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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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



for the quarterly period ended September 30, 2003



| ̈ | 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)



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



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



(Former Address)

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



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



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



Number of shares of common
stock outstanding as of September 30, 2003: 4,360,090



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|PART 1: |  | FINANCIAL INFORMATION
|------- |  | ---------------------



|ITEM 1: |  | FINANCIAL STATEMENTS
|------- |  | --------------------



COMMUNITY BANCORP INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)



|                                                                                                                                                                                          |  | September 30,2003                                |         |   | December 31,2002 |   |         | September 30,2002 | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ------- | - | ---------------- | - | ------- | ----------------- | 
|                                                                                                                                                                                          |  | (dollars in thousands, except per share amounts) |        
|ASSETS                                                                                                                                                                                    |  |                                                  |         |   |                  |   |         |                   | 
|Cash and cash equivalents                                                                                                                                                                 |  | $                                                | 36,843  |   |                  | $ | 21,504  |                   | 
|Restricted cash                                                                                                                                                                           |  |                                                  |        |   |                  |   | 1,152   |                   | 
|Interest bearing deposits in financial institutions                                                                                                                                       |  |                                                  | 99      |   |                  |   | 99      |                   | 
|Investments:                                                                                                                                                                              |  |                                                  |         |   |                  |   |         |                   | 
|Trading securities, at fair value                                                                                                                                                         |  |                                                  | 9,946   |   |                  |   | 16,076  |                   | 
|Held-to-maturity and other, at amortized cost; estimated fair value of $11,882 (2003), $21,631 (Dec. 2002) and $25,180 (Sep.
2002)                                                        |  |                                                  | 11,745  |   |                  |   | 21,306  |                   | 
|Available-for-sale, at estimated fair value ($1.8 million restricted)                                                                                                                     |  |                                                  | 3,102   |   |                  |   |        |                   | 
|Federal Reserve Bank & Federal Home Loan Bank stock, at cost                                                                                                                              |  |                                                  | 1,983   |   |                  |   | 1,548   |                   | 
|Loans held for investment                                                                                                                                                                 |  |                                                  | 329,644 |   |                  |   | 290,537 |                   | 
|Less allowance for loan losses                                                                                                                                                            |  |                                                  | (4,545  | ) |                  |   | (3,945  | )                 | 
|                                                                                                                                                                                          |  |                                                  |         |   |                  |   |         |                   | 
|Net loans held for investment                                                                                                                                                             |  |                                                  | 325,099 |   |                  |   | 286,592 |                   | 
|Loans held for sale                                                                                                                                                                       |  |                                                  | 55,307  |   |                  |   | 52,879  |                   | 
|Premises and equipment, net                                                                                                                                                               |  |                                                  | 3,728   |   |                  |   | 4,179   |                   | 
|Other real estate owned and repossessed assets                                                                                                                                            |  |                                                  | 1,199   |   |                  |   |        |                   | 
|Accrued interest and other assets                                                                                                                                                         |  |                                                  | 6,560   |   |                  |   | 5,256   |                   | 
|Income tax receivable                                                                                                                                                                     |  |                                                  | 19      |   |                  |   | 309     |                   | 
|Deferred tax asset, net                                                                                                                                                                   |  |                                                  | 1,713   |   |                  |   | 1,705   |                   | 
|Servicing assets, net                                                                                                                                                                     |  |                                                  | 3,076   |   |                  |   | 2,617   |                   | 
|Interest-only strips, at fair value                                                                                                                                                       |  |                                                  | 681     |   |                  |   | 480     |                   | 
|                                                                                                                                                                                          |  |                                                  |         |   |                  |   |         |                   | 
|Total assets                                                                                                                                                                              |  | $                                                | 461,100 |   |                  | $ | 415,702 |                   | 
|                                                                                                                                                                                          |  |                                                  |         |   |                  |   |         |                   | 
|                                                                                                                                                                                          |  |                                                  |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                      |  |                                                  |         |   |                  |   |         |                   | 
|Deposits                                                                                                                                                                                  |  |                                                  |         |   |                  |   |         |                   | 
|Interest bearing                                                                                                                                                                          |  | $                                                | 314,305 |   |                  | $ | 312,514 |                   | 
|Non-interest bearing                                                                                                                                                                      |  |                                                  | 66,884  |   |                  |   | 51,438  |                   | 
|                                                                                                                                                                                          |  |                                                  |         |   |                  |   |         |                   | 
|Total deposits                                                                                                                                                                            |  |                                                  | 381,189 |   |                  |   | 363,952 |                   | 
|Trust Preferred Securities, net of unrealized gains (losses) on fair value hedge of $(38) (2003), $4 (Dec. 2002) and $0 (Sep.
2002)                                                       |  |                                                  | 14,962  |   |                  |   | 10,004  |                   | 
|Other borrowings                                                                                                                                                                          |  |                                                  | 24,000  |   |                  |   | 15,500  |                   | 
|Reserve for losses on commitments to extend credit                                                                                                                                        |  |                                                  | 179     |   |                  |   | 174     |                   | 
|Accrued expenses and other liabilities                                                                                                                                                    |  |                                                  | 5,742   |   |                  |   | 5,499   |                   | 
|                                                                                                                                                                                          |  |                                                  |         |   |                  |   |         |                   | 
|Total liabilities                                                                                                                                                                         |  |                                                  | 426,072 |   |                  |   | 395,129 |                   | 
|                                                                                                                                                                                          |  |                                                  |         |   |                  |   |         |                   | 
|Commitments and contingencies (Note 5)                                                                                                                                                    |  |                                                  |         |   |                  |   |         |                   | 
|Shareholders equity                                                                                                                                                                      |  |                                                  |         |   |                  |   |         |                   | 
|Common stock, $ .625 par value; authorized 10,000,000 shares, issued and outstanding, 4,360,090 at September 30, 2003; 3,542,307
at December 31, 2002 and 3,342,145 at September 30, 2002 |  |                                                  | 2,725   |   |                  |   | 2,214   |                   | 
|Additional paid-in capital                                                                                                                                                                |  |                                                  | 20,697  |   |                  |   | 10,734  |                   | 
|Accumulated other comprehensive income, net of income taxes                                                                                                                               |  |                                                  | (13     | ) |                  |   |        |                   | 
|Retained earnings                                                                                                                                                                         |  |                                                  | 11,619  |   |                  |   | 7,625   |                   | 
|                                                                                                                                                                                          |  |                                                  |         |   |                  |   |         |                   | 
|Total shareholders equity                                                                                                                                                                |  |                                                  | 35,028  |   |                  |   | 20,573  |                   | 
|                                                                                                                                                                                          |  |                                                  |         |   |                  |   |         |                   | 
|Total liabilities and shareholders equity                                                                                                                                                |  | $                                                | 461,100 |   |                  | $ | 415,702 |                   | 
|                                                                                                                                                                                          |  |                                                  |         |   |                  |   |         |                   | 



See accompanying notes
to unaudited consolidated financial statements.



2



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited)



|                                                                |  | For the three monthsended September 30,          |       | For the nine monthsended September 30, |  
|--------------------------------------------------------------- |  | ------------------------------------------------ | ----- | -------------------------------------- | -
|                                                                |  | 2003                                             |       | 2002                                   |  
|                                                                |  | (dollars in thousands, except per share amounts) |      
|Interest Income:                                                |  |                                                  |       |                                        |  
|Interest and fees on loans                                      |  | $                                                | 6,428 |                                        | $
|Interest on cash equivalents                                    |  |                                                  | 53    |                                        |  
|Interest on interest bearing deposits in financial institutions |  |                                                  | 1     |                                        |  
|Interest on trading securities                                  |  |                                                  | 43    |                                        |  
|Interest on U.S Treasury, govt. agencies & other securities    |  |                                                  | 178   |                                        |  
|                                                                |  |                                                  |       |                                        |  
|Total interest income                                           |  |                                                  | 6,703 |                                        |  
|                                                                |  |                                                  |       |                                        |  
|Interest Expense:                                               |  |                                                  |       |                                        |  
|Interest expense - deposits                                     |  |                                                  | 1,185 |                                        |  
|Interest expense - other borrowed money                         |  |                                                  | 261   |                                        |  
|                                                                |  |                                                  |       |                                        |  
|Total interest expense                                          |  |                                                  | 1,446 |                                        |  
|                                                                |  |                                                  |       |                                        |  
|Net interest income before provision for loan losses            |  |                                                  | 5,257 |                                        |  
|Provision for loan losses                                       |  |                                                  | 474   |                                        |  
|                                                                |  |                                                  |       |                                        |  
|Net interest income after provision for loan losses             |  |                                                  | 4,783 |                                        |  
|                                                                |  |                                                  |       |                                        |  
|Other operating income:                                         |  |                                                  |       |                                        |  
|Net gain on sale of loans                                       |  |                                                  | 1,352 |                                        |  
|Loan servicing fees, net                                        |  |                                                  | 166   |                                        |  
|Customer service charges                                        |  |                                                  | 180   |                                        |  
|Loss on other repossessed assets                                |  |                                                  |      |                                        |  
|Other fee income                                                |  |                                                  | 313   |                                        |  
|                                                                |  |                                                  |       |                                        |  
|Total other operating income                                    |  |                                                  | 2,011 |                                        |  
|                                                                |  |                                                  |       |                                        |  
|Other operating expenses:                                       |  |                                                  |       |                                        |  
|Salaries and employee benefits                                  |  |                                                  | 2,473 |                                        |  
|Occupancy                                                       |  |                                                  | 335   |                                        |  
|Telephone                                                       |  |                                                  | 67    |                                        |  
|Premises and equipment                                          |  |                                                  | 60    |                                        |  
|Data processing                                                 |  |                                                  | 181   |                                        |  
|Depreciation and amortization expense                           |  |                                                  | 199   |                                        |  
|Marketing and promotions                                        |  |                                                  | 71    |                                        |  
|Professional services                                           |  |                                                  | 256   |                                        |  
|Director, officer and employee expenses                         |  |                                                  | 106   |                                        |  
|Office expenses                                                 |  |                                                  | 168   |                                        |  
|Other expenses                                                  |  |                                                  | 452   |                                        |  
|                                                                |  |                                                  |       |                                        |  
|Total other operating expenses                                  |  |                                                  | 4,368 |                                        |  
|                                                                |  |                                                  |       |                                        |  
|Income before income taxes                                      |  |                                                  | 2,426 |                                        |  
|Provision for income taxes                                      |  |                                                  | 919   |                                        |  
|                                                                |  |                                                  |       |                                        |  
|Net income                                                      |  | $                                                | 1,507 |                                        | $
|                                                                |  |                                                  |       |                                        |  
|Comprehensive income                                            |  | $                                                | 1,468 |                                        | $
|                                                                |  |                                                  |       |                                        |  



