         |   |      |   | (4,078   | )
|Maturities of available-for-sale investments                                                   |  |                                  | 2,390    |   |      |   | 422      |  
|Purchases of Federal Reserve & Federal Home Loan Bank stocks                                   |  |                                  | (768     | ) |      |   | (738     | )
|Proceeds from sale of OREO and repossessed assets                                              |  |                                  | 8        |   |      |   |         |  
|Increase in Affordable Housing Investment                                                      |  |                                  | (126     | ) |      |   | (960     | )
|Purchases of premises and equipment                                                            |  |                                  | (407     | ) |      |   | (111     | )
|Net (increase) decrease in Federal Funds sold                                                  |  |                                  | (11,065  | ) |      |   | (1,015   | )
|                                                                                               |  |                                  |          |   |      |   |          |  
|Net cash used in investing activities                                                          |  |                                  | (24,942  | ) |      |   | (26,741  | )
|                                                                                               |  |                                  |          |   |      |   |          |  



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



4



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)



|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                        |  | For the six monthsended June 30, |       
|                                                                                                                                                                        |  | 2004                             |        |   | 2003 |  
|Cash flows from financing activities:                                                                                                                                   |  |                                  |        |   |      |   |        |  
|Net increase/(decrease) in deposits:                                                                                                                                    |  |                                  |        |   |      |   |        |  
|Interest bearing                                                                                                                                                        |  | $                                | 39,210 |   |      | $ | (3,245 | )
|Non-interest bearing                                                                                                                                                    |  |                                  | 13,781 |   |      |   | 12,351 |  
|Proceeds from exercise of stock options                                                                                                                                 |  |                                  | 108    |   |      |   | 378    |  
|Cash dividends paid                                                                                                                                                     |  |                                  | (438   | ) |      |   |       |  
|Net (decrease) increase in short term borrowing                                                                                                                         |  |                                  | (1,000 | ) |      |   | 10,332 |  
|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  
|Net cash provided by financing activities                                                                                                                               |  |                                  | 51,661 |   |      |   | 19,816 |  
|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                                                                                                    |  |                                  | (224   | ) |      |   | 6,273  |  
|Cash and cash equivalents at beginning of period                                                                                                                        |  |                                  | 17,940 |   |      |   | 11,814 |  
|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                                                                                              |  | $                                | 17,716 |   |      | $ | 18,087 |  
|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  
|Supplemental disclosure of cash flow information:                                                                                                                       |  |                                  |        |   |      |   |        |  
|Cash paid during the period for:                                                                                                                                        |  |                                  |        |   |      |   |        |  
|Interest on time deposits                                                                                                                                               |  |                                  | 1,926  |   |      |   | 3,465  |  
|Interest on other borrowings                                                                                                                                            |  |                                  | 517    |   |      |   | 550    |  
|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  
|Total interest paid                                                                                                                                                     |  | $                                | 2,443  |   |      | $ | 4,015  |  
|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  
|Income Taxes                                                                                                                                                            |  | $                                | 2,755  |   |      | $ | 1,425  |  
|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  
|Supplemental disclosure of non-cash investing activities:                                                                                                               |  |                                  |        |   |      |   |        |  
|Loans transferred to other real estate owned                                                                                                                            |  | $                                |       |   |      | $ | 721    |  
|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  
|Loans held for sale transferred to held for investment                                                                                                                  |  | $                                | 689    |   |      | $ | 1,493  |  
|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  
|Loans held for investment transferred to held for sale                                                                                                                  |  | $                                | 1,072  |   |      | $ | 6,757  |  
|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  
|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 |  | $                                | (73    | ) |      | $ | 26     |  
|                                                                                                                                                                        |  |                                  |        |   |      |   |        |  



See
accompanying notes to unaudited consolidated financial statements.



5



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COMMUNITY BANCORP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 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 June 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 a 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 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.



6



---

Note 4 Stock Option Plans



At June 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 June 30:



|                                                                                                                                                |  |                                                  |       |   |                                   |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ----- | - | --------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                                                                |  | For the three months ended June 30,              |       |   | For the six months ended June 30, |  
|                                                                                                                                                |  | 2004                                             |       |   | 2003                              |   |       | 2004 |  |   | 2003  |  
|                                                                                                                                                |  | (dollars in thousands, except per share amounts) |      
|Net income, as reported                                                                                                                         |  | $                                                | 1,977 |   |                                   | $ | 1,363 |      |  | $ | 3,847 |   |  | $ | 2,487 |  
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                                                  | (59   | ) |                                   |   | (52   | )    |  |   | (116  | ) |  |   | (80   | )
|                                                                                                                                                |  |                                                  |       |   |                                   |   |       |      |  |   |       |   |  |   |       |  
|Proforma net income                                                                                                                             |  | $                                                | 1,918 |   |                                   | $ | 1,311 |      |  | $ | 3,731 |   |  | $ | 2,407 |  
|                                                                                                                                                |  |                                                  |       |   |                                   |   |       |      |  |   |       |   |  |   |       |  
|Basic income per share, as reported                                                                                                             |  | $                                                | 0.45  |   |                                   | $ | 0.38  |      |  | $ | 0.88  |   |  | $ | 0.69  |  
|Proforma basic income per share                                                                                                                 |  | $                                                | 0.44  |   |                                   | $ | 0.36  |      |  | $ | 0.85  |   |  | $ | 0.67  |  
|                                                                                                                                                |  |                                                  |       |  
|Diluted income per share, as reported                                                                                                           |  | $                                                | 0.42  |   |                                   | $ | 0.36  |      |  | $ | 0.82  |   |  | $ | 0.66  |  
|Proforma diluted income per share                                                                                                               |  | $                                                | 0.41  |   |                                   | $ | 0.34  |      |  | $ | 0.80  |   |  | $ | 0.64  |  



The per share weighted
average fair value of stock options granted under the plans during the three months ended June 30, 2004 were $10.20 compared to $4.92 for the three months ended June 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 June 30, 2004 - expected dividend yield of 0.99%, a weighted average risk free interest rate of 3.93%, an expected life of 5.0 years and a
volatility of 46.80%; Three months ended June 30, 2003 - no expected dividend yield, a risk free interest rate of 1.39%, an expected life of 5.0 years and a volatility of 40.68%.



The per share weighted average fair value of stock options granted under the plans during the six months ended June 30, 2004
were $9.30 compared to $3.95 for the six months ended June 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: Six months ended June
30, 2004 - expected dividend yield of 1.06%, a weighted average risk free interest rate of 3.39%, an expected life of 5.0 years and a volatility of 47.41%; Six months ended June 30, 2003 - no expected dividend yield, a risk free interest rate of
1.47%, an expected life of 5.0 years and a volatility of 40.73%.



7



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Note 5 Loans and Related Allowance for Loan Losses:



A summary of loans is as follows:



|                                                       |  |                        |        |   |                         |   |         |             |  |   |                    |   |  |                         |        |   |             |   |         |   |  |   |         |  
|------------------------------------------------------ |  | ---------------------- | ------ | - | ----------------------- | - | ------- | ----------- |  | - | ------------------ | - |  | ----------------------- | ------ | - | ----------- | - | ------- | - |  | - | ------- | -
|                                                       |  | June 30, 2004          |        |   | December 31, 2003       |  
|                                                       |  | Loans Heldfor Sale     |        |   | Loans HeldforInvestment |   |         | Total Loans |  |   | Loans Heldfor Sale |   |  | Loans HeldforInvestment |        |   | Total Loans |  
|                                                       |  | (dollars in thousands) |       
|Construction loans                                     |  | $                      |       |   |                         | $ | 66,084  |             |  | $ | 66,084             |   |  | $                       |       |   |             | $ | 66,957  |   |  | $ | 66,957  |  
|Real estate one- to four-family                        |  |                        |       |   |                         |   | 6,794   |             |  |   | 6,794              |   |  |                         |       |   |             |   | 9,671   |   |  |   | 9,671   |  
|Real estate multi-family                               |  |                        |       |   |                         |   | 7,018   |             |  |   | 7,018              |   |  |                         |       |   |             |   | 6,440   |   |  |   | 6,440   |  
|Real estate commercial                                 |  |                        | 92,792 |   |                         |   | 223,474 |             |  |   | 316,266            |   |  |                         | 69,148 |   |             |   | 194,779 |   |  |   | 263,927 |  
|Consumer home equity lines of credit                   |  |                        |       |   |                         |   | 1,465   |             |  |   | 1,465              |   |  |                         |       |   |             |   | 1,933   |   |  |   | 1,933   |  
|Other consumer                                         |  |                        |       |   |                         |   | 1,659   |             |  |   | 1,659              |   |  |                         |       |   |             |   | 2,085   |   |  |   | 2,085   |  
|Commercial                                             |  |                        |       |   |                         |   | 21,642  |             |  |   | 21,642             |   |  |                         |       |   |             |   | 20,590  |   |  |   | 20,590  |  
|Aircraft                                               |  |                        |       |   |                         |   | 28,869  |             |  |   | 28,869             |   |  |                         |       |   |             |   | 30,368  |   |  |   | 30,368  |  
|                                                       |  |                        |        |   |                         |   |         |             |  |   |                    |   |  |                         |        |   |             |   |         |   |  |   |         |  
|Total gross loans                                      |  |                        | 92,792 |   |                         |   | 357,005 |             |  |   | 449,797            |   |  |                         | 69,148 |   |             |   | 332,823 |   |  |   | 401,971 |  
|                                                       |  |                        |        |   |                         |  
|Deferred loan origination costs (fees)                 |  |                        | 239    |   |                         |   | (804    | )           |  |   | (565               | ) |  |                         | 181    |   |             |   | (781    | ) |  |   | (600    | )
|Discount on unguaranteed portion of SBA loans retained |  |                        | (216   | ) |                         |   | (1,971  | )           |  |   | (2,187             | ) |  |                         | (209   | ) |             |   | (1,740  | ) |  |   | (1,949  | )
|Allowance for loan losses                              |  |                        |       |   |                         |   | (5,715  | )           |  |   | (5,715             | ) |  |                         |       |   |             |   | (5,210  | ) |  |   | (5,210  | )
|                                                       |  |                        |        |   |                         |   |         |             |  |   |                    |   |  |                         |        |   |             |   |         |   |  |   |         |  
|Net loans                                              |  | $                      | 92,815 |   |                         | $ | 348,515 |             |  | $ | 441,330            |   |  | $                       | 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 June 30, 2004 and December 31,
2003, the valuation allowance for the servicing assets was $36,000 and $35,000, respectively. In estimating fair values at June 30, 2004 and December 31, 2003, the Company utilized a weighted average prepayment assumption of approximately 7.37% and
a discount rate of 10.00%.



8



---

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 six months ended June 30, 2004 and 2003. At June 30, 2004 and December 31, 2003, the fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 7.37% 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 $32,196,000 and $37,470,000 were outstanding at June 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 $100,386,000 and $100,014,000 as of June 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 $2,626,000 and $1,512,000 were outstanding at June 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 $23,836,000 and $25,845,000 were outstanding at June 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 June 30, 2004 and December 31, 2003.