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 nine months endedSeptember 30, |         
|---------------------------------------------------------------------------------------------- |  | -------------------------------------- | --------
|                                                                                               |  | 2003                                   |         
|Cash flows from operating activities:                                                          |  |                                        |         
|Net income                                                                                     |  | $                                      | 3,994   
|Adjustments to reconcile net income to net cash provided by operating activities:              |  |                                        |         
|Depreciation and amortization                                                                  |  |                                        | 613     
|Provision for loan losses                                                                      |  |                                        | 1,195   
|Net amortization (accretion) of premiums (discounts) on securities and loans held to maturity  |  |                                        | 179     
|Amortization of Affordable Housing Investment                                                  |  |                                        | 54      
|Cash premiums on sale of loans                                                                 |  |                                        | (3,479  
|Loan origination fees and gains on loan sales deferred, net of loan origination costs deferred |  |                                        | 526     
|Loss on sale of other repossessed assets                                                       |  |                                        |        
|Change in value of interest-only strips                                                        |  |                                        | 127     
|Capitalization of interest-only strips                                                         |  |                                        | (328    
|Capitalization of servicing asset                                                              |  |                                        | (716    
|Amortization of servicing asset                                                                |  |                                        | 268     
|Change in valuation allowance for servicing asset                                              |  |                                        | (11     
|Loss on trading securities                                                                     |  |                                        | 62      
|Unrealized hedging loss on interest rate swap                                                  |  |                                        | (38     
|Unrealized hedging gain on trust preferred securities                                          |  |                                        | 38      
|Origination of loans held for sale                                                             |  |                                        | (60,374 
|Proceeds from sale of loans held for sale                                                      |  |                                        | 60,909  
|Decrease in restricted cash                                                                    |  |                                        | 1,152   
|Decrease (increase) in income tax receivable                                                   |  |                                        | 290     
|Decrease in income tax payable                                                                 |  |                                        |        
|Decrease (increase) in accrued interest and other assets                                       |  |                                        | (1,218  
|Increase in accrued expenses and other liabilities                                             |  |                                        | 205     
|                                                                                               |  |                                        |         
|Net cash provided by operating activities                                                      |  |                                        | 3,448   
|                                                                                               |  |                                        |         
|Cash flows from investing activities:                                                          |  |                                        |         
|Origination of loans held for investment                                                       |  |                                        | (168,672
|Proceeds from principal paid on loans held for investment                                      |  |                                        | 127,765 
|Net change in interest bearing deposits in financial institutions                              |  |                                        |        
|Purchase of trading securities                                                                 |  |                                        | (37,132 
|Sale of trading securities                                                                     |  |                                        | 43,200  
|Purchases of securities held-to-maturity                                                       |  |                                        | (2,233  
|Maturities of securities held-to-maturity                                                      |  |                                        | 11,581  
|Purchase of securities available-for-sale                                                      |  |                                        | (4,078  
|Maturities of securities available-for-sale                                                    |  |                                        | 935     
|Purchases of Federal Reserve & Federal Home Loan Bank stocks                                   |  |                                        | (921    
|Sales of Federal Home Loan Bank stock                                                          |  |                                        | 486     
|Proceeds from sale of other repossessed assets                                                 |  |                                        |        
|Additions to premises and equipment                                                            |  |                                        | (161    
|                                                                                               |  |                                        |         
|Net cash used in investing activities                                                          |  |                                        | (29,230 
|                                                                                               |  |                                        |         
|                                                                                               |  |                                        |         



See accompanying notes
to unaudited consolidated financial statements.



4



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

(continued)



|                                                                                                                                           |  | For the nine monthsended September 30, |       
|------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------- | ------
|                                                                                                                                           |  | 2003                                   |       
|Cash flows from financing activities:                                                                                                      |  |                                        |       
|Net increase/(decrease) in deposits:                                                                                                       |  |                                        |       
|Interest bearing                                                                                                                           |  | $                                      | 1,791 
|Non-interest bearing                                                                                                                       |  |                                        | 15,446
|Proceeds from exercise of stock options                                                                                                    |  |                                        | 420   
|Proceeds from stock offering, net of expenses                                                                                              |  |                                        | 10,054
|Proceeds from the issuance of Trust Preferred Securities                                                                                   |  |                                        | 4,910 
|Proceeds from other borrowings                                                                                                             |  |                                        | 10,862
|Repayment of other borrowings                                                                                                              |  |                                        | (2,362
|Proceeds from sale of unallocated ESOP shares                                                                                              |  |                                        |      
|                                                                                                                                           |  |                                        |       
|Net cash provided by financing activities                                                                                                  |  |                                        | 41,121
|                                                                                                                                           |  |                                        |       
|Net increase (decrease) in cash and cash equivalents                                                                                       |  |                                        | 15,339
|Cash and cash equivalents at beginning of period                                                                                           |  |                                        | 21,504
|                                                                                                                                           |  |                                        |       
|Cash and cash equivalents at end of period                                                                                                 |  | $                                      | 36,843
|                                                                                                                                           |  |                                        |       
|Supplemental disclosure of cash flow information:                                                                                          |  |                                        |       
|Cash paid during the period for:                                                                                                           |  |                                        |       
|Interest on deposits                                                                                                                       |  |                                        | 4,668 
|Interest on other borrowings                                                                                                               |  |                                        | 1,075 
|                                                                                                                                           |  |                                        |       
|Total interest paid                                                                                                                        |  | $                                      | 5,743 
|                                                                                                                                           |  |                                        |       
|Income Taxes                                                                                                                               |  | $                                      | 2,275 
|                                                                                                                                           |  |                                        |       
|Supplemental disclosure of non-cash investing activities:                                                                                  |  |                                        |       
|Loans transferred to other repossessed assets                                                                                              |  | $                                      | 475   
|                                                                                                                                           |  |                                        |       
|Loans transferred to other real estate owned                                                                                               |  | $                                      | 724   
|                                                                                                                                           |  |                                        |       
|Loans to facilitate the sale of repossessed assets                                                                                         |  | $                                      |      
|                                                                                                                                           |  |                                        |       
|Loans held for investment transferred to held for sale                                                                                     |  | $                                      | 5,102 
|                                                                                                                                           |  |                                        |       
|Change in unrealized gains on available-for-sale securities net of taxes of $9 and $0,respectively, recorded in Other
Comprehensive Income |  | $                                      | (13   
|                                                                                                                                           |  |                                        |       



See accompanying notes
to unaudited consolidated financial statements.



5



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COMMUNITY BANCORP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

(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 subsidiaries Community National Bank (the Bank), Community (CA) Capital Trust
I (Trust I) and Community (CA) Capital Statutory Trust II (Trust II), (collectively, the Company) as consolidated with the elimination of all intercompany transactions. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. Nevertheless, the Company
believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys latest
Annual Report as found on Form 10-K. In the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of the Company with respect to the interim financial statements and the
results of its operations for the interim period ended September 30, 2003, have been included. Certain reclassifications may have been made to prior year amounts to conform to the 2003 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 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



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 $821,000, including placement agent fees. Of the $10,054,000 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



6



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subordinated debentures, of which $4.75 million was contributed to the Bank to increase its capital. The $5 million is included in Trust Preferred Securities
on the books of the Company, while the net $4.9 million is in cash and cash equivalents.



Note 4 Significant Accounting Policies



Stock Option Plans



At September 30, 2003, the
Company had three stock option plans, which are described more fully in Note 13 in the Companys 2002 Annual Report on Form 10-K. The Company accounts for stock options using the intrinsic value method under the provisions of Accounting
Principles Board (APB) Opinion No. 25 and provides proforma net income and proforma earnings per share disclosures for employee stock option grants as if the fair-value-based method, defined in Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, had been applied. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Companys net
income would have been reduced to the pro forma amounts indicated below for the three months and nine months ended September 30:



|                                                                                                                                                |  | For the threemonths endedSeptember 30,          |       |   | For the ninemonths endedSeptember 30, |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ----- | - | ------------------------------------- | -
|                                                                                                                                                |  | 2003                                            |       |   | 2002                                  |  
|                                                                                                                                                |  | (dollars in thousands,except per share amounts) |      
|                                                                                                                                                |  |                                                 |       |  
|Net income, as reported                                                                                                                         |  | $                                               | 1,507 |   |                                       | $
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of
related tax effects |  |                                                 | (38   | ) |                                       |  
|                                                                                                                                                |  |                                                 |       |   |                                       |  
|Proforma net income                                                                                                                             |  | $                                               | 1,469 |   |                                       | $
|                                                                                                                                                |  |                                                 |       |   |                                       |  
|Basic income per share, as reported                                                                                                             |  | $                                               | 0.37  |   |                                       | $
|Proforma basic income per share                                                                                                                 |  | $                                               | 0.36  |   |                                       | $
|                                                                                                                                                |  |                                                 |       |  
|Diluted income per share, as reported                                                                                                           |  | $                                               | 0.35  |   |                                       | $
|Proforma diluted income per share                                                                                                               |  | $                                               | 0.34  |   |                                       | $



The per share weighted
average fair value of stock options granted under the plans during the nine months ended September 30, 2003 were $4.73, compared to $2.77 for the nine months ended September 30, 2002. During the three months ended September 30, 2003 and 2002, the
weighted average fair value of stock options granted under the plans were $5.27 and $3.02, respectively. The fair value of the options were estimated at grant date using a Black-Scholes option pricing model with the following weighted average
assumptions: Nine months ended September 30, 2003, no expected dividend yield, a risk free interest rate of 1.273%, expected life of 5.0 years and a volatility of 40%; Nine months ended September 30, 2002, no expected dividend yield, a risk free
interest rate of 1.69%, expected life of 5.0 years and a volatility of 41%, Three months ended September 30, 2003, no expected dividend yield, a risk free interest rate of 1.14%, expected life of 5.0 years and a volatility of 40%, Three months ended
September 30, 2002, no expected dividend yield, a risk free interest rate of 1.69%, expected life of 5.0 years and a volatility of 41%.



7



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Note 5 Loans and Related Allowance for Loan Losses:



A summary of loans are as follows:



|                                                       |  | September 30, 2003     |        |   | December 31, 2002        |  
|------------------------------------------------------ |  | ---------------------- | ------ | - | ------------------------ | -
|                                                       |  | Loans Heldfor Sale     |        |   | Loans Heldfor Investment |  
|                                                       |  | (dollars in thousands) |       
|                                                       |  |                        |        |   |                          |  
|Construction loans                                     |  | $                      |       |   |                          | $
|Real estate one- to four-family                        |  |                        |       |   |                          |  
|Real estate commercial and multi-family                |  |                        | 55,451 |   |                          |  
|Consumer home equity lines of credit                   |  |                        |       |   |                          |  
|Other consumer                                         |  |                        |       |   |                          |  
|Commercial                                             |  |                        |       |   |                          |  
|Aircraft                                               |  |                        |       |   |                          |  
|                                                       |  |                        |        |   |                          |  
|Total gross loans                                      |  |                        | 55,451 |   |                          |  
|Deferred loan origination costs (fees)                 |  |                        | 132    |   |                          |  
|Discount on unguaranteed portion of SBA loans retained |  |                        | (276   | ) |                          |  
|Allowance for loan losses                              |  |                        |       |   |                          |  
|                                                       |  |                        |        |   |                          |  
|Net loans                                              |  | $                      | 55,307 |   |                          | $
|                                                       |  |                        |        |   |                          |  



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 Loans:



The
Company originates loans to customers under a SBA program that generally provides for SBA guarantees of 70% to 90% 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



8



---

maturity and recent prepayment speeds, as well as current interest rate levels, market forecasts and other economic conditions.



If the fair value of the servicing assets is less than the amortized carrying
value, the asset is considered impaired. A valuation allowance must be established for the impaired asset by a charge against income for the difference between the amortized carrying value and the fair value. As of September 30, 2003 and December
31, 2002, the valuation allowance for the servicing assets was $39,000 and $50,000, respectively. In estimating fair values at September 30, 2003, the Company utilized a weighted average prepayment assumption of approximately 8% and a discount rate
of 10%. In estimating fair values at December 31, 2002, the Company utilized a weighted average prepayment assumption of approximately 7% and a discount rate of 12%.



Rights to future interest income from serviced loans that exceed contractually specified servicing fees are classified as
interest-only strips. The interest-only strips are accounted for as trading securities and 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 nine months ended September 30, 2003 and 2002. At September 30, 2003, the fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 8% and a
discount rate of 10%. At December 31, 2002, the fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 7% and a discount rate of 12%.



Note 7 Commitments and Contingencies:



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



Commitments
to extend credit amounting to $40,552,000 and $33,327,000 were outstanding at September 30, 2003 and December 31, 2002, 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, which in general have a term of three months or less, 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.



Standby letters of credit and financial guarantees amounting to $2,194,000 and $2,243,000 were outstanding at September 30, 2003 and December 31, 2002,
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 construction loans and lines of credit amounting to $89,655,000 and $84,786,000 were outstanding at September 30, 2003 and December 31, 2002, respectively. Undisbursed construction loans are commitments to make additional
principal advances on construction loans subject to completion of phases of construction verified by inspection. 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 has a reserve for losses on commitments to extend credit totaling $179,000 and $174,000 as of September 30, 2003 and December 31, 2002, respectively.