As of June 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 rate swap agreement or $945,000. As of June 30, 2004, the collateral requirement was $1.4 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 June 30, 2004 and December 31, 2003, the Company pledged one agency mortgage backed security
classified as available for



9



---

sale as collateral with a market value of $1.7 million and $1.5 million, respectively. The unrealized loss on the
interest rate swap was ($594,000) and ($303,000) as of June 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 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 June 28, 2004, the Company entered
into a definitive agreement to acquire Cuyamaca Bank, N.A. (OTCBB:CUYA), a commercial bank, with assets of approximately $116.8 million for an aggregate purchase price estimated at $25.2 million. Under the agreement, Cuyamaca Bank will be
merged with and into Community National Bank, the wholly-owned subsidiary of the Company. Shareholders of Cuyamaca will have the right to select cash, common stock of the Company or a combination in exchange for their shares of Cuyamaca. The
agreement provides that 70% of the total consideration must be in common stock of the Company. The transaction is expected to be closed in the third quarter of 2004.



Cuyamaca Bank, which was founded in 1983, 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. It also has an SBA Department in La Mesa. The acquisition is subject to, among other things, approval by bank regulators and shareholder approval of Cuyamaca Bank.



10



---

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 six months ended June 30,   |      
|                                                                               |  | 2004                                |       |                     | 2003      |                
|                                                                               |  | Earnings(Numerator)                 |       | Shares(Denominator) |           | Per ShareAmount |   |       | Earnings(Numerator) |  | Shares(Denominator) |       | Per ShareAmount |          
|Net Earnings                                                                   |  | $                                   | 3,847 |                     |           |                 |   |       |                     |  | $                   | 2,487 |                 |           |  |   |       |  
|                                                                               |  |                                     |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  
|Basis EPS Earnings available to common shareholders                            |  | $                                   | 3,847 |                     | 4,376,951 |                 | $ | 0.88  |                     |  | $                   | 2,487 |                 | 3,582,301 |  | $ | 0.69  |  
|Effect of Dilutive Securities Options                                          |  |                                     |      |                     | 297,974   |                 |   | (0.06 | )                   |  |                     |      |                 | 194,184   |  |   | (0.03 | )
|                                                                               |  |                                     |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  
|Diluted EPS Earnings Available to common Shareholders plus assumed Conversions |  | $                                   | 3,847 |                     | 4,674,925 |                 | $ | 0.82  |                     |  | $                   | 2,487 |                 | 3,776,485 |  | $ | 0.66  |  
|                                                                               |  |                                     |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  
|                                                                               | 
|                                                                               |  | For the three months ended June 30, |      
|                                                                               |  | 2004                                |       |                     | 2003      |                
|                                                                               |  | Earnings(Numerator)                 |       | Shares(Denominator) |           | Per ShareAmount |   |       | Earnings(Numerator) |  | Shares(Denominator) |       | Per ShareAmount |          
|Net Earnings                                                                   |  | $                                   | 1,977 |                     |           |                 |   |       |                     |  | $                   | 1,363 |                 |           |  |   |       |  
|                                                                               |  |                                     |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  
|Basis EPS Earnings available to common shareholders                            |  | $                                   | 1,977 |                     | 4,383,815 |                 | $ | 0.45  |                     |  | $                   | 1,363 |                 | 3,603,509 |  | $ | 0.38  |  
|Effect of Dilutive Securities Options                                          |  |                                     |      |                     | 303,938   |                 |   | (0.03 | )                   |  |                     |      |                 | 218,475   |  |   | (0.02 | )
|                                                                               |  |                                     |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  
|Diluted EPS Earnings Available to common Shareholders plus assumed Conversions |  | $                                   | 1,977 |                     | 4,687,753 |                 | $ | 0.42  |                     |  | $                   | 1,363 |                 | 3,821,984 |  | $ | 0.36  |  
|                                                                               |  |                                     |       |                     |           |                 |   |       |                     |  |                     |       |                 |           |  |   |       |  



11



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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) Division. The Company determines
operating results of each segment based on an internal management system that allocates certain expenses to each.



|                                     |  |                                     |         |   |             |   |        |              |  |   |                 |   |  |             |         |   |              |   |        |   |  |   |         |  
|------------------------------------ |  | ----------------------------------- | ------- | - | ----------- | - | ------ | ------------ |  | - | --------------- | - |  | ----------- | ------- | - | ------------ | - | ------ | - |  | - | ------- | -
|                                     |  | For the six months ended June 30,   |        
|                                     |  | 2004                                |         |   | 2003        |  
|                                     |  | BankingDivision                     |         |   | SBADivision |   |        | TotalCompany |  |   | BankingDivision |   |  | SBADivision |         |   | TotalCompany |  
|                                     |  | (dollars in thousands)              |        
|Interest income                      |  | $                                   | 12,347  |   |             | $ | 2,284  |              |  | $ | 14,631          |   |  | $           | 11,141  |   |              | $ | 1,910  |   |  | $ | 13,051  |  
|Interest expense                     |  |                                     | (1,939  | ) |             |   | (628   | )            |  |   | (2,567          | ) |  |             | (2,669  | ) |              |   | (737   | ) |  |   | (3,406  | )
|                                     |  |                                     |         |   |             |   |        |              |  |   |                 |   |  |             |         |   |              |   |        |   |  |   |         |  
|Net interest income before provision |  |                                     | 10,408  |   |             |   | 1,656  |              |  |   | 12,064          |   |  |             | 8,472   |   |              |   | 1,173  |   |  |   | 9,645   |  
|Provision for loan losses            |  |                                     | (450    | ) |             |   | (63    | )            |  |   | (513            | ) |  |             | (523    | ) |              |   | (198   | ) |  |   | (721    | )
|Other income                         |  |                                     | 1,574   |   |             |   | 2,810  |              |  |   | 4,384           |   |  |             | 1,555   |   |              |   | 2,011  |   |  |   | 3,566   |  
|Other expenses                       |  |                                     | (7,977  | ) |             |   | (1,794 | )            |  |   | (9,771          | ) |  |             | (6,888  | ) |              |   | (1,469 | ) |  |   | (8,357  | )
|                                     |  |                                     |         |   |             |   |        |              |  |   |                 |   |  |             |         |   |              |   |        |   |  |   |         |  
|Income before income taxes           |  |                                     | 3,555   |   |             |   | 2,609  |              |  |   | 6,164           |   |  |             | 2,616   |   |              |   | 1,517  |   |  |   | 4,133   |  
|Income taxes                         |  |                                     | (1,247  | ) |             |   | (1,070 | )            |  |   | (2,317          | ) |  |             | (1,015  | ) |              |   | (630   | ) |  |   | (1,646  | )
|                                     |  |                                     |         |   |             |   |        |              |  |   |                 |   |  |             |         |   |              |   |        |   |  |   |         |  
|Net income                           |  | $                                   | 2,308   |   |             | $ | 1,539  |              |  | $ | 3,847           |   |  | $           | 1,601   |   |              | $ | 886    |   |  | $ | 2,487   |  
|                                     |  |                                     |         |   |             |   |        |              |  |   |                 |   |  |             |         |   |              |   |        |   |  |   |         |  
|Assets employed at quarter end       |  | $                                   | 448,831 |   |             | $ | 83,021 |              |  | $ | 531,852         |   |  | $           | 373,512 |   |              | $ | 65,292 |   |  | $ | 438,804 |  
|                                     |  |                                     |         |   |             |   |        |              |  |   |                 |   |  |             |         |   |              |   |        |   |  |   |         |  
|                                     | 
|                                     |  | For the three months ended June 30, |        
|                                     |  | 2004                                |         |   | 2003        |  
|                                     |  | BankingDivision                     |         |   | SBADivision |   |        | TotalCompany |  |   | BankingDivision |   |  | SBADivision |         |   | TotalCompany |  
|                                     |  | (dollars in thousands)              |        
|Interest income                      |  | $                                   | 6,296   |   |             | $ | 1,164  |              |  | $ | 7,460           |   |  | $           | 5,690   |   |              | $ | 946    |   |  | $ | 6,636   |  
|Interest expense                     |  |                                     | (958    | ) |             |   | (311   | )            |  |   | (1,269          | ) |  |             | (1,331  | ) |              |   | (303   | ) |  |   | (1,634  | )
|                                     |  |                                     |         |   |             |   |        |              |  |   |                 |   |  |             |         |   |              |   |        |   |  |   |         |  
|Net interest income before provision |  |                                     | 5,338   |   |             |   | 853    |              |  |   | 6,191           |   |  |             | 4,359   |   |              |   | 643    |   |  |   | 5,002   |  
|Provision for loan losses            |  |                                     | (326    | ) |             |   | 41     |              |  |   | (285            | ) |  |             | (147    | ) |              |   | (193   | ) |  |   | (340    | )
|Other income                         |  |                                     | 849     |   |             |   | 1,677  |              |  |   | 2,526           |   |  |             | 936     |   |              |   | 848    |   |  |   | 1,784   |  
|Other expenses                       |  |                                     | (4,278  | ) |             |   | (977   | )            |  |   | (5,255          | ) |  |             | (3,480  | ) |              |   | (745   | ) |  |   | (4,225  | )
|                                     |  |                                     |         |   |             |   |        |              |  |   |                 |   |  |             |         |   |              |   |        |   |  |   |         |  
|Income before income taxes           |  |                                     | 1,583   |   |             |   | 1,594  |              |  |   | 3,177           |   |  |             | 1,668   |   |              |   | 553    |   |  |   | 2,221   |  
|Income taxes                         |  |                                     | (546    | ) |             |   | (654   | )            |  |   | (1,200          | ) |  |             | (628    | ) |              |   | (230   | ) |  |   | (858    | )
|                                     |  |                                     |         |   |             |   |        |              |  |   |                 |   |  |             |         |   |              |   |        |   |  |   |         |  
|Net income                           |  | $                                   | 1,037   |   |             | $ | 940    |              |  | $ | 1,977           |   |  | $           | 1,040   |   |              | $ | 323    |   |  | $ | 1,363   |  
|                                     |  |                                     |         |   |             |   |        |              |  |   |                 |   |  |             |         |   |              |   |        |   |  |   |         |  
|Asset employed at quarter end        |  | $                                   | 448,831 |   |             | $ | 83,021 |              |  | $ | 531,852         |   |  | $           | 373,512 |   |              | $ | 65,292 |   |  | $ | 438,804 |  
|                                     |  |                                     |         |   |             |   |        |              |  |   |                 |   |  |             |         |   |              |   |        |   |  |   |         |  



12



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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 June 30, 2003. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of SFAS No. 149 did not have a material impact on the Companys financial condition, results of operations or cash flows.