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.



9



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As of September 30, 2003 and December 31, 2002, the Company had non-mandatory commitments to sell loans
of none and $4,787,000, respectively.



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 a minimum of $945,000. As of September 30, 2003, the collateral requirement was $956,000. Should interest rates increase, it is probable that the mark to
market value of the interest rate swap will exceed the minimum requirement of $945,000, which would require additional securities or other collateral to be pledged. As of September 30, 2003, the Company pledged one agency mortgage backed security
classified as available for sale as collateral with a market value of $1.6 million. At December 31, 2002, the Company pledged restricted cash as collateral. The unrealized gain (loss) on the interest rate swap was $(38,000) and $4,000 as of
September 30, 2003 and December 31, 2002, 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 are 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. 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.



10



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Note 8 Earnings per share



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



|                                                                               |  | For the nine months ended September 30, |      
|------------------------------------------------------------------------------ |  | --------------------------------------- | -----
|                                                                               |  | 2003                                    |      
|                                                                               |  | Earnings(Numerator)                     |      
|Net Earnings                                                                   |  | $                                       | 3,994
|                                                                               |  |                                         |      
|Basis EPS Earnings available to common shareholders                            |  | $                                       | 3,994
|Effect of Dilutive Securities Options                                          |  |                                         |     
|                                                                               |  |                                         |      
|Diluted EPS Earnings Available to common Shareholders plus assumed Conversions |  | $                                       | 3,994
|                                                                               |  |                                         |      



|                                                                               |  | For the three months ended September 30, |      
|------------------------------------------------------------------------------ |  | ---------------------------------------- | -----
|                                                                               |  | 2003                                     |      
|                                                                               |  | Earnings(Numerator)                      |      
|Net Earnings                                                                   |  | $                                        | 1,507
|                                                                               |  |                                          |      
|Basis EPS Earnings available to common shareholders                            |  | $                                        | 1,507
|Effect of Dilutive Securities Options                                          |  |                                          |     
|                                                                               |  |                                          |      
|Diluted EPS Earnings Available to common Shareholders plus assumed Conversions |  | $                                        | 1,507
|                                                                               |  |                                          |      



Note 9 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.



11



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|                                     |  | For the nine months ended September 30, |        
|------------------------------------ |  | --------------------------------------- | -------
|                                     |  | 2003                                    |        
|                                     |  | BankingDivision                         |        
|                                     |  | (dollars in thousands)                  |        
|                                     |  |                                         |        
|Interest income                      |  | $                                       | 14,982 
|Interest expense                     |  |                                         | (2,765 
|                                     |  |                                         |        
|Net interest income before provision |  |                                         | 12,217 
|Provision for loan losses            |  |                                         | (730   
|Other income                         |  |                                         | 1,137  
|Other expenses                       |  |                                         | (9,116 
|                                     |  |                                         |        
|Income before income taxes           |  |                                         | 3,508  
|Income taxes                         |  |                                         | (1,296 
|                                     |  |                                         |        
|Net income                           |  | $                                       | 2,212  
|                                     |  |                                         |        
|Assets employed at quarter end       |  | $                                       | 352,510
|                                     |  |                                         |        



|                                     |  | For the three months ended September 30, |        
|------------------------------------ |  | ---------------------------------------- | -------
|                                     |  | 2003                                     |        
|                                     |  | BankingDivision                          |        
|                                     |  | (dollars in thousands)                   |        
|                                     |  |                                          |        
|Interest income                      |  | $                                        | 5,105  
|Interest expense                     |  |                                          | (765   
|                                     |  |                                          |        
|Net interest income before provision |  |                                          | 4,340  
|Provision for loan losses            |  |                                          | (227   
|Other income                         |  |                                          | 331    
|Other expenses                       |  |                                          | (3,140 
|                                     |  |                                          |        
|Income before income taxes           |  |                                          | 1,304  
|Income taxes                         |  |                                          | (452   
|                                     |  |                                          |        
|Net income                           |  | $                                        | 852    
|                                     |  |                                          |        
|Asset employed at quarter end        |  | $                                        | 352,510
|                                     |  |                                          |        



Note 10 Recent Accounting
Developments:



In July 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes
Emerging Issues Task Force (EITF) 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entitys commitment to an
exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The adoption of SFAS No. 146 by the Company on January 1, 2003 did not have a material impact on the Companys financial
condition, results of operations or cash flows.



In December
2002, SFAS No. 148, Accounting for Stock-based CompensationTransition and Disclosure, an amendment of FASB Statement No. 123, was issued and amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for
stock-based employee compensation



12



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and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for annual financial statements for fiscal years ending
after December 15, 2002, and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company has not adopted the fair value based method of accounting for stock-based employee
compensation.



In November 2002, the FASB issued Interpretation
(FIN) No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, an interpretation of SFAS Nos. 5, 57 and 107, and rescission of FIN No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also
requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of the interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN
No. 45 did not have a material impact on the Companys financial condition, results of operations or cash flows.



In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities,an interpretation of Accounting Research Bulletin No. 51.
FIN No. 46 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. 46 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
of FIN No. 46 will apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after
June 15, 2003. The disclosure requirements will apply in all financial statements issued after January 31, 2003. The Corporation adopted the provisions of FIN No. 46 for interim periods beginning after December 31, 2002, and the provisions did not
had a material effect 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.



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 nine months ended September 30, 2003. This analysis should be read in conjunction with our 2002 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 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 and other factors referenced in the
10-K report for December 31, 2002 on file with the SEC, including in Item 1. BUSINESS - FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS. 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. All per
share numbers have been adjusted for the effects of a 5% stock dividend paid in November 2002.



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 southern 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 2000 to July 2002.



At September 30, 2003, we had total assets of $461 million,
total deposits of $381 million and shareholders equity of $35 million. We have five full service branches serving the communities of Escondido, Vista, Fallbrook, Bonsall and Temecula and an additional five SBA loan production offices in
California that originate loans in California, Arizona, Nevada and Oregon. According to June 30, 2002 FDIC data, our five branches have an 8.4% 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.



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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General Business Strategy



Our strategy is to be a high performing bank holding company serving the needs of small to medium-sized businesses and
individuals in our targeted communities.



Our operating goals
are to:



| |  | Enhance profitability and expand our franchise;
| | - | -----------------------------------------------



| |  | Maintain high credit quality;
| | - | -----------------------------



| |  | Increase core deposits and lower the costs of funds; and
| | - | --------------------------------------------------------



| |  | Efficiently manage capital.
| | - | ---------------------------



Enhance profitability and expand our franchise.We have improved earnings by expanding net interest income, growing non-interest income and
controlling expenses. This has resulted in record earnings for 2002 of $3.0 million and $4.0 million for the first nine months of 2003. Our return on average equity (ROAE) was 16.00% and 21.51% for the same periods. Our efficiency ratio
(operating expenses divided by net interest income before provision for loan losses plus non-interest income) has also improved from 70.25% for 2002 to 62.14% for the first nine months of 2003.



Maintain high credit quality. Oversight of our
lending portfolio has been performed by individuals with extensive experience in commercial lending, and who have been with us for a significant period of time. Donald W. Murray, Executive Vice President, Chief Credit Officer has 20 years experience
in commercial and SBA lending and has been with us since 1994. Gary M. Youmans, Executive Vice President, was hired in 1991 to develop our SBA lending operation. Mr. Youmans has over 33 years of experience in banking and SBA lending. In addition,
our other non-SBA commercial lending officers have an average tenure with us of 5 years, and have experience in excess of 15 years on average in commercial lending. Our consistent lending quality and underwriting expertise is the result of
experienced lenders and sound underwriting practices.



Over the
last five years the percentage of our net loan charge-offs to average loans outstanding was 0.13% with the percentages being 0.16% for 2002 and 0.22% for the first nine months of 2003. Non-accrual loans, net of government guarantees, to total loans
have averaged 0.42% of total loans for the last five years and were 0.23% at September 30, 2003.



Increase core deposits and lower our cost of funds. In 2000, Michael Patterson, Senior Vice President and Chief Administrative Officer, was
hired to oversee retail banking. Mr. Patterson, with 27 years experience as a regional retail banking manager for major banks and thrifts, brought new focus to both core deposit and fee generation in the deposit side. In addition, Mr. Patterson
expanded the branch operation by adding two new branches in 2001, with an additional branch planned for 2004. As a result, transaction accounts (checking, savings and money market accounts) increased 25% for the third quarter over last years
third quarter to $181.9 million as of September 30, 2003. Non-interest bearing deposits increased by 35% at the end of the third quarter of 2003 over September 30, 2002 levels.



With the continued expansion of the retail banking operations, wholesale deposits as a percentage of total deposits have
been declining. Wholesale deposits decreased from $81.7 million as of December 31, 2001 to $63.7 million as of December 31, 2002 and to $44.2 million as of September 30, 2003. We reduced the costs of deposits by 76 basis points between the quarters
ended September 30, 2002 and September 30, 2003. This has contributed to the improved net interest margin.



15



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Efficiently manage capital.We have efficiently managed capital at the holding company
while maintaining a well-capitalized status on all regulatory capital ratios at the Bank level. We maintain our capital levels at appropriate levels to fund foreseeable growth. Our capital base at the holding company is made up of
borrowed funds, Trust Preferred securities and Common Stock. Our goal is to continue to maximize ROAE and to minimize our overall cost of capital by maintaining an efficient capital structure.



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 other repossessed assets. Actual results could differ from those
estimates.



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



| |  | In determining the appropriate level of the allowance for loan losses, our Directors Loan Committee initially identifies 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 Directors Loan Committee establishes 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 are determined based on the historical losses on the underlying collateral of the commitment. The majority of these
commitments are on construction loans. Our Directors Loan Committee also establishes 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.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



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



| |  | Servicing assets and interest-only strips. In accordance with FAS 140, the Company recognizes a servicing asset or liability at the time a loan is sold and the Company
retains the servicing, based on the present value of the estimated future cash flows. The servicing asset is amortized proportionately over the period based on the ratio of net servicing income received in the current period to total net servicing
income projected to be realized from the servicing rights. Projected net servicing income is determined on the basis of the estimated future balance of the underlying loan portfolio which decreases over time from scheduled loan amortization and
prepayments. The Company estimates future prepayment rates based on relevant characteristics of the servicing portfolio, such as loan types, original terms to maturity and recent prepayment speeds, as well as current interest rate levels, market
forecasts and other economic conditions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We periodically evaluate servicing assets for impairment. For purposes of measuring impairment, the rights are stratified based on original term to maturity. The amount of
impairment recognized is the amount by which the servicing asset for a stratum exceeds its fair value. In estimating fair values at September 30, 2003, we utilized a weighted average prepayment assumption of approximately 8% and a discount rate of
10%. In estimating fair values at December 31, 2002, we utilized a weighted average prepayment assumption of approximately 7% and a discount rate of 12%.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Rights to future interest income from serviced loans that exceed contractually specified servicing fees are classified as interest-only strips. The interest-only strips are
accounted for as trading securities and 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 nine
months ended September 30, 2003 and 2002. At September 30, 2003, the fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 8% and a discount rate of 10%. At December 31, 2002, the fair value
of interest-only strips was estimated using a weighted average prepayment assumption of approximately 7% and a discount rate of 12%.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 Other Repossessed Assets. Real estate or other assets acquired through foreclosure or deed-in-lieu of foreclosure are initially recorded at the lower of
cost or fair value less estimated costs to sell through a charge to the allowance for estimated loan losses. Subsequent declines in value are charged to operations. There were two OREOs acquired through foreclosure as of September 30, 2003 compared
to none as of December 31, 2002. Valuation was done using the collateral method based on a recent appraisal of the underlying collateral. As of September 30, 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



Net income for the Banking division
increased to $2.2 million for the nine months ended September 30, 2003 compared to $362,000 for the nine months ended September 30, 2002. For the three months ended September 30, 2003, the Banking division net income increased to $852,000 compared
to $294,000 for the three months ended September 30, 2002. The increase in net income for the Banking division was primarily driven by increases in net interest income and non-interest income, and was partially offset by increases in provisions for
loan losses and non-interest expense. Net interest income for the Banking division increased from $9.1 million for the nine months ended September 30, 2002 to $12.2 million for the nine months ended September 30, 2003. This increase is primarily due
to the 35% decrease in interest expense from $4.3 million for the nine months ended September 30, 2002 to $2.8 million for the nine months ended September 30, 2003. The reduction in interest expense is the



17



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result of changes in the market rates for time deposits combined with an 18% increase in the average balance of transaction accounts (demand deposits plus
interest bearing checking, savings and money market accounts) for the nine months ended September 30, 2003 when compared to the same period in 2002. For the three months ended September 30, 2003, net interest income increased to $4.3 million
compared to $3.5 million for the three months ended September 30, 2002. The increase in net interest income is primarily due to the 40% decrease in interest expense. Interest expense decreased to $765,000 for the three months ended September 30,
2003 compared to $1.3 million for the three months ended September 30, 2002. Average transaction accounts increased 28% to $178.6 million for the three months ended September 30, 2003 compared to $139.6 million for the three months ended September
30, 2002.



SBA Division - Net Income



Net income for the SBA division increased to $1.8 million for the nine
months ended September 30, 2003 compared to $1.7 million for the nine months ended September 30, 2002. For the three months ended September 30, 2003, the SBA division net income increased to $655,000 compared to $481,000 for the three months ended
September 30, 2002. The increase in net income for the SBA division was primarily driven by increases in net interest income and non-interest income, and was partially offset by increases in provisions for loan losses and non-interest expense. Net
interest income for the SBA division increased from $2.5 million for the nine months ended September 30, 2002 to $2.7 million for the nine months ended September 30, 2003. The increase in net interest income is primarily due to the increase in
interest earning assets for the SBA division. Non-interest income increased from $3.7 million for the nine months ended September 30, 2002 to $4.4 million for the nine months ended September 30, 2003, as a result of increases in net gain on sale of
loans. For the three months ended September 30, 2003, non-interest income increased to $1.7 million compared to $1.2 million for the three months ended September 30, 2002, primarily due to increases in net gain on sale of loans.



Net gain on sale of loans increased from $1.0 million for the quarter ended
September 30, 2002 to $1.4 million for the quarter ended September 30, 2003. During the nine months ended September 30, 2003, net gain on sale of loans increased to $3.7 million compared to $3.4 million for the nine months ended September 30, 2002.
During the three months ended September 30, 2003 we originated $26.3 million in SBA loans compared to $22.3 million during the three months ended September 30, 2002. We sold $14.6 million in SBA loans, or 56% of originations, during the three months
ended September 30, 2003 compared to $14.4 million in SBA loans, or 65% of originations, during the three month period ended September 30, 2002. Although the dollar amount of sales increased only 1.4%, the gain on sale of loans increased 40.0% due
to an increase in the premiums received from the secondary market in 2003 when compared with 2002. During the nine months ended September 30, 2003, we originated $65.3 million in SBA loans compared to $60.4 million during the nine months ended
September 30, 2002. We sold $46.5 million in SBA loans, or 71% of originations, during the nine months ended September 30, 2003 compared to $55.2 million, or 91% of originations, during the nine months ended September 30, 2002. The gain on sale of
loans increased even though the volume of loans sold declined due to an increase in the premiums received from the secondary market in 2003 when compared with 2002. In the past, we had chosen to focus on retaining a certain percentage of SBA loan
production.



Non-interest expense for the three months ended
September 30, 2003 increased to $1.2 million compared to $1.0 million for the three months ended September 30, 2002. For the nine months ended September 30, 2003, non-interest expenses increased to $3.6 million compared to $3.1 million for the nine
months ended September 30, 2002. The increase in non-interest expense for the three month and nine month periods ended September 30, 2003 when compared with the same periods in 2002 is the result of incentive based compensation from increased SBA
loan originations noted above.



Net Income - Consolidated



Net income increased to $1.5 million for the three months ended September
30, 2003 compared to $775,000 for the three months ended September 30, 2002. Basic earnings per share were $0.37 and $0.22 for the three months



18



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ended September 30, 2003 and 2002, respectively. Diluted earnings per share were $0.35 and $0.21 for the three months ended September 30, 2003 and 2002,
respectively. ROAE was 19.93% for the three months ended September 30, 2003 compared to 16.10% for the three months ended September 30, 2002. The return on average assets (ROAA) for the three months ended September 30, 2003 was 1.33%
compared to 0.79% for the three months ended September 30, 2002.



Net income increased to $4.0 million for the nine months ended September 30, 2003 compared to $2.1 million for the nine months ended September 30, 2002. Basic earnings per share were $1.07 and $0.60 for the nine months ended September 30,
2003 and 2002, respectively. Diluted earnings per share were $1.01 and $0.58 for the nine months ended September 30, 2003 and 2002, respectively. ROAE was 21.51% for the nine months ended September 30, 2003 compared to 15.12% for the nine months
ended September 30, 2002. The ROAA for the nine months ended September 30, 2003 was 1.23% compared to 0.71% for the nine months ended September 30, 2002.



The increase in net income and profitability over both the three months ended and the nine months ended September 30, 2003 was mainly due to the increases
in net interest income and non-interest income, partially offset by increases in provision for loan losses and 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 the net gain on sale of loans. Other operating expenses increased as a result of the Companys expansion and increased loan production.



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.





19



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



|                                              |  | For the three months ended September 30, |        
|--------------------------------------------- |  | ---------------------------------------- | -------
|                                              |  | 2003                                     |        
|                                              |  | AverageBalance                           |        
|                                              |  | (dollars in thousands)                   |        
|Average assets:                               |  |                                          |        
|Securities and time deposits at other banks   |  | $                                        | 26,870 
|Fed funds sold                                |  |                                          | 21,503 
|Loans:                                        |  |                                          |        
|Commercial                                    |  |                                          | 109,090
|Real Estate                                   |  |                                          | 232,856
|Aircraft                                      |  |                                          | 29,709 
|Consumer                                      |  |                                          | 4,483  
|                                              |  |                                          |        
|Total loans                                   |  |                                          | 376,138
|                                              |  |                                          |        
|Total earning assets                          |  |                                          | 424,511
|Non earning assets                            |  |                                          | 29,911 
|                                              |  |                                          |        
|Total average assets                          |  | $                                        | 454,422
|                                              |  |                                          |        
|Average liabilities and shareholders equity:  |  |                                          |        
|Interest bearing deposits:                    |  |                                          |        
|Savings and interest bearing accounts         |  | $                                        | 113,993
|Time deposits                                 |  |                                          | 207,425
|                                              |  |                                          |        
|Total interest bearing deposits               |  |                                          | 321,418
|Trust preferred securities(1)                 |  |                                          | 10,415 
|Other borrowings                              |  |                                          | 21,412 
|                                              |  |                                          |        
|Total interest bearing liabilities            |  |                                          | 353,245
|Demand deposits                               |  |                                          | 64,568 
|Accrued expenses and other liabilities        |  |                                          | 6,366  
|Net shareholders equity                       |  |                                          | 30,243 
|                                              |  |                                          |        
|Total average liabilities shareholders equity |  | $                                        | 454,422
|                                              |  |                                          |        
|Net interest spread                           |  |                                          |        
|                                              |  |                                          |        
|Net interest income                           |  |                                          |        
|                                              |  |                                          |        
|Net interest margin                           |  |                                          |        
|                                              |  |                                          |        



|(1) | Trust preferred securities are shown net of the effect of the interest rate swap described below.
|--- | -------------------------------------------------------------------------------------------------



Interest income for the three months ended September 30, 2003 increased to
$6.7 million, compared to $6.3 million for the three months ended September 30, 2002. The increase was due to the 15.53% 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 5.25% decline in the prime rate since the beginning of 2001. 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 $424.5 million for the three months ended September 30, 2003 compared to $367.5 million for the three months ended September 30, 2002. The yield on
interest earning assets decreased to 6.26% for the three months ended September 30, 2003 compared to 6.77% for the three months ended September 30, 2002. The largest single component of interest earning assets was real estate loans receivable, which
had an average balance of $232.9 million with a yield of 7.02% for the three months ended September 30, 2003 compared to $179.8 million with a yield of 7.50% for the three months ended September 30, 2002.



Interest expense for the three months ended September 30, 2003 decreased to
$1.4 million compared to $2.1 million for the three months ended September 30, 2002. This decrease was due to the repricing of maturing



20



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certificates of deposit (CDs) following a 5.25% decline in the prime rate since the beginning of 2001 combined with the effects of an interest
rate swap hedging the Trust Preferred Securities, and was partially offset by an increase in average interest bearing liabilities. Average interest-bearing liabilities increased to $353.2 million for the three months ended September 30, 2003
compared to $323.5 million for the three months ended September 30, 2002. Average time deposits, the largest component of interest bearing liabilities, increased to $207.4 million with a cost of 1.91% for the three months ended September 30, 2003
compared to $202.7 million with a cost of 2.92% for the three months ended September 30, 2002.



Other average borrowings increased to $31.8 million with a cost of 3.25% for the three months ended September 30, 2003 compared to $27.3 million with a cost of 5.82% for the three months ended September 30, 2002. We
issued $10.0 million in Trust Preferred Securities in 2000. In December 2002, the Company entered into an interest rate swap agreement with a third party, which in effect changed the interest rate from an 11.0% fixed rate coupon to a six month
floating rate that resets semi-annually at 5.455% over six month LIBOR. As a result of the interest rate swap, the cost of the Trust Preferred Securities declined to 7.31% for the three months ended September 30, 2003 compared to 11.03% for the
three months ended September 30, 2002.



In addition to the
decrease in cost of interest bearing deposits and other borrowings, the increase in non-interest bearing demand deposits has contributed significantly to the lowered cost of funds. Demand deposits increased 40% from an average $46.1 million for the
three months ended September 30, 2002 to $64.6 million for the three months ended September 30, 2003. The cost of deposits, including demand deposits and interest bearing deposits, decreased to 1.22% for the three months ended September 30, 2003
compared to 1.98% for the three months ended September 30, 2002. Average transaction accounts (including interest bearing checking, demand deposits, money market accounts and savings accounts), increased 28% to $178.6 million for the three months
ended September 30, 2003 compared to $139.6 million for the three months ended September 30, 2002. The cost of funds, including interest bearing liabilities and demand deposits, was reduced 90 basis points to 1.37% for the three months ended
September 30, 2003 compared to 2.27% for the three months ended September 30, 2002.