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



In March of 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 115Accounting 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. 18The 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 including adjustments for amortization, accretion, foreign exchange, and hedging. 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. The investor should consider its cash or working capital needs to assess its intent and ability to hold an investment for a reasonable period of time for the recovery of fair value up to or beyond the cost of the
investment. Although not presumptive, a pattern of selling investments prior to the forecasted recovery of fair value may call into question the investors intent. In addition, 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. The Company is currently
evaluating the impact of the new accounting guidance on its process for determining whether other-than-temporary declines exist within its debt and equity investment portfolio. Adoption of this standard may accelerate the timing of losses from
declines in value due to interest rates; however, it is not anticipated to have a significant impact on equity as fluctuations in market value of available for sale securities are already reflected in Accumulated Other Comprehensive Income.



13



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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 six months ended June 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 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 June 30, 2004, we had total assets of $532 million, total deposits of
$446 million and stockholders equity of $41 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, 2003 FDIC data, our five branches have an 8.1% 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.



14



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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.
| | - | ---------------------



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 six months ended June 30, 2004 increased 55% to $3.8 million compared to $2.5 million for the six months ended June 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 $0.88 for the six months ended June 30, 2004 compared to $0.69 for the six
months ended June 30, 2003. Diluted EPS increased to $0.82 for the six months ended June 30, 2004 compared to $0.66 for the six months ended June 30, 2003. Our ROE was 19.58% for the six months ended June 30, 2004 compared to 22.60% for the six
months ended June 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 six months ended June 30, 2004 increased to 1.56% compared to 1.17% for the six months ended June 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 25% to $12.1 million for the six months ended June 30, 2004 compared to $9.6 million for the six months ended June 30, 2003. Our net interest margin has also improved to 5.30% for the six months ended June 30,
2004 compared to 4.89% for the six months ended June 30, 2003.



We have also improved our non-interest income. Non-interest income for the six months ended June 30, 2004 was $4.4 million compared to $3.6 million for the six months ended June 30, 2003. Gain on sale of loans increased to $3.0 million for
the six months ended June 30, 2004 compared to $2.4 million for the six months ended June 30, 2003, consistent with the Companys goal of having an average gain on sale of loans between $1.0 million and $1.5 million per quarter. Loan servicing
fees increased 25% to $393,000 for the first half of 2004 compared to $315,000 for the first half 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



15



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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. For example, the SBA 7a program was halted briefly in January 2004, and when the program returned to operation, the maximum loan size had been decreased from $1.3 million to $750,000 per loan. Furthermore,
the loans could no longer be secured by a second trust deed as previously allowed under the rules. However, with increased funding from new legislation in April, the SBA rescinded the $750,000 loan cap and piggyback loans were once again allowed.



Customer service charges have increased to $384,000 for the
first half of 2004 compared to $368,000 for the same period in 2003 due to an increase in average transaction accounts. Other fee income increased to $621,000 for the first six months of 2004 compared to $512,000 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 $1.7 million as of June 30, 2004 compared to
$961,000 as of December 31, 2003. Non-performing loans as a percentage of gross loans increased to 0.38% as of June 30, 2004 compared to 0.24% as of December 31, 2003. Net of government guarantees, non-performing loans totaled $710,000, or 0.16% of
total loans as of June 30, 2004 compared to $271,000, or 0.07%, as of December 31, 2003. Non-performing assets were $2.1 million as of June 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 0.22% as of June 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 23% (annualized) during the first half of 2004 from $476.7 million as of December 31, 2003 to $531.9 million as of June 30, 2004. Total gross loans increased 24% (annualized) to $449.8 million as of June 30, 2004
compared to $402.0 million as of December 31, 2003. Total deposits increased 27% (annualized) to $446.1 million as of June 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 59.41% for the first half of 2004 compared to 63.26% for the first half 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 25% to $16.4 million for the six months ended June 30, 2004, while
operating expenses increased 17% to $9.8 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



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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.



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 June 30, 2004 and December 31, 2003, we utilized a weighted average prepayment assumption of approximately 7.37% 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 six months ended June 30, 2004 and 2003. At June 30, 2004 and December 31, 2003, the fair value of interest-only strips was estimated using a weighted average prepayment
assumption of approximately 7.37% and a discount rate of 10.00%.



17



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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 June 30, 2004 or December 31, 2003. As of June 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 $2.3 million for the six months ended June 30, 2004 compared to $1.6 million for the six months ended June 30,
2003. The increase in net income for the Banking division was primarily driven by increases in net interest income and a decline in the provision for loan losses, and was partially offset by an increase in non-interest expense. Net interest income
for the Banking division increased from $8.5 million for the six months ended June 30, 2003 to $10.4 million for the six months ended June 30, 2004. This increase is primarily due to the 27% decrease in interest expense from $2.7 million for the six
months ended June 30, 2003 to $1.9 million for the six months ended June 30, 2004. 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 six months ended June 30, 2004 when compared to the same period in 2003. Average transaction accounts increased 32% to $197.4 million for the six
months ended June 30, 2004 compared to $149.6 million for the six months ended June 30, 2003. As a result of the increase in transaction accounts noted above, customer service charges increased to $384,000 for the six months ended June 30, 2004
compared to $368,000 for the six months ended June 30, 2003.



For the quarter ended June 30, 2004 and 2003, net income for the Banking division was $1.0 million. While the net income was flat when comparing the second quarters of 2004 and 2003, the composition of revenues and expenses changed.
Operating expenses for the Banking division increased to $4.3 million for the quarter ended June 30, 2004 compared to $3.5 million for the quarter ended June 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 $4.4 million for the three months ended June 30, 2003 to $5.3 million for the three
months ended June 30, 2004. This increase is primarily due to the 27% decrease in interest expense from $1.3 million for the three months ended June 30, 2003 to $958,000 for the three months ended June 30, 2004. 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 three months ended June
30, 2004 when compared to the same period in 2003. Average transaction accounts increased 31% to $208.5 million for the three months ended June 30, 2004 compared to $159.1 million for the three months ended June 30, 2003. As a result of the increase
in transaction accounts noted above, customer service charges increased to $190,000 for the three months ended June 30, 2004 compared to $181,000 for the three months ended June 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 229% when comparing the first six months of 2004 with the same period in 2003. During the six months ended June 30, 2004 the Banking division originated
$180.5 million in loans, including $64.5 million in SBA 504 loans, compared to $140.1 million during the six months ended June 30, 2003, including $19.6 million in



18



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SBA 504 loans. We sold $13.5 million in SBA 504 loans during the six months ended June 30, 2004 compared to $11.3 million
in SBA 504 loans during the six months ended June 30, 2003. As a result, the net gain on sale of SBA 504 loans for the Banking division increased to $611,000 for the six months ended June 30, 2004 compared to $522,000 for the six months ended June
30, 2003. Fees from the brokering of commercial loans decreased from $270,000 for the six months ended June 30, 2003 to $239,000 for the six months ended June 30, 2004 as a result of shifting demand for the product.



During the three months ended June 30, 2004 the Banking division originated
$108.5 million in loans, including $39.8 million in SBA 504 loans, compared to $72.2 million during the three months ended June 30, 2003, including $12.6 million in 504 loans. We sold $6.8 million in SBA 504 loans during the three months ended June
30, 2004 compared to $7.2 million in SBA 504 loans during the three months ended June 30, 2003. As a result, for the quarter ended June 30, 2004, net gain on sale of loans decreased to $305,000 compared to $391,000 for the quarter ended June 30,
2003. Fees from the brokering of commercial loans decreased from $211,000 for the six months ended June 30, 2003 to $127,000 for the six months ended June 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 $1.5 million for the six months ended June 30, 2004 compared to $886,000 for the six months ended June 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 $1.2 million for the six months ended June 30, 2003 to
$1.7 million for the six months ended June 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 $2.0 million for the six months ended June 30, 2003 to $2.8 million for the six months
ended June 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 $940,000 for the three months ended June 30, 2004 compared to $323,000 for the three months ended June 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 $643,000 for the three months ended June 30, 2003 to $853,000 for the three months ended June 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 $848,000 for the three months ended June 30, 2003 to $1.7 million for the three months ended June 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 $2.4 million for
the six months ended June 30, 2004 compared to $1.8 million for the six months ended June 30, 2003. During the six months ended June 30, 2004 we originated $24.1 million in SBA 7a loans compared to $19.3 million during the six months ended June 30,
2003. We sold $21.5 million in SBA 7a loans during the six months ended June 30, 2004 compared to $20.6 million in SBA 7a loans during the six months ended June 30, 2003. While the dollar amount of sales increased 5%, the gain on sale of loans
increased 33% to $2.4 million due to an increase in the premiums received from the secondary market in 2004 when compared with 2003.



For the quarter ended June 30, 2004, net gain on sale of loans increased to $1.5 million compared to $831,000 for the quarter ended June 30, 2003. During
the three months ended June 30, 2004 we originated $12.3 million in SBA 7a loans compared to $12.2 million during the three months ended June 30, 2003. We sold $13.2 million in SBA 7a loans during the three months ended June 30, 2004 compared to
$8.8 million in SBA 7a loans during the three months ended June 30, 2003. While the dollar amount of sales increased 50%, the gain on sale of loans increased 85% to $1.5 million due to an increase in the premiums received from the secondary market
in 2004 when compared with 2003.



19



---

Loan servicing income increased to $195,000 for the three months ended June 30, 2004 compared to $163,000
for the three months ended June 30, 2003. For the six months ended June 30, 2004, loan servicing income increased to $393,000 compared to $315,000 for the six months ended June 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 June 30, 2004, SBA loans serviced for others increased to $147.1 million compared to $125.7 million as of June 30, 2003. The increase in loans serviced for others is a result of the loans sold in 2003 and the first
six months of 2004, net of principal repayments.



Operating
expenses for the six months ended June 30, 2004 increased to $1.8 million compared to $1.5 million for the six months ended June 30, 2003. During the three months ended June 30, 2004, operating expenses have increased to $977,000 for the SBA
division compared to $745,000 for the three months ended June 30, 2003. Operating expenses for the three months and six months ended June 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 six months of 2004, the expense for efficiency consultants totaled $159,000, compared to none during
the first six 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 June 30, 2004 compared to $1.4 million for the three months ended June 30, 2003. Basic
earnings per share were $0.45 and $0.38 for the three months ended June 30, 2004 and 2003, respectively. Diluted earnings per share were $0.42 and $0.36 for the three months ended June 30, 2004 and 2003, respectively. ROE was 19.73% for the three
months ended June 30, 2004 compared to 24.05% for the three months ended June 30, 2003. The ROA for the three months ended June 30, 2004 was 1.57% compared to 1.27% for the three months ended June 30, 2003.



Net income increased to $3.8 million for the six months ended June 30, 2004
compared to $2.5 million for the six months ended June 30, 2003. Basic earnings per share were $0.88 and $0.69 for the six months ended June 30, 2004 and 2003, respectively. Diluted earnings per share were $0.82 and $0.66 for the six months ended
June 30, 2004 and 2003, respectively. ROE was 19.58% for the six months ended June 30, 2004 compared to 22.60% for the six months ended June 30, 2003. The ROA for the six months ended June 30, 2004 was 1.56% compared to 1.17% for the six months
ended June 30, 2003.



The increase in net income and
profitability for the three months and six months ended June 30, 2004 was mainly due to the increases in net interest income and non-interest income combined with a decrease in the provision for loan losses, 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.



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.



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.



20



---

|                                               |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|---------------------------------------------- |  | ----------------------------------- | ------- | ------------------- | ---- | ----------------- |  | ---- | -------------- |  | ------------------- | ------- | ----------------- | - | ----- |  | ---- | -
|                                               |  | For the three months ended June 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    |  | $                                   | 25,434  |                     | $    | 229               |  | 3.62 | %              |  | $                   | 29,176  |                   | $ | 260   |  | 3.57 | %
|Fed funds sold                                 |  |                                     | 14,521  |                     |      | 36                |  | 1.00 | %              |  |                     | 10,923  |                   |   | 32    |  | 1.18 | %
|Loans:                                         |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Commercial                                     |  |                                     | 148,108 |                     |      | 2,363             |  | 6.42 | %              |  |                     | 106,232 |                   |   | 1,722 |  | 6.50 | %
|Real Estate                                    |  |                                     | 245,697 |                     |      | 4,261             |  | 6.98 | %              |  |                     | 221,659 |                   |   | 3,963 |  | 7.17 | %
|Aircraft                                       |  |                                     | 29,668  |                     |      | 514               |  | 6.97 | %              |  |                     | 29,499  |                   |   | 555   |  | 7.55 | %
|Consumer                                       |  |                                     | 3,183   |                     |      | 57                |  | 7.20 | %              |  |                     | 5,344   |                   |   | 104   |  | 7.81 | %
|                                               |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total loans                                    |  |                                     | 426,656 |                     |      | 7,195             |  | 6.78 | %              |  |                     | 362,734 |                   |   | 6,344 |  | 7.01 | %
|                                               |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total earning assets                           |  |                                     | 466,611 |                     |      | 7,460             |  | 6.43 | %              |  |                     | 402,833 |                   |   | 6,636 |  | 6.61 | %
|Non earning assets                             |  |                                     | 36,659  |                     |      |                   |  |      |                |  |                     | 27,848  |                   |   |       |  |      |  
|                                               |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total average assets                           |  | $                                   | 503,270 |                     |      |                   |  |      |                |  | $                   | 430,681 |                   |   |       |  |      |  
|                                               |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Average liabilities and shareholders equity:  |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Interest bearing deposits:                     |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Savings and interest bearing accounts          |  | $                                   | 124,198 |                     |      | 140               |  | 0.45 | %              |  | $                   | 98,924  |                   |   | 197   |  | 0.80 | %
|Time deposits                                  |  |                                     | 222,542 |                     |      | 872               |  | 1.58 | %              |  |                     | 211,983 |                   |   | 1,165 |  | 2.20 | %
|                                               |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total interest bearing deposits                |  |                                     | 346,740 |                     |      | 1,012             |  | 1.17 | %              |  |                     | 310,907 |                   |   | 1,362 |  | 1.76 | %
|Short term borrowing                           |  |                                     | 10,708  |                     |      | 30                |  | 1.13 | %              |  |                     | 19,173  |                   |   | 62    |  | 1.30 | %
|Long term debt (1)                             |  |                                     | 14,506  |                     |      | 227               |  | 6.29 | %              |  |                     | 12,019  |                   |   | 210   |  | 7.01 | %
|                                               |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total interest bearing liabilities             |  |                                     | 371,954 |                     |      | 1,269             |  | 1.37 | %              |  |                     | 342,099 |                   |   | 1,634 |  | 1.92 | %
|Demand deposits                                |  |                                     | 84,289  |                     |      |                   |  |      |                |  |                     | 60,152  |                   |   |       |  |      |  
|Accrued expenses and other liabilities         |  |                                     | 6,940   |                     |      |                   |  |      |                |  |                     | 5,759   |                   |   |       |  |      |  
|Net shareholders equity                       |  |                                     | 40,087  |                     |      |                   |  |      |                |  |                     | 22,671  |                   |   |       |  |      |  
|                                               |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total average liabilities shareholders equity |  | $                                   | 503,270 |                     | $    | 6,191             |  |      |                |  | $                   | 430,681 |                   | $ | 5,002 |  |      |  
|                                               |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Net interest spread                            |  |                                     |         |                     |      |                   |  | 5.06 | %              |  |                     |         |                   |   |       |  | 4.69 | %
|                                               |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Net interest margin                            |  |                                     |         |                     |      |                   |  | 5.34 | %              |  |                     |         |                   |   |       |  | 4.98 | %
|                                               |  |                                     |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  

---

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



Interest income for the three months ended June 30, 2004 increased to $7.5 million compared to $6.6 million for the three months ended June 30, 2003. The
increase was due to the 15.83% increase in the average balance of interest earning assets, and was partially offset by a decrease 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 $466.6 million for the three
months ended June 30, 2004 compared to $402.8 million for the three months ended June 30, 2003. The yield on interest earning assets decreased to 6.43% for the three months ended June 30, 2004 compared to 6.61% for the three months ended June 30,
2003. The largest single component of interest earning assets was real estate loans receivable, which had an average balance of $245.7 million with a yield of 6.98% for the three months ended June 30, 2004 compared to $221.7 million with a yield of
7.17% for the three months ended June 30, 2003.



Interest
expense for the three months ended June 30, 2004 decreased to $1.3 million compared to $1.6 million for the three months ended June 30, 2003. This decrease was due to the repricing of maturing certificates of deposit (CDs) following a
5.25% 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 $372.0 million for the three months ended
June 30, 2004 compared to $342.1 million for the three months ended June 30, 2003. Average time deposits, the largest component of interest bearing liabilities, increased to $222.5 million with a cost of 1.58% for the three months ended June 30,
2004 compared to $212.0 million with a cost of 2.20% for the three months ended June 30, 2003.



21



---

Other average borrowings decreased to $25.2 million with a cost of 4.10% for the three months ended June
30, 2004 compared to $31.2 million with a cost of 3.50% for the three months ended June 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 7.01% for the three months ended June 30, 2003 to 6.29% for the three months ended June 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 40% from an average $60.2 million for the three months ended June 30,
2003 to $84.3 million for the three months ended June 30, 2004. The cost of deposits, including demand deposits and interest bearing deposits, decreased to 0.94% for the three months ended June 30, 2004 compared to 1.47% for the three months ended
June 30, 2003. Average transaction accounts (including interest bearing checking, demand deposits, money market accounts and savings accounts), increased 31% to $208.5 million for the three months ended June 30, 2004 compared to $159.1 million for
the three months ended June 30, 2003. The cost of funds, including interest bearing liabilities and demand deposits, was reduced 51 basis points to 1.12% for the three months ended June 30, 2004 compared to 1.63% for the three months ended June 30,
2003.



22



---

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 six months ended June 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   |  | $                                 | 25,873  |                     | $    | 496               |  | 3.86 | %              |  | $                   | 32,090  |                   | $ | 580    |  | 3.64 | %
|Fed funds sold                                |  |                                   | 15,008  |                     |      | 72                |  | 0.96 | %              |  |                     | 9,946   |                   |   | 58     |  | 1.18 | %
|Loans:                                        |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Commercial                                    |  |                                   | 142,910 |                     |      | 4,526             |  | 6.37 | %              |  |                     | 107,550 |                   |   | 3,469  |  | 6.50 | %
|Real Estate                                   |  |                                   | 239,871 |                     |      | 8,341             |  | 6.99 | %              |  |                     | 213,079 |                   |   | 7,607  |  | 7.20 | %
|Aircraft                                      |  |                                   | 30,286  |                     |      | 1,062             |  | 7.05 | %              |  |                     | 29,371  |                   |   | 1,105  |  | 7.59 | %
|Consumer                                      |  |                                   | 3,602   |                     |      | 134               |  | 7.48 | %              |  |                     | 6,037   |                   |   | 232    |  | 7.75 | %
|                                              |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total loans                                   |  |                                   | 416,669 |                     |      | 14,063            |  | 6.79 | %              |  |                     | 356,037 |                   |   | 12,413 |  | 7.03 | %
|                                              |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total earning assets                          |  |                                   | 457,550 |                     |      | 14,631            |  | 6.43 | %              |  |                     | 398,073 |                   |   | 13,051 |  | 6.61 | %
|Non earning assets                            |  |                                   | 35,477  |                     |      |                   |  |      |                |  |                     | 26,289  |                   |   |        |  |      |  
|                                              |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total average assets                          |  | $                                 | 493,027 |                     |      |                   |  |      |                |  | $                   | 424,362 |                   |   |        |  |      |  
|                                              |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Average liabilities and shareholders equity:  |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Interest bearing deposits:                    |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Savings and interest bearing accounts         |  | $                                 | 118,700 |                     |      | 283               |  | 0.48 | %              |  | $                   | 93,472  |                   |   | 377    |  | 0.81 | %
|Time deposits                                 |  |                                   | 221,395 |                     |      | 1,757             |  | 1.60 | %              |  |                     | 213,800 |                   |   | 2,471  |  | 2.33 | %
|                                              |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total interest bearing deposits               |  |                                   | 340,095 |                     |      | 2,040             |  | 1.21 | %              |  |                     | 307,272 |                   |   | 2,848  |  | 1.87 | %
|Short term borrowing                          |  |                                   | 13,565  |                     |      | 75                |  | 1.11 | %              |  |                     | 21,361  |                   |   | 137    |  | 1.29 | %
|Long term debt (1)                            |  |                                   | 14,686  |                     |      | 452               |  | 6.19 | %              |  |                     | 12,004  |                   |   | 421    |  | 7.07 | %
|                                              |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total interest bearing liabilities            |  |                                   | 368,346 |                     |      | 2,567             |  | 1.40 | %              |  |                     | 340,637 |                   |   | 3,406  |  | 2.02 | %
|Demand deposits                               |  |                                   | 78,695  |                     |      |                   |  |      |                |  |                     | 56,153  |                   |   |        |  |      |  
|Accrued expenses and other liabilities        |  |                                   | 6,698   |                     |      |                   |  |      |                |  |                     | 5,560   |                   |   |        |  |      |  
|Net shareholders equity                       |  |                                   | 39,288  |                     |      |                   |  |      |                |  |                     | 22,012  |                   |   |        |  |      |  
|                                              |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total average liabilities shareholders equity |  | $                                 | 493,027 |                     | $    | 12,064            |  |      |                |  | $                   | 424,362 |                   | $ | 9,645  |  |      |  
|                                              |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Net interest spread                           |  |                                   |         |                     |      |                   |  | 5.03 | %              |  |                     |         |                   |   |        |  | 4.59 | %
|                                              |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Net interest margin                           |  |                                   |         |                     |      |                   |  | 5.30 | %              |  |                     |         |                   |   |        |  | 4.89 | %
|                                              |  |                                   |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  



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



Net interest income for the six months ended June 30, 2004 increased to $12.1 million compared to $9.6 million for the six months ended June 30, 2003. The
increase was due to the 14.94% 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 $457.6 million for the six months ended June
30, 2004 compared to $398.1 million for the six months ended June 30, 2003. The yield on interest earning assets decreased to 6.43% for the six months ended June 30, 2004 compared to 6.61% for the six months ended June 30, 2003. The largest single
component of interest earning assets was real estate loans receivable, which had an average balance of $239.9 million with a yield of 6.99% for the six months ended June 30, 2004 compared to $213.1 million with a yield of 7.20% for the six months
ended June 30, 2003.