21



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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. All liabilities are
short term with the exception of the Trust Preferred Securities, which are long term.



|                                              |  | For the nine months ended September 30, |        
|--------------------------------------------- |  | --------------------------------------- | -------
|                                              |  | 2003                                    |        
|                                              |  | AverageBalance                          |        
|                                              |  | (dollars in thousands)                  |        
|Average assets:                               |  |                                         |        
|Securities and time deposits at other banks   |  | $                                       | 30,350 
|Fed funds sold                                |  |                                         | 13,798 
|Loans:                                        |  |                                         |        
|Commercial                                    |  |                                         | 108,063
|Real Estate                                   |  |                                         | 219,672
|Aircraft                                      |  |                                         | 29,484 
|Consumer                                      |  |                                         | 5,519  
|                                              |  |                                         |        
|Total loans                                   |  |                                         | 362,738
|                                              |  |                                         |        
|Total earning assets                          |  |                                         | 406,886
|Non earning assets                            |  |                                         | 27,496 
|                                              |  |                                         |        
|Total average assets                          |  | $                                       | 434,382
|                                              |  |                                         |        
|Average liabilities and shareholders equity:  |  |                                         |        
|Interest bearing deposits:                    |  |                                         |        
|Savings and interest bearing accounts         |  | $                                       | 100,312
|Time deposits                                 |  |                                         | 211,675
|                                              |  |                                         |        
|Total interest bearing deposits               |  |                                         | 311,987
|Trust preferred securities(1)                 |  |                                         | 10,138 
|Other borrowings                              |  |                                         | 22,679 
|                                              |  |                                         |        
|Total interest bearing liabilities            |  |                                         | 344,804
|Demand deposits                               |  |                                         | 58,958 
|Accrued expenses and other liabilities        |  |                                         | 5,864  
|Net shareholders equity                       |  |                                         | 24,756 
|                                              |  |                                         |        
|Total average liabilities shareholders equity |  | $                                       | 434,382
|                                              |  |                                         |        
|Net interest spread                           |  |                                         |        
|                                              |  |                                         |        
|Net interest income                           |  |                                         |        
|                                              |  |                                         |        
|Net interest margin                           |  |                                         |        
|                                              |  |                                         |        



|(1) | Trust preferred securities are shown net of the interest rate swap described below.
|--- | -----------------------------------------------------------------------------------



Interest income for the nine months ended September 30, 2003 increased to $19.8 million compared to $18.4 million for the
nine months ended September 30, 2002. The increase was due to the 11.99% 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
$406.9 million for the nine months ended September 30, 2003 compared to $363.3 million for the nine months ended September 30, 2002. The yield on interest earning assets decreased to 6.49% for the nine months ended September 30, 2003 compared to
6.76% for the nine months ended September 30, 2002. The largest single component of interest earning assets was real estate loans receivable, which had an average balance of $219.7 million with a yield of 7.14% for the nine months ended September
30, 2003 compared to $175.9 million with a yield of 7.45% for the nine months ended September 30, 2002.



Interest expense for the nine months ended September 30, 2003 decreased to $4.9 million compared to $6.7 million for the nine months ended September 30,
2002. This decrease was due to the repricing of maturing certificates of deposit (CDs) combined with the effects of an interest rate swap hedging our Trust Preferred Securities, and was partially offset by an increase in average interest
bearing deposits and other borrowings. Average interest-bearing liabilities increased to $344.8 million for the nine months ended September 30, 2003 compared to $323.2 million for the nine months ended September 30, 2002. Average time deposits, the
largest component of interest bearing deposits, increased to $211.7 million with a cost of 2.19% for the nine months ended September 30, 2003 compared to $206.6 million with a cost of 3.18% for the nine months ended September 30, 2002.





22



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Other average borrowings increased to $32.8 million with a cost of 3.34% for the nine months ended
September 30, 2003 compared to $25.3 million with a cost of 6.03% for the nine months ended September 30, 2002. In March of 2001, we established a line of credit with the Federal Home Loan Bank (FHLB) collateralized by commercial loans. Funds from
the credit line were used to increase our liquidity. In addition to FHLB advances, other lines of credit are utilized to increase capital at the Bank and, until February 14, 2002, to fund our ESOP. The loan to our ESOP was paid in full on February
14, 2002. As a result of an interest rate swap, the cost of our Trust Preferred Securities declined to 7.04% for the nine months ended September 30, 2003 compared to 11.15% for the nine months ended September 30, 2002.



Net Interest Income before Provision for Estimated Loan Losses



Net interest income before provision for estimated loan losses for the three
months ended September 30, 2003 was $5.3 million compared to $4.2 million for the three months ended September 30, 2002. 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 $424.5 million for the three months ended September 30, 2003 with a net interest margin of 4.91% compared to $367.5 million with a net interest margin of 4.49% for the three months ended September
30, 2002.



Net interest income before provision for estimated
loan losses for the nine months ended September 30, 2003 was $14.9 million compared to $11.6 million for the nine months ended September 30, 2002. 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 $406.9 million for the nine months ended September 30, 2003 with a net interest margin of 4.90% compared to $363.3 million with a net interest margin of 4.28% for the nine
months ended September 30, 2002.



For the three months ended
and the nine months ended September 30, 2003, 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



Due to the growth in loans, the
provision for estimated loan losses increased to $474,000 for the three months ended September 30, 2003 from $306,000 for the three months ended September 30, 2002. For the nine months ended September 30, 2003 and 2002, the provision for estimated
loan losses totaled $1.2 million and $785,000, respectively. 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 $2.0 million for the three months ended September 30, 2003 compared to $1.6 million for the three months ended September 30, 2002. For the nine months ended
September 30, 2003, other operating income totaled $5.6 million compared to $4.7 million for the nine months ended September 30, 2002. The increase in other operating income for the three months and nine months ended September 30 2003 was due to an
increase in gains on sale of loans, loan servicing fees, customer service charges and other fee income.



Net gain on sale of loans increased from $1.0 million for the quarter ended September 30, 2002 to $1.4 million for the quarter ended September 30, 2003.
During the nine months ended September 30, 2003, net gain on sale of loans increased to $3.7 million compared to $3.4 million for the nine months ended September 30, 2002. For further discussion of the change in net gain on sale of loans, please see
SBA Division  Net Income above.



In order to
provide greater stability to our earnings and provide meaningful guidance to investors, we have publicly announced that our goal will be to sell sufficient SBA loans on a quarter-by-quarter basis to generate



23



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between $1.0 million and $1.5 million in gain on sale of loans each quarter. SBA loans not sold in the secondary market will be retained to enhance interest
income.



We originated $11.2 million in mortgage loans during
the three months ended September 30, 2002. Due to the closure of the mortgage department effective January 31, 2003 we did not originate any mortgage loans during the three months ended September 30, 2003. During the nine months ended September 30,
2003, we originated $2.4 million in mortgage loans compared to $37.7 million during the nine months ended September 30, 2002. We sold $9.3 million and $33.7 million in mortgage loans during the three and nine months ended September 30, 2002,
respectively, compared to none and $6.6 million during the three and nine months ended September 30, 2003, respectively. The closure of the mortgage department is expected to have minimal impact on the gain on sale of loans.



Loan servicing income increased to $166,000 for the three months ended
September 30, 2003 compared to $137,000 for the three months ended September 30, 2002. For the nine months ended September 30, 2003, loan servicing fees totaled $481,000 compared to $333,000 for the nine months ended September 30, 2002. Loan
servicing income is the result of the spread between the interest rate paid by borrowers and the interest rate paid to third party investors, multiplied by the total volume of loans sold, net of the amortization of the servicing asset. The increase
in loan servicing income is a result of the increase in loans serviced for others. As of September 30, 2003, SBA loans serviced for others increased to $131.4 million compared to $109.6 million as of September 30, 2002. The increase in loans
serviced for others is a result of the loans sold in 2002 and the first nine months of 2003, net of principal repayments.



Customer service charges increased to $180,000 for the three months ended September 30, 2003 compared to $160,000 for the three months ended September 30,
2002. For the nine months ended September 30, 2003, customer service charges increased to $548,000 compared to $435,000 for the nine months ended September 30, 2002. The increase is the result of a 40% increase in average demand deposit accounts to
$64.6 million for the three months ended September 30, 2003 from $46.1 million for the three months ended September 30, 2002 and the 36% increase in average demand accounts to $59.0 million for the nine months ended September 30, 2003 compared to
$43.3 million for the nine months ended September 30, 2002.



Other fee income increased to $313,000 for the three months ended September 30, 2003 compared to $259,000 for the three months ended September 30, 2002. For the nine months ended September 30, 2003, other fee income increased to $825,000
compared to $649,000 for the nine months ended September 30, 2002. The increase in other fee income for the three month and nine month periods is a result of an increase in fees from brokering of loans to other financial institutions which the
Company does not directly fund.



Other Operating Expenses



Other operating expenses are non-interest types of expenses and are incurred
in our normal course of business. Salaries and employee benefits, occupancy, telephone, premises and equipment, data processing, depreciation, marketing and promotions, professional services, director/officer/employee expenses, office and other
expenses are the major categories of other operating expenses. Other operating expenses increased to $4.4 million for the three months ended September 30, 2003 compared to $4.1 million for the three months ended September 30, 2002. For the nine
months ended September 30, 2003, operating expenses increased to $12.7 million compared to $12.0 million for the nine months ended September 30, 2002.



For the three months ended September 30, 2003, the increase in other operating expenses is primarily due to the increase in salaries and employee benefits
as a result of an increase in incentive based compensation. The decrease in depreciation and other expenses is the result of non-recurring expenses incurred in the three months and nine months ended September 30, 2002 as a result of the relocation
to our new corporate headquarters. In addition to salaries and employee benefits, professional services, including legal, accounting and other consultants increased due to several factors including compliance with the Sarbanes-Oxley Act of 2002.



Our efficiency ratio, which is the ratio of operating expenses
to net interest income before provision for loan losses plus non-interest income (excluding gains or losses on the sale of OREO), improved to 60.10% for the three



24



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months ended September 30, 2003 compared to 71.44% for the three months ended September 30, 2002. The decrease in efficiency ratio was due to the increase in
net interest and other operating income as well, partially offset by an increase in operating expenses. For the nine months ended September 30, 2003 the efficiency ratio improved to 62.14% compared to 73.24% for the nine months ended September 30,
2002 due to improved net interest and non-interest income, partially offset by an increase in operating expenses.



The following table compares each of the components of other operating expenses for the three months and nine months ended September 30, 2003 and 2002,
respectively:



|                                        |  | For the three monthsended Sep. 30, |       |      | For the nine monthsended Sep. 30, |         
|--------------------------------------- |  | ---------------------------------- | ----- | ---- | --------------------------------- | --------
|                                        |  | 2003                               |       | 2002 |                                   | Change $
|                                        |  | (dollars in thousands)             |      
|Other operating expenses:               |  |                                    |       |      |                                   |         
|Salaries and employee benefits          |  | $                                  | 2,473 |      | $                                 | 2,268   
|Occupancy                               |  |                                    | 335   |      |                                   | 321     
|Telephone                               |  |                                    | 67    |      |                                   | 75      
|Premises and equipment                  |  |                                    | 60    |      |                                   | 54      
|Data processing                         |  |                                    | 181   |      |                                   | 150     
|Depreciation expense                    |  |                                    | 199   |      |                                   | 212     
|Marketing and promotions                |  |                                    | 71    |      |                                   | 60      
|Professional services                   |  |                                    | 256   |      |                                   | 303     
|Director, officer and employee expenses |  |                                    | 106   |      |                                   | 105     
|Office expenses                         |  |                                    | 168   |      |                                   | 148     
|Other expenses                          |  |                                    | 452   |      |                                   | 392     
|                                        |  |                                    |       |      |                                   |         
|Total other operating expenses          |  | $                                  | 4,368 |      | $                                 | 4,088   
|                                        |  |                                    |       |      |                                   |         



Provision for Income Taxes



The effective income tax rate was 37.9% for the three
months ended September 30, 2003 compared to 41.6% for the three months ended September 30, 2002. For the nine months ended September 30, 2003, the effective tax rate was 39.1% compared to 41.6% for the nine months ended September 30, 2002. The
effective tax rate declined in the three months and nine month periods in 2003 when compared to 2002 due to investments which generate income tax credits. See FINANCIAL CONDITION  Investments section of this discussion for further
information. Provisions for income taxes totaled $919,000 and $553,000 for the three months ended September 30, 2003 and 2002, respectively. Provisions for income taxes totaled $2.6 million and $1.5 million for the nine months ended September 30,
2003 and 2002, respectively.



FINANCIAL CONDITION



Summary of Changes in Consolidated Balance Sheets



September 30, 2003 compared to December 31, 2002 and September 30, 2002



Total assets increased to $461.1 million as of September 30, 2003
compared to $415.7 million as of December 31, 2002 and $388.6 million as of September 30, 2002. The increase in total assets was primarily due to the growth in net loans to $380.4 million as of September 30, 2003, compared to $339.5 million as of
December 31, 2002, and $318.7 million as of September 30, 2002. Please refer to the Loans section of this discussion for further information.