Interest expense for the six months ended
June 30, 2004 decreased to $2.6 million compared to $3.4 million for the six months ended June 30, 2003. This decrease was due to the repricing of maturing certificates of deposit (CDs) following a 5.25% 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 $368.3 million for the six months ended June 30, 2004 compared to $340.6
million for the six months ended June 30, 2003. Average time deposits, the largest component of interest bearing liabilities, increased to $221.4 million with a cost of 1.60% for the six months ended June 30, 2004 compared to $213.8 million with a
cost of 2.33% for the six months ended June 30, 2003.



23



---

Other average borrowings decreased to $28.3 million with a cost of 3.74% for the six months ended June
30, 2004 compared to $33.4 million with a cost of 3.37% for the six months ended June 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 7.07% for the six months ended June 30, 2003 to 6.19% for the six months ended June 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 40% from an average $56.2 million for the six months ended June 30,
2003 to $78.7 million for the six months ended June 30, 2004. The cost of deposits, including demand deposits and interest bearing deposits, decreased to 0.98% for the six months ended June 30, 2004 compared to 1.58% for the six months ended June
30, 2003. Average transaction accounts (including interest bearing checking, demand deposits, money market accounts and savings accounts), increased 32% to $197.4 million for the six months ended June 30, 2004 compared to $149.6 million for the six
months ended June 30, 2003. The cost of funds, including interest bearing liabilities and demand deposits, was reduced 58 basis points to 1.15% for the six months ended June 30, 2004 compared to 1.73% for the six months ended June 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 June 30, 2004 was $6.2 million compared to $5.0 million for the three months ended June 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 $466.6 million for the three months ended June 30, 2004 with a net interest margin of 5.34% compared to $402.8 million with a net interest margin of 4.98% for the three months ended June
30, 2003.



Net interest income before provision for estimated
loan losses for the six months ended June 30, 2004 was $12.1 million compared to $9.6 million for the six months ended June 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 $457.6 million for the six months ended June 30, 2004 with a net interest margin of 5.30% compared to $398.1 million with a net interest margin of 4.89% for the six months ended June 30,
2003.



For the three months and six months ended June 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 $285,000 for the three months
ended June 30, 2004 compared to $340,000 for the three months ended June 30, 2003. For the six months ended June 30, 2004, provision for loan losses was $513,000 compared to $721,000 for the six months ended June 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 June 30, 2004 compared to $1.8 million for the three months ended June 30, 2003. For the six months ended June 30, 2004, other operating income was $4.4 million compared to $3.6 million for the six months ended June 30, 2003. The increase in
other operating income for the three months and six months ended June 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.



24



---

Other fee income increased to $294,000 for the three months ended June 30, 2004 compared to $206,000 for
the three months ended June 30, 2003. For the six months ended June 30, 2004, other fee income totaled $621,000 compared to $512,000 for the six months ended June 30, 2003. The increase in other fee income for the three and six months ended June 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 June 30, 2004 compared to $4.2
million for the three months ended June 30, 2003. For the six months ended June 30, 2004, operating expenses totaled $9.8 million compared to $8.4 million for the six months ended June 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 60.28% for the quarter ended June 30, 2004 compared to 62.26% for the quarter ended June 30, 2003. For the six
months ended June 30, 2004, the efficiency ratio improved to 59.41% compared to 63.26% for the six months ended June 30, 2003.



Salaries and employee benefits increased to $2.8 million for the quarter ended June 30, 2004 compared to $2.4 million for the quarter ended June 30, 2003.
For the six months ended June 30, 2004, salaries and employee benefits increased to $5.2 million compared to $4.7 for the six months ended June 30, 2003. The increase in salaries and employee benefits for the three and six month periods ended June
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 June 30, 2004 compared to $750,000 for the quarter ended June 30, 2003. For the six months ended June 30, 2004, incentive based
compensation, not including related tax expense, totaled $1.7 million compared to $1.3 million for the six months ended June 30, 2003.



Occupancy expense increased to $335,000 for the quarter ended June 30, 2004 compared to $322,000 for the quarter ended June 30, 2003. For the six months
ended June 30, 2004, occupancy expense increased to $693,000 compared to $639,000 for the six months ended June 30, 2003. The increase in occupancy expense for the three and six months ended June 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 $654,000 for the quarter ended June 30, 2004 compared to $288,000 for the quarter ended June 30, 2003. For the six months
ended June 30, 2004, professional services increased to $1.1 million compared to $605,000 for the six months ended June 30, 2003. The increase in professional services for the three and six months ended June 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, excluding employee expense, have totaled $205,000 for the first six months of 2004 compared to none
during the first six months of 2003, and have been allocated proportionately between the Banking division and the SBA division. For the first six months of 2004, the expense for the efficiency consultants totaled $159,000, compared to none during
the first six 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 $186,000 for the quarter ended June 30, 2004 compared to $204,000 for the
quarter ended June 30, 2003. For the six months ended June 30, 2004, depreciation and amortization expense declined to $376,000 compared to $414,000 for the six months ended June 30, 2003. The decline in depreciation and amortization expense for the
three and six months ended June 30, 2004 was due to the decrease in the amount of premises and equipment, which declined from an average $4.0 million during the first half of 2003 to $3.7 million for the first half of 2004. The decline is the result
of normal amortization of premises and equipment.



Data
processing expense increased to $236,000 for the quarter ended June 30, 2004 compared to $174,000 for the quarter ended June 30, 2003. For the six months ended June 30, 2004, data processing expense increased to $417,000 compared to $334,000 for the
six months ended June 30, 2003. Data processing expense for the three months and six months ended June 30, 2004 increased due to the increase in both deposits and loans as well as normal cost increases.



25



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Office expenses were $165,000 quarter ended June 30, 2004 compared to $154,000 for the quarter ended June
30, 2003. For the six months ended June 30, 2004, office expenses totaled $328,000 compared to $316,000 for the six months ended June 30, 2003.



Increases in other operating expenses are due to the normal expansion of our operations. Other expenses increased to $924,000 for the quarter ended June
30, 2004 compared to $700,000 for the quarter ended June 30, 2003. For the six months ended June 30, 2004, other operating expenses totaled $1.7 million compared to $1.3 million for the six months ended June 30, 2003. Total assets increased 21.2% to
$531.9 million as of June 30, 2004 compared to $438.8 million as of June 30, 2003.



Provision for Income Taxes



The effective
income tax rate was 37.77% for the three months ended June 30, 2004 compared to 38.63% for the three months ended June 30, 2003. For the six months ended June 30, 2004, the effective tax rate was 37.59% compared to 39.83% for the six months ended
June 30, 2003. The effective tax rate declined in the three months and six months ended June 30, 2004 due to investments which generate income tax credits. See Financial Condition  Investments section of this discussion for further
information. Provisions for income taxes totaled $1.2 million and $858,000 for the three months ended June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004, provisions for income taxes totaled $2.3 million compared to $1.6
million for the six months ended June 30, 2003.



FINANCIAL CONDITION



Summary of Changes in Consolidated Balance Sheets

June 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 June 30, 2004, total assets
were $531.9 million, an increase of 23.14% (annualized) compared to $476.7 million as of December 31, 2003. Total gross loans increased to $449.8 million as of June 30, 2004 compared to $402.0 million as of December 31, 2003. Total deposits
increased to $446.1 million as of June 30, 2004 compared to $393.1 million as of December 31, 2003. Stockholders equity increased to $40.5 million as of June 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 $5.0 million as of June 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. All of the $5.0 million was held as collateral for public funds, treasury, tax and loan deposits and for other purposes at June 30, 2004.



Our available for sale portfolio declined to $13.4 million as of June 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 to the maturing or prepayment of agency bonds and mortgage backed securities. Of the $13.4 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 June 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-



26



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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 June 30, 2004. The Companys usage of tax credits approximated $107,000 and $67,000 during the quarters ended June 30, 2004 and 2003, respectively. The Companys usage of tax credits approximated $214,000 and $75,000
during the six months ended June 30, 2004 and 2003, respectively. Investment amortization amounted to $79,000 and $19,000 for the quarters ended June 30, 2004 and 2003, respectively. Investment amortization amounted to $140,000 and $30,000 for the
six months ended June 30, 2004 and 2003, respectively. As of June 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
June 30, 2004.



Average Federal Funds sold for the three months
ended June 30, 2004 were $14.5 million compared to $10.9 million for the three months ended June 30, 2003. For the six months ended June 30, 2004, average Federal Funds sold totaled $15.0 million compared to $9.9 million for the six months ended
June 30, 2003.



We held $937,000 in Federal Reserve Bank stock
as of June 30, 2004 compared to $569,000 as of December 31, 2003. We held $1,830,000 in Federal Home Loan Bank stock as of June 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 June 30,            |        | At December 31,    
|                                            |  | 2004                   |        | 2003               
|                                            |  | AmortizedCost          |        | EstimatedFair value |   | AmortizedCost |  | EstimatedFair value
|                                            |  | (dollars in thousands)
|Held to maturity                            |  |                        |        |                     |   |               |  |                     |        |  |   |       
|U.S. Government agency and other securities |  | $                      |       |                     | $ |              |  | $                   | 1,501  |  | $ | 1,523 
|Agency mortgage backed securities           |  |                        | 4,020  |                     |   | 4,038         |  |                     | 5,213  |  |   | 5,305 
|SBA pass through securities                 |  |                        | 931    |                     |   | 929           |  |                     | 973    |  |   | 979   
|                                            |  |                        |        |                     |   |               |  |                     |        |  |   |       
|Total held to maturity                      |  |                        | 4,951  |                     |   | 4,967         |  |                     | 7,687  |  |   | 7,807 
|                                            |  |                        |        |                    
|                                            |  | AmortizedCost          |        | Fair value          |   | AmortizedCost |  | Fair value         
|Available for sale                          |  |                        |        |                     |   |               |  |                     |        |  |   |       
|Agency mortgage backed securities           |  | $                      | 13,613 |                     | $ | 13,364        |  | $                   | 16,048 |  | $ | 15,921
|                                            |  |                        |        |                     |   |               |  |                     |        |  |   |       