Deposits increased to $381.2 million as of September 30, 2003 compared to $364.0 million as of December 31, 2002 and $336.1 million as of September 30,
2002. Cash and cash equivalents was $36.8 million as of September 30, 2003 compared to $21.5 million as of December 31, 2002 and $28.4 million as of September 30, 2002. Please refer to the Deposits and Borrowings section of this
discussion for further information.



Shareholders equity
was $35.0 million as of September 30, 2003 compared to $20.6 million as of December 31, 2002, and was $19.5 million as of September 30, 2002. Please refer to the Capital section of this discussion for further information.



25



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Investments



Our held to maturity portfolio and other investments consists primarily of U.S. Treasury and agency securities, mortgage backed securities, SBA securities
and Low Income Housing Limited Partnerships. Held to maturity securities totaled $11.7 million as of September 30, 2003, compared to $21.3 million as of December 31, 2002 and $24.7 million as of September 30, 2002. Of these totals, U.S Government
and other securities totaled $3.0 million as of September 30, 2003 compared to $5.0 million as of December 31, 2002 and $5.4 million as of September 30, 2002. As of September 30, 2003 all of these securities were held as collateral for public funds,
tax and loan deposits. As of September 30, 2003 the remainder of the held to maturity portfolio was held in mortgage backed securities backed by agencies of the U.S. government. The decline on held to maturity securities is a result of maturities
and prepayments.



As of September 30, 2003, our available for
sale portfolio totaled $3.1 million in mortgage backed securities. The securities were purchased during the nine months ended September 30, 2003. Of this total, a single security of $1.6 million were pledged as additional security for our interest
rate swap. The interest rate swap was established in December 2002 and we pledged restricted cash instead of securities at that time. 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. As of September 30, 2003, the collateral requirement was $956,000, compared to $1.2 million as of December 31, 2002.



As of September 30, 2003 our trading securities consisted of a mutual fund
which invests primarily in U.S. Government agency and treasury securities. The trading securities totaled $9.9 million as of September 30, 2003 compared to $16.1 million as of December 31, 2003 and none as of September 30, 2002.



As of September 30, 2003 we held investments in certain limited partnerships
included with held to maturity securities totaling $2.9 million, compared to $1.0 million as of December 31, 2002 and none as of September 30, 2002. These funds generate returns by providing income tax credits as a result of their investment in low
income housing developments.



Average Federal Funds sold for
the three months and nine months ended September 30, 2003 were $21.5 million and $13.8 million, respectively, compared to $19.1 million and $17.8 million for the three months and nine months ended September 30, 2002, respectively.



We held $569,000 in Federal Reserve Bank stock as of September 30, 2003 and
December 31, 2002 compared to $554,000 as of September 30, 2002. We held $1,414,000 in Federal Home Loan Bank stock as of September 30, 2003 compared to $979,000 as of December 31, 2002 and $1,729,000 as of September 30, 2002.



26



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The following table sets forth the carrying values and estimated fair values of our held to maturity and
other investment portfolio at the dates indicated:



|                                            |  | At September 30,       |        | At December 31,    
|------------------------------------------- |  | ---------------------- | ------ | -------------------
|                                            |  | 2003                   |        | 2002               
|                                            |  | AmortizedCost          |        | EstimatedFair value
|                                            |  | (dollars in thousands)
|U.S. Government agency and other securities |  | $                      | 3,001  |                    
|Agency mortgage backed securities           |  |                        | 6,291  |                    
|SBA loan pools                              |  |                        | 997    |                    
|Low income housing investments              |  |                        | 1,456  |                    
|                                            |  |                        |        |                    
|Total Securities                            |  | $                      | 11,745 |                    
|                                            |  |                        |        |                    



The contractual maturities held to
maturity at September 30, 2003 were as follows:



|Year maturing                                                            |  | AmortizedCost          |        | EstimatedFair Value |   | WeightedAverageInterest Rate | 
|------------------------------------------------------------------------ |  | ---------------------- | ------ | ------------------- | - | ---------------------------- | 
|                                                                         |  | (dollars in thousands) |       
|                                                                         |  |                        |       
|Due in one year or less                                                  |  | $                      | 1,498  |                     | $ | 1,533                        | 
|Due greater than one year through five years                             |  |                        | 1,503  |                     |   | 1,521                        | 
|Due greater than ten years*                                              |  |                        | 1,456  |                     |   | 1,456                        | 
|                                                                         |  |                        |        |                     |   |                              | 
|Subtotal U.S. Government agencies and other securities                   |  |                        | 4,457  |                     |   | 4,510                        | 
|Mortgage backed securities due greater than five years through ten years |  |                        | 1,582  |                     |   | 1,624                        | 
|Mortgage backed securities due greater than ten years                    |  |                        | 4,709  |                     |   | 4,745                        | 
|                                                                         |  |                        |        |                     |   |                              | 
|Subtotal mortgage backed securities                                      |  |                        | 6,291  |                     |   | 6,369                        | 
|SBA loan pools due greater than ten years                                |  |                        | 997    |                     |   | 1,003                        | 
|                                                                         |  |                        |        |                     |   |                              | 
|Total                                                                    |  | $                      | 11,745 |                     | $ | 11,882                       | 
|                                                                         |  |                        |        |                     |   |                              | 



|* | Note: Weighted Average Interest Rate is based on a tax equivalent yield.
|- | ------------------------------------------------------------------------



Loans



Loan balances, net of the allowance for loan losses, increased to $380.4 million as of September 30, 2003 compared to $339.5 million as of December 31, 2002 and $318.7 million as of September 30, 2002. Total gross
loans increased 19.6% from September 30, 2002 to September 30, 2003. We service SBA 7a loans sold to other investors. As of September 30, 2003, we serviced $131.4 million in SBA 7a loans for other investors compared to $117.2 million as of December
31, 2002 and $109.6 million as of September 30, 2002.



27



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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 nine monthsended September 30, |         | At or for the three monthsended September 30,
|-------------------------------- |  | -------------------------------------------- | ------- | ---------------------------------------------
|                                 |  | 2003                                         |         | 2002                                         
|                                 |  | (dollars in thousands)                       |         | (dollars in thousands)                       
|                                 |  |                                              |         |                                              
|Beginning balance                |  | $                                            | 339,471 |                                              
|Loans originated for sale:       |  |                                              |         |                                              
|Real estate:                     |  |                                              |         |                                              
|One-to four-family               |  |                                              | 2,353   |                                              
|Commercial                       |  |                                              | 58,021  |                                              
|                                 |  |                                              |         |                                              
|Total loans originated for sale  |  |                                              | 60,374  |                                              
|Loans sold:                      |  |                                              |         |                                              
|Real estate:                     |  |                                              |         |                                              
|Construction                     |  |                                              | 1,725   |                                              
|One-to four-family               |  |                                              | 6,645   |                                              
|Commercial                       |  |                                              | 49,060  |                                              
|                                 |  |                                              |         |                                              
|Total loans sold                 |  |                                              | 57,430  |                                              
|Loans originated for investment: |  |                                              |         |                                              
|Commercial loans                 |  |                                              | 21,307  |                                              
|Real estate:                     |  |                                              |         |                                              
|Construction loans               |  |                                              | 83,582  |                                              
|One-to four-family               |  |                                              |        |                                              
|Commercial                       |  |                                              | 62,626  |                                              
|Consumer                         |  |                                              | 1,157   |                                              
|                                 |  |                                              |         |                                              
|Total loans originated           |  |                                              | 168,672 |                                              
|Less:                            |  |                                              |         |                                              
|Principal repayments             |  |                                              | 129,556 |                                              
|Other net charges(1)             |  |                                              | 1,125   |                                              
|                                 |  |                                              |         |                                              
|Total Loans                      |  | $                                            | 380,406 |                                              
|                                 |  |                                              |         |                                              

---

|(1) | Other net changes include changes in allowance for loan losses, deferred loan fees, loans in process and unamortized premiums and discounts.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



Loans held for sale are accounted for at the
lower of cost or market at any given reporting date. Market is determined by obtaining estmated pricing from third party investors in similar types of product and considers loan type, maturity, interest rate, margin (if applicable) and other
factors. As of September 30, 2003, loans held for sale totaled $55.3 million compared to $52.9 million as of December 31, 2002 and $51.1 million as of September 30, 2002. For the three months and nine months ended September 30, 2003 and 2002, there
were no mark to market adjustments to loans held for sale.



28



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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 September 30,       |         |   | At December 31, |       
|----------------------------------------------- |  | ---------------------- | ------- | - | --------------- | ------
|                                                |  | 2003                   |         |   | 2002            |       
|                                                |  | Amount                 |         |   | Percent         |       
|                                                |  | (dollars in thousands) |        
|Loan portfolio composition:                     |  |                        |         |   |                 |       
|Commercial loans                                |  | $                      | 20,763  |   |                 | 5.36  
|Aircraft loans                                  |  |                        | 29,813  |   |                 | 7.70  
|Real estate:                                    |  |                        |         |   |                 |       
|Construction loans                              |  |                        | 74,098  |   |                 | 19.13 
|Secured by                                      |  |                        |         |   |                 |       
|One- to four-family                             |  |                        | 10,312  |   |                 | 2.66  
|Commercial                                      |  |                        | 248,054 |   |                 | 64.04 
|Consumer:                                       |  |                        |         |   |                 |       
|Home equity lines of credit                     |  |                        | 1,517   |   |                 | 0.39  
|Other                                           |  |                        | 2,802   |   |                 | 0.72  
|                                                |  |                        |         |   |                 |       
|Total Gross loans outstanding                   |  |                        | 387,359 |   |                 | 100.00
|Deferred loan fees and unamortized gains        |  |                        | (2,408  | ) |                 |       
|Allowance for loan losses                       |  |                        | (4,545  | ) |                 |       
|                                                |  |                        |         |   |                 |       
|Net loans held for investment and held for sale |  | $                      | 380,406 |   |                 |       
|                                                |  |                        |         |   |                 |       



Loan Maturity



The following table sets forth the contractual maturities
of our gross loans at September 30, 2003:



|                                                        |  | One yearor less        |         | More than1 year to3 years |   | More than3 years to5 years |  | More than5 years |        | TotalLoans
|------------------------------------------------------- |  | ---------------------- | ------- | ------------------------- | - | -------------------------- |  | ---------------- | ------ | ----------
|                                                        |  | (dollars in thousands)
|Loan portfolio composition:                             |  |                        |         |                           |   |                            |  |                  |        |           
|Commercial loans                                        |  | $                      | 8,818   |                           | $ | 1,839                      |  | $                | 6,533  |           
|Aircraft loans                                          |  |                        | 846     |                           |   | 76                         |  |                  | 330    |           
|Real estate:                                            |  |                        |         |                           |   |                            |  |                  |        |           
|Construction loans                                      |  |                        | 68,934  |                           |   | 1,053                      |  |                  | 164    |           
|Secured by one- to four-family residential properties   |  |                        | 3,266   |                           |   | 2,185                      |  |                  | 1,264  |           
|Secured by commercial properties                        |  |                        | 37,917  |                           |   | 14,656                     |  |                  | 17,175 |           
|Consumer:                                               |  |                        |         |                           |   |                            |  |                  |        |           
|Home equity lines of credit                             |  |                        |        |                           |   | 92                         |  |                  | 51     |           
|Other                                                   |  |                        | 803     |                           |   | 858                        |  |                  | 819    |           
|                                                        |  |                        |         |                           |   |                            |  |                  |        |           
|Total gross loans held for investment and held for sale |  | $                      | 120,584 |                           | $ | 20,759                     |  | $                | 26,336 |           
|                                                        |  |                        |         |                           |   |                            |  |                  |        |           



Non-performing
assets.Non-performing assets consist of non-performing loans, Other Real Estate Owned (OREO) and other 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.