27



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



|                                                      |  |                        |       |                     |   |                               |  |      |  
|----------------------------------------------------- |  | ---------------------- | ----- | ------------------- | - | ----------------------------- |  | ---- | -
|Year maturing                                         |  | Amortized Cost         |       | Estimated FairValue |   | WeightedAverage InterestYield | 
|                                                      |  | (dollars in thousands) |      
|Mortgage backed securities                            |  |                        |       |                     |   |                               |  |      |  
|Due greater than one year through five years          |  |                        | 291   |                     |   | 296                           |  | 4.89 | %
|Due greater than five years through ten years         |  |                        | 1,315 |                     |   | 1,344                         |  | 5.10 | %
|Mortgage backed securities due greater than ten years |  |                        | 2,414 |                     |   | 2,398                         |  | 4.78 | %
|                                                      |  |                        |       |                     |   |                               |  |      |  
|Subtotal mortgage backed securities                   |  |                        | 4,020 |                     |   | 4,038                         |  | 4.89 | %
|                                                      |  |                        |      
|SBA pass through securities                           |  |                        |       |                     |   |                               |  |      |  
|Due greater than ten years                            |  |                        | 931   |                     |   | 929                           |  | 3.37 | %
|                                                      |  |                        |       |                     |   |                               |  |      |  
|Total                                                 |  | $                      | 4,951 |                     | $ | 4,967                         |  | 4.61 | %
|                                                      |  |                        |       |                     |   |                               |  |      |  



As of June 30, 2004,
the Company held investments with unrealized holding losses totaling $0.2 million, consisting of the following (in thousands):



|                            |  |            |        |                     |   |      |  
|--------------------------- |  | ---------- | ------ | ------------------- | - | ---- | -
|                            |  | Fair Value |        | GrossUnrealizedLoss |  
|Mortgage-backed securities: |  |            |        |                     |   |      |  
|FNMA                        |  | $          | 8,085  |                     | $ | (142 | )
|FHLMC                       |  |            | 5,278  |                     |   | (107 | )
|                            |  |            |        |                     |   |      |  
|                            |  | $          | 13,364 |                     | $ | (249 | )
|                            |  |            |        |                     |   |      |  



As of June 30, 2004,
the unrealized holding losses relate to a total of eight hybrid variable rate mortgage-backed securities, which have been in an unrealized loss position (ranging from a de-minimus percentage to 3.0% of cost) for less than six months. Such unrealized
holding losses are the result of an increase in market interest rates in the second half of 2003 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 June 30, 2004.



Loans



As a result of
increased loan origination total gross loans have increased to $449.8 million as of June 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 increased to $147.1 million
as of June 30, 2004 compared to $137.0 million as of December 31, 2003.



28



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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 six monthsended June 30, |         | At or for the three monthsended June 30,
|                                 |  | 2004                                   |         | 2003                                     |   | 2004    |  | 2003
|                                 |  | (dollars in thousands)                 |         | (dollars in thousands)                  
|Beginning balance                |  | $                                      | 394,211 |                                          | $ | 339,471 |  | $    | 416,428 |  | $ | 351,091
|                                 |  |                                        |         |                                         
|Loans originated for sale:       |  |                                        |         |                                          |   |         |  |      |         |  |   |        
|Real estate:                     |  |                                        |         |                                          |   |         |  |      |         |  |   |        
|One-to four-family               |  |                                        |        |                                          |   | 2,353   |  |      |        |  |   |       
|Commercial                       |  |                                        | 65,343  |                                          |   | 30,996  |  |      | 41,783  |  |   | 19,072 
|                                 |  |                                        |         |                                          |   |         |  |      |         |  |   |        
|Total loans originated for sale  |  |                                        | 65,343  |                                          |   | 33,349  |  |      | 41,783  |  |   | 19,072 
|                                 |  |                                        |         |                                         
|Loans sold:                      |  |                                        |         |                                          |   |         |  |      |         |  |   |        
|Real estate:                     |  |                                        |         |                                          |   |         |  |      |         |  |   |        
|Construction                     |  |                                        |        |                                          |   | 1,725   |  |      |        |  |   | 1,725  
|One-to four-family               |  |                                        |        |                                          |   | 6,645   |  |      |        |  |   |       
|Commercial                       |  |                                        | 35,006  |                                          |   | 34,447  |  |      | 19,978  |  |   | 18,614 
|                                 |  |                                        |         |                                          |   |         |  |      |         |  |   |        
|Total loans sold                 |  |                                        | 35,006  |                                          |   | 42,817  |  |      | 19,978  |  |   | 20,339 
|                                 |  |                                        |         |                                         
|Loans originated for investment: |  |                                        |         |                                          |   |         |  |      |         |  |   |        
|Commercial loans                 |  |                                        | 17,517  |                                          |   | 16,085  |  |      | 6,323   |  |   | 8,150  
|Real estate:                     |  |                                        |         |                                          |   |         |  |      |         |  |   |        
|Construction loans               |  |                                        | 69,768  |                                          |   | 56,955  |  |      | 46,479  |  |   | 31,354 
|One-to four-family               |  |                                        | 375     |                                          |   |        |  |      | 375     |  |   |       
|Commercial                       |  |                                        | 48,422  |                                          |   | 46,922  |  |      | 25,198  |  |   | 23,878 
|Multi-family                     |  |                                        | 2,362   |                                          |   | 5,298   |  |      |        |  |   | 1,840  
|Consumer                         |  |                                        | 830     |                                          |   | 801     |  |      | 720     |  |   | 129    
|                                 |  |                                        |         |                                          |   |         |  |      |         |  |   |        
|Total loans originated           |  |                                        | 139,274 |                                          |   | 126,061 |  |      | 79,095  |  |   | 65,351 
|                                 |  |                                        |         |                                         
|Less:                            |  |                                        |         |                                          |   |         |  |      |         |  |   |        
|Principal repayments             |  |                                        | 121,786 |                                          |   | 86,959  |  |      | 75,481  |  |   | 46,503 
|Other net charges (1)            |  |                                        | 706     |                                          |   | 975     |  |      | 517     |  |   | 542    
|                                 |  |                                        |         |                                          |   |         |  |      |         |  |   |        
|Total Loans                      |  | $                                      | 441,330 |                                          | $ | 368,130 |  | $    | 441,330 |  | $ | 368,130
|                                 |  |                                        |         |                                          |   |         |  |      |         |  |   |        



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 June 30, 2004, loans held for sale totaled $92.8 million compared to $69.1 million as of December 31, 2003. For the three months and six months ended June 30, 2004 and 2003, there were no lower of cost or market
adjustments to loans held for sale.



29



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Total Loan Portfolio Composition



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



|                                                |  |                        |         |                 |         |         |        |   |         |         |  |        
|----------------------------------------------- |  | ---------------------- | ------- | --------------- | ------- | ------- | ------ | - | ------- | ------- |  | -------
|                                                |  | At June 30,            |         | At December 31,
|                                                |  | 2004                   |         | 2003           
|                                                |  | Amount                 |         |                 | Percent |         | Amount |   |         | Percent
|                                                |  | (dollars in thousands)
|Loan portfolio composition:                     |  |                        |         |                 |         |         |        |   |         |         |  |        
|Commercial loans                                |  | $                      | 21,642  |                 |         | 4.81%   |        | $ | 20,590  |         |  | 5.12%  
|Aircraft loans                                  |  |                        | 28,869  |                 |         | 6.42%   |        |   | 30,368  |         |  | 7.55%  
|Real estate:                                    |  |                        |         |                 |         |         |        |   |         |         |  |        
|Construction loans                              |  |                        | 66,084  |                 |         | 14.69%  |        |   | 66,957  |         |  | 16.66% 
|Secured by                                      |  |                        |         |                 |         |         |        |   |         |         |  |        
|One-to four-family                              |  |                        | 6,794   |                 |         | 1.51%   |        |   | 9,671   |         |  | 2.41%  
|Multi-family                                    |  |                        | 7,018   |                 |         | 1.56%   |        |   | 6,440   |         |  | 1.60%  
|Commercial                                      |  |                        | 316,266 |                 |         | 70.31%  |        |   | 263,927 |         |  | 65.66% 
|Consumer:                                       |  |                        |         |                 |         |         |        |   |         |         |  |        
|Home equity lines of credit                     |  |                        | 1,465   |                 |         | 0.33%   |        |   | 1,933   |         |  | 0.48%  
|Other                                           |  |                        | 1,659   |                 |         | 0.37%   |        |   | 2,085   |         |  | 0.52%  
|                                                |  |                        |         |                 |         |         |        |   |         |         |  |        
|Total Gross loans outstanding                   |  |                        | 449,797 |                 |         | 100.00% |        |   | 401,971 |         |  | 100.00%
|Deferred loan fees and unamortized gains        |  |                        | (2,752  | )               |         |         |        |   | (2,549  | )       |  |        
|Allowance for loan losses                       |  |                        | (5,715  | )               |         |         |        |   | (5,210  | )       |  |        
|                                                |  |                        |         |                 |         |         |        |   |         |         |  |        
|Net loans held for investment and held for sale |  | $                      | 441,330 |                 |         |         |        | $ | 394,212 |         |  |        
|                                                |  |                        |         |                 |         |         |        |   |         |         |  |        
|SBA loans serviced for others                   |  | $                      | 147,067 |                 |         |         |        | $ | 136,966 |         |  |        
|                                                |  |                        |         |                 |         |         |        |   |         |         |  |        



Loan Maturity



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



|                                                        |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|------------------------------------------------------- |  | ---------------------- | ------- | ------------------------ | - | ------------------------- |  | ---------------- | ------ | ---------- | - | ------- |  | - | -------
|                                                        |  | One yearor less        |         | Morethan 1year to3 years |   | Morethan 3years to5 years |  | More than5 years |        | TotalLoans
|                                                        |  | (dollars in thousands)
|Loan portfolio composition:                             |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Commercial loans                                        |  | $                      | 12,814  |                          | $ | 1,194                     |  | $                | 2,750  |            | $ | 4,884   |  | $ | 21,642 
|Aircraft loans                                          |  |                        | 647     |                          |   | 123                       |  |                  | 272    |            |   | 27,827  |  |   | 28,869 
|Real estate:                                            |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Construction loans                                      |  |                        | 57,945  |                          |   | 3,997                     |  |                  |       |            |   | 4,142   |  |   | 66,084 
|Secured by one-to four-family residential properties    |  |                        | 2,165   |                          |   | 1,785                     |  |                  | 358    |            |   | 2,486   |  |   | 6,794  
|Secured by multi-family residential properties          |  |                        | 5,195   |                          |   |                          |  |                  | 809    |            |   | 1,014   |  |   | 7,018  
|Secured by commercial properties                        |  |                        | 47,082  |                          |   | 24,184                    |  |                  | 15,421 |            |   | 229,579 |  |   | 316,266
|Consumer:                                               |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Home equity lines of credit                             |  |                        |        |                          |   | 90                        |  |                  | 64     |            |   | 1,311   |  |   | 1,465  
|Other                                                   |  |                        | 379     |                          |   | 527                       |  |                  | 487    |            |   | 266     |  |   | 1,659  
|                                                        |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Total gross loans held for investment and held for sale |  | $                      | 126,227 |                          | $ | 31,900                    |  | $                | 20,161 |            | $ | 271,509 |  | $ | 449,797
|                                                        |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        



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.



30



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



|                                                                                                                      |  |                        |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                      |  | June 30,2004           |         |   | December 31,2003 |  
|                                                                                                                      |  | (dollars in thousands) |        
|Non-accrual loans                                                                                                     |  | $                      | 1,690   |   |                  | $ | 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                                                                                            |  |                        | 1,690   |   |                  |   | 961     |  
|Repossessed assets                                                                                                    |  |                        | 450     |   |                  |   | 458     |  
|                                                                                                                      |  |                        |         |   |                  |   |         |  
|Total non-performing assets                                                                                           |  | $                      | 2,140   |   |                  | $ | 1,419   |  
|                                                                                                                      |  |                        |         |   |                  |   |         |  
|SUPPLEMENTAL DATA                                                                                                     |  |                        |         |   |                  |   |         |  
|Undisbursed portion of construction and other loans                                                                   |  | $                      | 103,012 |   |                  | $ | 101,526 |  
|Government guaranteed portion of total loans                                                                          |  | $                      | 32,196  |   |                  | $ | 30,360  |  
|Non-performing loans, net of government guarantees                                                                    |  | $                      | 710     |   |                  | $ | 271     |  
|                                                                                                                      |  |                       
|Total non-performing loans/gross loans                                                                                |  |                        | 0.38    | % |                  |   | 0.24    | %
|Total non-performing assets/total assets                                                                              |  |                        | 0.40    | % |                  |   | 0.30    | %
|Total non-performing loans, net of guarantees/gross loans                                                             |  |                        | 0.16    | % |                  |   | 0.07    | %
|Total non-performing assets, net of guarantees/total assets                                                           |  |                        | 0.22    | % |                  |   | 0.15    | %
|                                                                                                                      |  |                       
|Allowance for loan losses                                                                                             |  | $                      | 5,715   |   |                  | $ | 5,210   |  
|Loan loss allowance/loans, gross                                                                                      |  |                        | 1.27    | % |                  |   | 1.30    | %
|Loan loss allowance/total gross loans net of guarantees                                                               |  |                        | 1.37    | % |                  |   | 1.40    | %
|Loan loss allowance/loans held for investment                                                                         |  |                        | 1.61    | % |                  |   | 1.58    | %
|Loan loss allowance/non-performing loans                                                                              |  |                        | 338.17  | % |                  |   | 542.14  | %
|Loan loss allowance/total assets                                                                                      |  |                        | 1.07    | % |                  |   | 1.09    | %
|Loan loss allowance/non-performing assets                                                                             |  |                        | 267.06  | % |                  |   | 367.16  | %
|Loan loss allowance/non-performing loans, net of guarantees                                                           |  |                        | 804.93  | % |                  |   | 1922.51 | %
|Loan loss allowance/non-performing assets, net of guarantees                                                          |  |                        | 492.67  | % |                  |   | 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 June 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 June 30, 2004 we had five loans on non-accrual status totaling $1,690,000 with $980,000, or 58%,
guaranteed by the government. As of December 31, 2003, we had five loans on non-accrual status totaling $961,000. Of this total, $690,000, or 72%, was guaranteed by the government.



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 $4.6 million as of June 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.



31



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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.



32



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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 six monthsended June 30, |       |   | At or for the three monthsended June 30, |  
|                                                    |  | 2004                                   |       |   | 2003                                     |   |       | 2004 |  |   | 2003  |  
|                                                    |  | (dollars in thousands)                 |       |   | (dollars in thousands)                   |  
|Balance at beginning of period                      |  | $                                      | 5,210 |   |                                          | $ | 3,945 |      |  | $ | 5,428 |   |  | $ | 4,266 |  
|Chargeoffs:                                         |  |                                        |       |   |                                          |   |       |      |  |   |       |   |  |   |       |  
|Real estate loans:                                  |  |                                        |       |   |                                          |   |       |      |  |   |       |   |  |   |       |  
|One- to four- family                                |  |                                        |      |   |                                          |   |      |      |  |   |      |   |  |   |      |  
|Commercial                                          |  |                                        |      |   |                                          |   | 80    |      |  |   |      |   |  |   | 80    |  
|Commercial                                          |  |                                        | 11    |   |                                          |   | 65    |      |  |   |      |   |  |   |      |  
|Aircraft                                            |  |                                        |      |   |                                          |   |      |      |  |   |      |   |  |   |      |  
|Consumer                                            |  |                                        | 10    |   |                                          |   | 7     |      |  |   | 2     |   |  |   | 2     |  
|                                                    |  |                                        |       |   |                                          |   |       |      |  |   |       |   |  |   |       |  
|Total chargeoffs                                    |  |                                        | 21    |   |                                          |   | 152   |      |  |   | 2     |   |  |   | 82    |  
|Recoveries:                                         |  |                                        |       |   |                                          |   |       |      |  |   |       |   |  |   |       |  
|Real estate loans:                                  |  |                                        |       |   |                                          |   |       |      |  |   |       |   |  |   |       |  
|One- to four-family                                 |  |                                        |      |   |                                          |   |      |      |  |   |      |   |  |   |      |  
|Commercial                                          |  |                                        |      |   |                                          |   | 20    |      |  |   |      |   |  |   |      |  
|Commercial                                          |  |                                        | 4     |   |                                          |   | 12    |      |  |   | 4     |   |  |   | 12    |  
|Aircraft                                            |  |                                        |      |   |                                          |   |      |      |  |   |      |   |  |   |      |  
|Consumer                                            |  |                                        | 9     |   |                                          |   |      |      |  |   | 2     |   |  |   |      |  
|                                                    |  |                                        |       |   |                                          |   |       |      |  |   |       |   |  |   |       |  
|Total recoveries                                    |  |                                        | 13    |   |                                          |   | 32    |      |  |   | 6     |   |  |   | 12    |  
|                                                    |  |                                        |       |   |                                          |   |       |      |  |   |       |   |  |   |       |  
|Net chargeoffs                                      |  |                                        | 8     |   |                                          |   | 120   |      |  |   | (4    | ) |  |   | 70    |  
|Reserve for losses on commitments to extend credit* |  |                                        |      |   |                                          |   | (16   | )    |  |   | (2    | ) |  |   | (6    | )
|Provision for loan losses                           |  |                                        | 513   |   |                                          |   | 721   |      |  |   | 285   |   |  |   | 340   |  
|                                                    |  |                                        |       |   |                                          |   |       |      |  |   |       |   |  |   |       |  
|Balance at end of period                            |  | $                                      | 5,715 |   |                                          | $ | 4,530 |      |  | $ | 5,715 |   |  | $ | 4,530 |  
|                                                    |  |                                        |       |   |                                          |   |       |      |  |   |       |   |  |   |       |  
|Net charge offs to average loans                    |  |                                        | 0.00  | % |                                          |   | 0.07  | %    |  |   | 0.00  | % |  |   | 0.08  | %
|Reserve for losses on commitments to extend credit  |  | $                                      | 203   |   |                                          | $ | 190   |      |  | $ | 203   |   |  | $ | 190   |  

---

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



As of June 30, 2004 the balance in the allowance for loans losses was $5.7
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 June 30, 2004 and December 31, 2003. The balance of commitments to extend credit on undisbursed
construction and other loans and letters of credit was $103.0 million as of June 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 June 30, 2004 the allowance was 1.27% of total gross loans compared to 1.30% as of December 31, 2003. As a percent of
loans held for investment, the allowance was 1.61% as of June 30, 2004 compared to 1.58% as of December 31, 2003. During the three months and six months ended June 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
338.17% as of June 30, 2004 compared to 542.14% as of December 31, 2003. Management believes the allowance at June 30, 2004 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors.



33



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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 recoveries for the three months ended June 30, 2004 totaled $4,000 compared to net charge offs of $70,000 for the three months ended June 30, 2003. Net charge offs for the six months ended June 30, 2004 totaled
$8,000 compared to $120,000 for the six months ended June 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 June 30, 2004 or December 31, 2003. As of
June 30, 2004, the repossessed asset in the amount of $450,000 was a small aircraft.



Deposits and Borrowings



Total deposits
increased to $446.1 million as of June 30, 2004 compared to $393.1 million as of December 31, 2003. Interest bearing deposits increased to $363.7 million as of June 30, 2004 compared to $324.5 million as of December 31, 2003. Non-interest bearing
deposits increased to $82.4 million as of June 30, 2004 compared to $68.7 million as of December 31, 2003. Total wholesale deposits were $79.2 million as of June 30, 2004 compared to $59.5 million as of December 31, 2003. Total retail banking
deposits increased 20% (annualized) to $366.9 million as of June 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 in 2004 in the City of Murrieta, California.



Short term borrowings totaled $24.0 million as of June 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 $14.4 million as of June 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 $40.5 million as of June 30, 2004 compared to $37.1 million as of December 31, 2003. The increase in stockholders equity is a result of net income of $3.8 million for the six months ended June 30, 2004 combined with proceeds from
the exercise of stock options, less the cash dividend paid during the six 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 Trust used the proceeds from the sale of the trust preferred securities to purchase junior subordinated
debentures of



34



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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 May 25, 2004, the Company announced the payment of a cash dividend of $0.05 per common share payable on June 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 $15,000,000 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 June 30, 2004 and December 31, 2003, all capital ratios were above all current Federal capital guidelines for a
well capitalized bank. As of June 30, 2004, the Banks regulatory Total Capital to risk-weighted assets ratio was 12.63% compared to 13.39% as of December 31, 2003. The Banks regulatory Tier 1 Capital to risk-weighted assets
ratio was 11.39% as of June 30, 2004 compared to 12.14% as of December 31, 2003. The Banks regulatory Tier 1 Capital to average assets ratio was 10.83% as of June 30, 2004 compared to 10.90% as of December 31, 2003.



As of June 30, 2004, our regulatory total capital to risk-weighted assets
ratio was 12.81% compared to 13.77% as of December 31, 2003. Our regulatory Tier 1 Capital to risk-weighted assets ratio was 11.26% as of June 30, 2004 compared to 11.88% as of December 31, 2003. Our regulatory Tier 1 Capital to average assets ratio
was 10.70% as of June 30, 2004 compared to 10.67% as of December 31, 2003.



Financial Borrowings and Commitments



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



|           |  |                         |       |                           |   |                  |  |   |       
|---------- |  | ----------------------- | ----- | ------------------------- | - | ---------------- |  | - | ------
|           |  | Gross RentalCommitments |       | Trust PreferredSecurities |   | TotalCommitments
|           |  | (dollars in thousands) 
|2004       |  | $                       | 533   |                           | $ |                 |  | $ | 533   
|2005       |  |                         | 1,142 |                           |   |                 |  |   | 1,142 
|2006       |  |                         | 1,170 |                           |   |                 |  |   | 1,170 
|2007       |  |                         | 1,019 |                           |   |                 |  |   | 1,019 
|2008       |  |                         | 927   |                           |   |                 |  |   | 927   
|Thereafter |  |                         | 4,435 |                           |   | 15,000           |  |   | 19,435
|           |  |                         |       |                           |   |                  |  |   |       
|Total      |  | $                       | 9,226 |                           | $ | 15,000           |  | $ | 24,226
|           |  |                         |       |                           |   |                  |  |   |       



In addition to the
above, we have commitments to extend credit on undisbursed construction and other loans totaling $103.0 million as of June 30, 2004.