29



---

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



|                                                                                                                      |  | September 30,2003      |        |   | December 31,2002 |   |        | September 30,2002 | 
|--------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | - | ------ | ----------------- | 
|                                                                                                                      |  | (dollars in thousands) |       
|                                                                                                                      |  |                        |       
|Non-accrual loans                                                                                                     |  | $                      | 2,378  |   |                  | $ | 2,254  |                   | 
|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                                                                                            |  |                        | 2,378  |   |                  |   | 2,254  |                   | 
|Other real estate owned                                                                                               |  |                        | 724    |   |                  |   |       |                   | 
|Other repossessed assets                                                                                              |  |                        | 475    |   |                  |   |       |                   | 
|                                                                                                                      |  |                        |        |   |                  |   |        |                   | 
|Total non-performing assets                                                                                           |  | $                      | 3,577  |   |                  | $ | 2,254  |                   | 
|                                                                                                                      |  |                        |        |   |                  |   |        |                   | 
|                                                                                                                      |  |                        |       
|SUPPLEMENTAL DATA                                                                                                     |  |                        |        |   |                  |   |        |                   | 
|Government guaranteed portion of total loans                                                                          |  | $                      | 27,837 |   |                  | $ | 32,066 |                   | 
|Non-performing loans, net of government guarantees                                                                    |  | $                      | 910    |   |                  | $ | 651    |                   | 
|Total non-performing loans/gross loans                                                                                |  |                        | 0.61   | % |                  |   | 0.65   | %                 | 
|Total non-performing assets/total assets                                                                              |  |                        | 0.78   | % |                  |   | 0.54   | %                 | 
|Total non-performing loans, net of guarantees/gross loans                                                             |  |                        | 0.23   | % |                  |   | 0.19   | %                 | 
|Total non-performing assets, net of guarantees/total assets                                                           |  |                        | 0.46   | % |                  |   | 0.16   | %                 | 
|Allowance for loan losses                                                                                             |  | $                      | 4,545  |   |                  | $ | 3,945  |                   | 
|Net charge offs to average loans outstanding                                                                          |  |                        | 0.22   | % |                  |   | 0.16   | %                 | 
|Loan loss allowance/loans, gross                                                                                      |  |                        | 1.17   | % |                  |   | 1.14   | %                 | 
|Loan loss allowance/loans held for investment                                                                         |  |                        | 1.38   | % |                  |   | 1.36   | %                 | 
|Loan loss allowance/non-performing loans                                                                              |  |                        | 191.13 | % |                  |   | 175.02 | %                 | 
|Loan loss allowance/total assets                                                                                      |  |                        | 0.99   | % |                  |   | 0.95   | %                 | 
|Loan loss allowance/non-performing assets                                                                             |  |                        | 127.06 | % |                  |   | 175.02 | %                 | 
|Loan loss allowance/non-performing loans, net of guarantees                                                           |  |                        | 499.45 | % |                  |   | 605.99 | %                 | 
|Loan loss allowance/non-performing assets, net of guarantees                                                          |  |                        | 215.50 | % |                  |   | 605.99 | %                 | 



Non-accrual Loans.Non-accrual loans are impaired loans where the original contractual amount may not be fully collectible. We measure our impaired loans by using the fair value of the collateral if the loan is collateral-dependent and the present value of the
expected future cash flows discounted at the loans effective interest rate if the loan is not collateral-dependent. As of September 30, 2003, December 31, 2002 and September 30, 2002 all impaired or non-accrual loans were collateral-dependent.
We place loans on non-accrual status that are delinquent 90 days or more or when a reasonable doubt exists as to the collectibility of interest and principal. As of September 30, 2003 we had twelve loans on non-accrual status totaling $2.4 million
with $1.5 million, or 62%, guaranteed by the SBA. As of December 31, 2002, we had fourteen loans on non-accrual status totaling $2.3 million. Of this total, $1.6 million, or 71%, was guaranteed by the SBA. As of September 30, 2002, we had fourteen
loans on non-accrual status totaling $2.9 million. Of this total $1.9 million, or 65%, was guaranteed by the SBA.



Included in non-accrual loans are loans less than 90 days delinquent. Loans 90 days or more delinquent totaled $1.8 million as of September 30, 2003,
compared to $655,000 as of December 31, 2002 and $1.0 million as of September 30, 2002. Net of government guarantees, loans 90 days or more delinquent as of September 30, 2003 were $150,000 compared to $107,000 as of December 31, 2002 and $164,000
as of September 30, 2002.



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 other repossessed assets, (all net of government guarantees) at September 30, 2003 were $4.9 million compared to $1.4 million as of December 31, 2002 and $2.2 million as of September 30, 2002.



30



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



In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being
made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The allowance is increased by provisions charged against earnings
and reduced by net loan chargeoffs. 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 our Directors Loan Committee. This committee assigns 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 Directors Loan Committee meets quarterly to review the portfolio. To the extent that any of these conditions are evidenced by identifiable
problem credit or portfolio segment as of the evaluation date, the committees 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.



31



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



|                                                    |  | At or for the nine months ended September 30, |       |   | At or for the three monthsended September 30, |  
|--------------------------------------------------- |  | --------------------------------------------- | ----- | - | --------------------------------------------- | -
|                                                    |  | 2003                                          |       |   | 2002                                          |  
|                                                    |  | (dollars in thousands)                        |       |   | (dollars in thousands)                        |  
|Balance at beginning of period                      |  | $                                             | 3,945 |   |                                               | $
|Chargeoffs:                                         |  |                                               |       |   |                                               |  
|Real estate loans:                                  |  |                                               |       |   |                                               |  
|One - to four - family                              |  |                                               | 102   |   |                                               |  
|Commercial                                          |  |                                               | 129   |   |                                               |  
|Commercial                                          |  |                                               | 329   |   |                                               |  
|Aircraft                                            |  |                                               | 48    |   |                                               |  
|Consumer                                            |  |                                               | 34    |   |                                               |  
|                                                    |  |                                               |       |   |                                               |  
|Total chargeoffs                                    |  |                                               | 642   |   |                                               |  
|Recoveries:                                         |  |                                               |       |   |                                               |  
|Real estate loans:                                  |  |                                               |       |   |                                               |  
|One - to four-family                                |  |                                               | 20    |   |                                               |  
|Commercial                                          |  |                                               | 4     |   |                                               |  
|Commercial                                          |  |                                               | 27    |   |                                               |  
|Aircraft                                            |  |                                               |      |   |                                               |  
|Consumer                                            |  |                                               | 1     |   |                                               |  
|                                                    |  |                                               |       |   |                                               |  
|Total recoveries                                    |  |                                               | 52    |   |                                               |  
|                                                    |  |                                               |       |   |                                               |  
|Net chargeoffs                                      |  |                                               | 590   |   |                                               |  
|Reserve for losses on commitments to extend credit* |  |                                               | (5    | ) |                                               |  
|Provision for loan losses                           |  |                                               | 1,195 |   |                                               |  
|                                                    |  |                                               |       |   |                                               |  
|Balance at end of period                            |  | $                                             | 4,545 |   |                                               | $
|                                                    |  |                                               |       |   |                                               |  
|Net charge offs to average loans                    |  |                                               | 0.22  | % |                                               |  
|Reserve for losses on commitments to extend credit  |  | $                                             | 179   |   |                                               | $



|* | During the three months and nine months ended September 30, 2002 and 2003, there have been no charge offs or recoveries on commitments to extend credit.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------



As of September 30, 2003 the balance in the allowance for loans losses was
$4.5 million compared to $3.9 million as of December 31, 2002 and $3.6 million as of September 30, 2002. In addition, the reserve for losses on commitments to extend credit was $179,000 as of September 30, 2003 compared to $174,000 as of December
31, 2002 and was $145,000 as of September 30, 2002. The balance of commitments to extend credit on undisbursed construction and other loans was $89.7 million as of September 30, 2003 compared to $87.0 million as of December 31, 2002 and was $72.6
million as of September 30, 2002. 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 Directors Loan
Committee has established reserve levels for each category based upon loan type as well as economic uncertainties and other risks that exist as of each reporting period. In general there are no reserves established for the government guaranteed
portion of commitments to extend credit.



As of September 30,
2003 the allowance was 1.17% of total gross loans compared to 1.14% as of December 31, 2002 and 1.11% as of September 30, 2002. As a percent of loans held for investment, the allowance was 1.38% as of September 30, 2003 compared to 1.36% as of
December 31, 2002 and 1.33% as of September 30, 2002. During the nine months ended September 30, 2003, there were no major changes in loan concentrations that affected the allowance for loan losses. However, the level of classified loans has
increased since December 31, 2002 in loans secured by single family 1-4 dwelling units, which increased from $25,000 as of December 31, 2002 to $1.4 million as of September 30, 2003. Therefore, while the percentage of reserves to loans held for
investment has remained



32



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relatively stable, the allocation between product types has changed based upon the relative loan quality. 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 191.13% as of September 30, 2003 compared to 175.02% as of December
31, 2002 and 123.70% as of September 30, 2002. Management believes the allowance at September 30, 2002 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors.



We perform a migration analysis on a quarterly basis using an eight quarter
history of charge offs to average loans by collateral type. Net charge offs for the nine months ended September 30, 2003 totaled $590,000, or 0.22% (annualized) of average loans outstanding, compared to $107,000, or 0.07% annualized, for the nine
months ended September 30, 2002. Our Directors Loan Committee has 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 Directors Loan Committee will consider trends in delinquencies and potential charge offs by loan type, market for the underlying real estate or other collateral, trends in industry types, economic changes and other
risks. In general, there are no reserves established for the government guaranteed portion of loans outstanding.



Other real estate owned and repossessed assets.There were two OREOs as of September 30, 2003 totaling $724,000 compared to none at December 31,
2002 and one totaling $197,000 as of September 30, 2002. As of September 30, 2003, the other repossessed asset in the amount of $475,000 was a small aircraft.



Deposits and Borrowings



Total deposits increased to $381.2 million as of September 30, 2003 compared to $364.0 million as of December 31, 2002 and $336.1 million as of September
30, 2002. Interest bearing deposits increased to $314.3 million as of September 30, 2003 compared to $312.5 million as of December 31, 2002 and $286.5 million as of September 30, 2002. Non-interest bearing deposits increased to $66.9 million as of
September 30, 2003 compared to $51.4 million as of December 31, 2002 and $49.7 million as of September 30, 2002. Total wholesale deposits were $44.2 million as of September 30, 2003 compared to $63.7 million as of December 31, 2002 and $34.7 million
as of September 30, 2002. Total retail banking deposits increased to $337.0 million as of September 30, 2003 compared to $300.3 million as of December 31, 2002 and $301.4 million as of September 30, 2002. 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 of two retail banking offices in 2001. We plan to open an additional branch in 2004 in the City of Murrieta, CA.



During the first quarter of 2000, we issued $10 million in Trust Preferred
Securities, which are debt-like securities that are designated as additional capital for regulatory purposes. In September 2003, we issued an additional $5 million in Trust Preferred Securities. The average balance outstanding was $10.1 million for
the nine months ended September 30, 2003, compared to $10.0 million for the nine months ended September 30, 2002. Proceeds from the issuance of Trust Preferred Securities were used to provide additional capital to the Bank, and, in the case of the
$10 million issued in 2000, pay off debt. In December 2002, we entered into an interest rate swap that exchanged our fixed rate coupon of 11% on the $10 million Trust Preferred Security issued in 2000 for a floating rate that resets semiannually at
5.455% over the six month LIBOR.



Other borrowings totaled
$24.0 million as of September 30, 2003 compared to $15.5 million as of December 31, 2002 and $18.1 million as of September 30, 2002. We established a line of credit with the FHLB collateralized by commercial loans and government securities. Funds
from the credit line were used to purchase government securities and increase our liquidity. In addition to the FHLB advances, other lines of credit are utilized to increase capital at the Bank. In June 2001, we borrowed $1.0 million from an
unaffiliated lender to contribute to the equity capital of the Bank, which was paid off with the proceeds from a stock offering in August 2003. The outstanding principal balance of this line as of September 30, 2003 was $0 compared to $2.0 million
as of December 31, 2002 and $2.0 million as of September 30, 2002. See the Capital discussion for further details on this loan.