The Company has a credit line with the FHLB with a limit of $50.8 million as of June 30, 2004, with a balance outstanding of $24.0 million. In addition,
we have credit lines with other correspondent banks of $15.0 million. There were no advances against these lines as of June 30, 2004. The $24.0 million in advances from the FHLB have a remaining term of less than one year.



35



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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
$26.9 million during the six months ended June 30, 2004 compared to net cash inflows of $13.2 million during the six months ended June 30, 2003. Net cash outflows from operating activities during the first six 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 six 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 $24.9 million and $26.7 million during the six months ended June 30, 2004 and 2003,
respectively. Net cash outflows from investing activities for the six months ended June 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 six months ended June 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 $51.7 million and $19.8 million
during the six months ended June 30, 2004 and 2003, respectively. During the six months ended June 30, 2004, interest bearing and non-interest bearing deposits increased $39.2 million and $13.8 million, respectively. This increase was partially
offset by a net decrease in short term borrowing. During the first six 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 June 30, 2004 our available borrowing capacity includes approximately $15.0 million in federal funds line facilities and $25.8 million in unused FHLB advances. We believe our liquidity sources to be stable and
adequate. At June 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 six months ended June 30, 2004 there were no dividends paid by the Bank to Community Bancorp Inc. During the six months ended June 30, 2003, the Bank paid $300,000 in
dividends to Community Bancorp Inc. As of June 30, 2004, approximately $13.6 million of undivided profits of the Bank were available for dividends to the Company.



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



36



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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 June 30, 2004, 85.19% 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 June 30, 2004, 52.45% of our deposits were time deposits with a stated maturity (generally one
year or less) and a fixed rate of interest. As of June 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 six month adjustment period. The Gap table on page 38 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.



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



37



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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 June 30, 2004, 52.45% 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 June 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 $129.7 million in interest bearing transaction accounts (savings, money markets and interest bearing checking) as of June 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.



The following table sets forth information concerning repricing opportunities for our interest-earning assets and interest bearing liabilities as of June
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.



38



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Contractual Static GAP Position as of June 30, 2004



|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |              |   |         |   |  |   |         |  
|------------------------------------------------------ |  | ---------------------- | ------- | - | ------------------------------- | - | ------- | -------------------------------- |  | - | ------------------------------- | - |  | ---------- | ------- | - | ------------ | - | ------- | - |  | - | ------- | -
|                                                       |  | 0 - 3 months           |         |   | Greater than3 monthsto 6 months |   |         | Greater than6 monthsto 12 months |  |   | Greater than12 monthsto 5 years |   |  | Thereafter |         |   | Totalbalance |  
|                                                       |  | (dollars in thousands) |        
|Interest sensitive assets:                             |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |              |   |         |   |  |   |         |  
|Loans receivable:                                      |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |              |   |         |   |  |   |         |  
|Adjustable rate loans, gross                           |  | $                      | 226,042 |   |                                 | $ | 19,660  |                                  |  | $ | 42,774                          |   |  | $          | 93,970  |   |              | $ | 752     |   |  | $ | 383,198 |  
|Fixed rate loans, gross (1)(2)                         |  |                        | 13,055  |   |                                 |   | 10,928  |                                  |  |   | 4,638                           |   |  |            | 12,230  |   |              |   | 25,747  |   |  |   | 66,598  |  
|Investments:                                           |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |              |   |         |   |  |   |         |  
|Investment securities held-to-maturity                 |  |                        | 930     |   |                                 |   |        |                                  |  |   |                                |   |  |            | 2,674   |   |              |   | 1,347   |   |  |   | 4,951   |  
|Investment securities available-for-sale               |  |                        |        |   |                                 |   |        |                                  |  |   |                                |   |  |            | 13,364  |   |              |   |        |   |  |   | 13,364  |  
|Federal funds sold                                     |  |                        | 28,990  |   |                                 |   |        |                                  |  |   |                                |   |  |            |        |   |              |   |        |   |  |   | 28,990  |  
|Other investments                                      |  |                        | 1,513   |   |                                 |   |        |                                  |  |   |                                |   |  |            |        |   |              |   | 2,767   |   |  |   | 4,280   |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |              |   |         |   |  |   |         |  
|Total interest sensitive assets                        |  |                        | 270,530 |   |                                 |   | 30,588  |                                  |  |   | 47,412                          |   |  |            | 122,238 |   |              |   | 30,613  |   |  |   | 501,381 |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |              |   |         |   |  |   |         |  
|Interest sensitive liabilities:                        |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |              |   |         |   |  |   |         |  
|Deposits:                                              |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |              |   |         |   |  |   |         |  
|Non-interest bearing                                   |  |                        |        |   |                                 |   |        |                                  |  |   |                                |   |  |            |        |   |              |   | 82,441  |   |  |   | 82,441  |  
|Interest bearing (1)                                   |  |                        | 206,645 |   |                                 |   | 52,937  |                                  |  |   | 96,488                          |   |  |            | 7,606   |   |              |   |        |   |  |   | 363,676 |  
|Other Borrowings (3)                                   |  |                        | 29,000  |   |                                 |   | 9,406   |                                  |  |   |                                |   |  |            |        |   |              |   |        |   |  |   | 38,406  |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |              |   |         |   |  |   |         |  
|Total interest sensitive liabilities                   |  | $                      | 235,645 |   |                                 | $ | 62,343  |                                  |  | $ | 96,488                          |   |  | $          | 7,606   |   |              | $ | 82,441  |   |  | $ | 484,523 |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |              |   |         |   |  |   |         |  
|GAP Analysis                                           |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |              |   |         |   |  |   |         |  
|Interest rate sensitivity gap                          |  | $                      | 34,885  |   |                                 | $ | (31,755 | )                                |  | $ | (49,076                         | ) |  | $          | 114,632 |   |              | $ | (51,828 | ) |  | $ | 16,858  |  
|GAP as % of total interest sensitive assets            |  |                        | 6.96    | % |                                 |   | -6.33   | %                                |  |   | -9.79                           | % |  |            | 22.86   | % |              |   | -10.34  | % |  |   | 3.36    | %
|Cumulative interest rate sensitivity gap               |  | $                      | 34,885  |   |                                 | $ | 3,130   |                                  |  | $ | (45,946                         | ) |  | $          | 68,686  |   |              | $ | 16,858  |   |  | $ | 16,858  |  
|Cumulative gap as % of total interest sensitive assets |  |                        | 6.96    | % |                                 |   | 0.62    | %                                |  |   | -9.16                           | % |  |            | 13.70   | % |              |   | 3.36    | % |  |   | 3.36    | %

---

|(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, 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 June 30, 2004, we had $255.5 million of loans with floors outstanding. Of this total, $243.3 million, or 95%, were at their floor and had a weighted average rate of
6.29%. The contractual weighted average margin over prime of this portfolio was 1.23% as of June 30, 2004, and therefore, based on the current prime rate of 4.25%, the prime rate



39



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would have to increase 0.81% 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 $1.1 million increase in projected net interest income between the current rates and a 100 basis point increase in rates, compared to the $2.9 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 $1.8 million, or $747,000 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 June 30, 2005 under the interest rate shock scenarios stated. The table was prepared as of June 30, 2004, at which time prime was 4.25%.



|                 |  |                             |        |                     |   |       |                       |  |       |  
|---------------- |  | --------------------------- | ------ | ------------------- | - | ----- | --------------------- |  | ----- | -
|Changes in Rates |  | ProjectedNet interestIncome |        | ChangefromBase Case |   |       | % Changefrom BaseCase | 
|                 |  | (dollars in thousands)      |        |                     |   |      
|+ 300 bp         |  | $                           | 32,169 |                     | $ | 4,788 |                       |  | 17.49 | %
|+ 200 bp         |  | $                           | 30,302 |                     | $ | 2,921 |                       |  | 10.67 | %
|+ 100 bp         |  | $                           | 28,468 |                     | $ | 1,087 |                       |  | 3.97  | %
|0 bp             |  | $                           | 27,381 |                     |   |       |                       |  |       |  
|-   25 bp        |  | $                           | 27,309 |                     | $ | (72   | )                     |  | -0.26 | %
|-   50 bp        |  | $                           | 27,238 |                     | $ | (143  | )                     |  | -0.52 | %
|- 100 bp         |  | $                           | 27,115 |                     | $ | (266  | )                     |  | -0.97 | %



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 June 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.



40



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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 annual
meeting held on May 26, 2004:



| | 1. | Election of the following four persons for a term of three years to the Board of Directors of the Company.
| | -- | ----------------------------------------------------------------------------------------------------------



The results of the vote were as follows:



|                  |  |           |  |         
|----------------- |  | --------- |  | --------
|NAME              |  | FOR       |  | WITHHELD
|G. Bruce Dunn     |  | 3,416,891 |  | 6,532   
|C. Granger Haugh  |  | 3,416,891 |  | 6,532   
|Michael J. Perdue |  | 3,410,512 |  | 12,911  
|Corey A. Seale    |  | 3,416,765 |  | 6,658   



Item 5 Other information



None to report.



Item 6 Exhibits and Reports from 8-K



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



| | 10.21 | Employment Agreement with Rick Sanborn
| | ----- | --------------------------------------

| | 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 7 and 12 on April 22, 2004 announcing earnings for the quarter ended March 31, 2004.



The Company filed an 8-K report under items 5 and 7 on May 27, 2004
declaring a quarterly cash dividend payable on June 30, 2004.



The Company filed an 8-K report under items 5 and 7 on June 7, 2004 announcing the hiring of Rick Sanborn as Senior Vice President/Administrative Group.



The Company filed an 8-K report under items 5 and 7 on June 29, 2004 announcing the execution of an acquisition agreement
with Cuyamaca Bank, N.A.



41



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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 August 6, 2004 |  | /s/ Michael J. Perdue                      
|                    |  | Michael J. Perdue                          
|                    |  | President and Chief Executive Officer      
|                    | 
|Date August 6, 2004 |  | /s/ L. Bruce Mills, Jr.                    
|                    |  | L. Bruce Mills, Jr.                        
|                    |  | Sr. Vice President, Chief Financial Officer



42



---

EXHIBIT INDEX



|            |  |                                       
|----------- |  | --------------------------------------
|Exhibit No. |  | Description                           
|10.21       |  | Employment Agreement with Rick Sanborn
|            | 
|31.1        |  | Rule 13a-14(a) Certification          
|            | 
|31.2        |  | Rule 13a-14(a) Certification          
|            | 
|32          |  | Section 1350 Certifications           



43