33



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Capital



Our shareholders equity increased to $35.0 million as of September 30, 2003 compared to $20.6 million as of December 31, 2002 and $19.5 million as
of September 30, 2002. The $14.5 million increase in shareholders equity from December 31, 2002 to September 30, 2003 is a result of net income of $4.0 million for the nine months ended September 30, 2003 plus net proceeds from a $10.1 million
stock offering, combined with proceeds from the exercise of stock options.



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 $821,000, including placement agent fees. Of the $10,054,000 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.



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 Trust Preferred Securities on the books of the Company, while the net $4.9 million
is in cash and cash equivalents.



As part of our strategic
plan, during the third quarter of 1998 the Board elected to eliminate cash dividends in favor of retaining earnings to support future growth. We declared a 5% stock dividend to shareholders of record as of November 15, 2002 which was paid on
November 29, 2002. Whether or not stock dividends or 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.



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



On March 23, 2000, we issued $10,000,000 in trust preferred securities. We issued an additional $5,000,000 in trust preferred securities on September 17,
2003. We have the right to defer the payment of interest on both of 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.



At September 30, 2003 and December 31, 2002, all capital ratios were above
all current Federal capital guidelines for a well capitalized bank. As of September 30, 2003, the Banks regulatory Total Capital to



34



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risk-weighted assets ratio was 13.32% compared to 10.40% as of December 31, 2002. The Banks regulatory Tier 1 Capital to risk-weighted assets ratio was
12.13% as of September 30, 2003 compared to 9.20% as of December 31, 2002. The Banks regulatory Tier 1 Capital to average assets ratio was 10.61% as of September 30, 2003 compared to 7.95% as of December 31, 2002.



As of September 30, 2003, our regulatory total capital to risk-weighted
assets ratio was 13.71% compared to 9.99% as of December 31, 2002. Our regulatory Tier 1 Capital to risk-weighted assets ratio was 11.68% as of September 30, 2003 and 7.88% as of December 31, 2002. Our regulatory Tier 1 Capital to average assets
ratio was 10.22% as of September 30, 2003 compared to 6.80% as of December 31, 2002.



Financial Borrowings and Commitments



As of
September 30, 2003 the financial borrowings and commitments having an initial or remaining term of more than one year are as follows:



|           |  | Gross RentalCommitments |       | TrustPreferredSecurities |   | TotalCommitments
|---------- |  | ----------------------- | ----- | ------------------------ | - | ----------------
|           |  | (dollars in thousands) 
|2003       |  | $                       | 223   |                          | $ |                
|2004       |  |                         | 920   |                          |   |                
|2005       |  |                         | 950   |                          |   |                
|2006       |  |                         | 978   |                          |   |                
|2007       |  |                         | 841   |                          |   |                
|Thereafter |  |                         | 4,345 |                          |   | 15,000          
|           |  |                         |       |                          |   |                 
|Total      |  | $                       | 8,257 |                          | $ | 15,000          
|           |  |                         |       |                          |   |                 



In addition to the
above, we have commitments to extend credit on undisbursed construction and other loans totaling $89.7 million as of September 30, 2003.



The Company has a credit line with the FHLB with a limit of $44.9 million as of September 2003, with a balance outstanding of $24.0 million. In addition,
we have a credit line with a correspondent bank of $10.0 million. There were no advances against this line as of September 30, 2003. The $24.0 million in advances from the FHLB have a remaining term of less than one year.



Liquidity



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



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



We
experienced net cash inflows from operating activities of $3.4 million during the nine months ended September 30, 2003 compared to $3.0 million during the nine months ended September 30, 2002. Net cash



35



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inflows from operating activities during the first nine months of 2003 were primarily from net income. Net cash inflows from operating activities during the
first nine months of 2002 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 $29.2 million and
$29.6 million during the nine months ended September 30, 2003 and 2002, respectively. Net cash outflows from investing activities for the nine months ended September 30, 2003 can be attributed primarily to the growth in the Banks loan
portfolio in excess of proceeds from principal repayments on loans held for investment, and was partially offset by the sale and maturity of securities in excess of the purchases of trading and held-to-maturity investment securities. Net cash
outflows from investing activities for the nine months ended September 30, 2002 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 purchases of held to maturity securities. We experienced net cash inflows from financing activities of $41.1 million and $16.0 million during the nine months ended September 30, 2003 and 2002, respectively. During the nine months ended September
30, 2003, the Company completed a stock offering with net proceeds of $10.1 million and a Trust Preferred securities offering with net proceeds of $4.9 million. In addition, during the same period, non-interest bearing deposits increased $15.4
million, and advances from the Federal Home Loan Bank totaled $10.9 million. During the first nine months of 2002 net cash inflows were primarily from increases in non-interest bearing deposits and advances from the Federal Home Loan Bank.



As a means of augmenting our liquidity, we have established
federal funds lines with a correspondent bank. At September 30, 2003 our available borrowing capacity includes approximately $10.0 million in federal funds line facilities and $20.9 million in unused FHLB advances. We believe our liquidity sources
to be stable and adequate. At September 30, 2003, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.



The liquidity of the parent company, Community Bancorp Inc. is primarily dependent on the payment of cash dividends by its
subsidiary, Community National Bank, subject to limitations imposed by the National Bank Act. During the nine months ended September 30, 2003, the Bank paid dividends of $300,000 to Community Bancorp Inc. During the nine months ended September 30,
2002, there were no dividends paid by the Bank to Community Bancorp. As of September 30, 2003, approximately $8.7 million of undivided profits of the Bank were available for dividends to the Company.



|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- |  | ----------------------------------------------------------



Interest rate risk (IRR) and credit risk constitute the two greatest sources of financial exposure for insured financial institutions. Please
refer to ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Financial ConditionLoans, for a discussion of our lending activities. IRR represents the impact that changes in
absolute and relative levels of market interest rates may have upon our net interest income (NII). Changes in the NII are the result of changes in the net interest spread between interest-earning assets and interest-bearing liabilities
(timing risk), the relationship between various rates (basis risk), and changes in the shape of the yield curve.



We realize income principally from the differential or spread between the interest earned on loans, investments, other interest-earning assets and the
interest incurred on deposits. The volumes and yields on loans, deposits and borrowings are affected by market interest rates. As of September 30, 2003, 87.22% of our loan portfolio was tied to adjustable rate indices. The majority of the loans are
tied to prime and reprice immediately. The exception is SBA 7a loans, which reprice on the first day of the subsequent quarter after a change in prime. As of September 30, 2003, 52.27% of our deposits were time deposits with a stated maturity
(generally one year or less) and a fixed rate of interest. As of September 30, 2003, 25.67% of our borrowings were 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 trust preferred to a variable rate liability with a six month adjustment period. The Gap table on page 30 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



36



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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. ALCO operates under policies and within risk limits prescribed by, reviewed and
approved by the Board of Directors.



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



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



Interest rate simulations provide us with an estimate of both the dollar amount and percentage change in NII under various
rate scenarios. All assets and liabilities are normally subjected to up to 300 basis points in 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.



A traditional, although analytically limited, measure of a financial
institutions IRR is the static gap. Static gap is the difference between the amount of assets and liabilities (adjusted for any off-balance sheet positions) which are expected to mature or reprice within a specific period. Generally, a
positive gap benefits an institution during periods of rising interest rates, and a negative gap benefits an institution during periods of declining interest rates.



At September 30, 2003, 52.27% of our deposits were comprised of certificate of deposit (CD) accounts, the
majority of which have original terms averaging twelve months. The remaining, weighted average term to maturity for our CD accounts approximated seven months at September 30, 2003. 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 $115.1 million in interest bearing transaction accounts (savings, money markets and interest
bearing checking) as of September 30, 2003, with rates being paid between 0.20% and 1.15%. While the maturities of interest bearing deposits in the following gap table imply that declines in interest rates will result in further declines in interest
rates paid on deposits, interest rates cannot drop below 0%, and there is a behavioral limit somewhere above 0% as to how low the rates can be reduced before our customers no longer will maintain the deposit with.



We have been originating loans with interest rate floors on adjustable rate
loans for the past several years. As of September 30, 2003, we had $182.1 million of loans with floors outstanding. Of this total, $165.3 million, or 91%, were at their floor and had a weighted average rate of 6.47%. The contractual weighted average
margin over prime of this portfolio was 1.11% as of September 30, 2003, and therefore, based on the current prime rate of 4.00%, the prime rate would have to increase 1.36% 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 $39,000 increase in



37



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projected net interest income between the current rates and a 100 basis point increase in rates, compared to the $1.9 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 $1,818,000, or $1,779,000 greater than the difference between the current
interest rate simulation and the 100 basis point simulation.





38



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The following table sets forth information concerning repricing opportunities for our interest-earning
assets and interest bearing liabilities as of September 30, 2003. The amount of assets and liabilities shown within a particular period were determined in accordance with their contractual maturities, except that adjustable rate products are
included in the period in which they are first scheduled to adjust and not in the period in which they mature. Such assets and liabilities are classified by the earlier of their maturity or repricing date.



Contractual Static GAP Position as of September 30, 2003



|                                                       |  | 0 - 3months            |         |   | 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                           |  | $                      | 224,266 |   |                                 | $ | 15,443  |                                  |  | $ | 31,677                          |   |  | $          | 64,688 |   |              | $
|Fixed rate loans, gross(1)(2)                          |  |                        | 7,167   |   |                                 |   | 2,200   |                                  |  |   | 4,558                           |   |  |            | 11,881 |   |              |  
|Investments:                                           |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |        |   |              |  
|Investment securities held-to-maturity                 |  |                        | 2,497   |   |                                 |   | 498     |                                  |  |   | 1,003                           |   |  |            | 2,836  |   |              |  
|Investment securities available-for-sale               |  |                        |        |   |                                 |   |        |                                  |  |   |                                |   |  |            | 3,102  |   |              |  
|Federal funds sold                                     |  |                        | 22,100  |   |                                 |   |        |                                  |  |   |                                |   |  |            |       |   |              |  
|Trading securities                                     |  |                        | 9,946   |   |                                 |   |        |                                  |  |   |                                |   |  |            |       |   |              |  
|Other investments                                      |  |                        | 780     |   |                                 |   |        |                                  |  |   |                                |   |  |            |       |   |              |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |        |   |              |  
|Total interest sensitive assets                        |  |                        | 266,756 |   |                                 |   | 18,141  |                                  |  |   | 37,238                          |   |  |            | 82,507 |   |              |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |        |   |              |  
|Interest sensitive liabilities:                        |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |        |   |              |  
|Deposits:                                              |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |        |   |              |  
|Non-interest bearing                                   |  |                        |        |   |                                 |   |        |                                  |  |   |                                |   |  |            |       |   |              |  
|Interest bearing(1)                                    |  |                        | 172,044 |   |                                 |   | 37,666  |                                  |  |   | 101,057                         |   |  |            | 3,538  |   |              |  
|Other Borrowings(3)                                    |  |                        | 38,962  |   |                                 |   |        |                                  |  |   |                                |   |  |            |       |   |              |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |        |   |              |  
|Total interest sensitive liabilities                   |  | $                      | 211,006 |   |                                 | $ | 37,666  |                                  |  | $ | 101,057                         |   |  | $          | 3,538  |   |              | $
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |        |   |              |  
|GAP Analysis                                           |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |        |   |              |  
|Interest rate sensitivity gap                          |  | $                      | 55,750  |   |                                 | $ | (19,525 | )                                |  | $ | (63,819                         | ) |  | $          | 78,969 |   |              | $
|GAP as % of total interest sensitive assets            |  |                        | 12.76   | % |                                 |   | -4.47   | %                                |  |   | -14.60                          | % |  |            | 18.07  | % |              |  
|Cumulative interest rate sensitivity gap               |  | $                      | 55,750  |   |                                 | $ | 36,225  |                                  |  | $ | (27,594                         | ) |  | $          | 51,375 |   |              | $
|Cumulative gap as % of total interest sensitive assets |  |                        | 12.76   | % |                                 |   | 8.29    | %                                |  |   | -6.31                           | % |  |            | 11.76  | % |              |  

---

|(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 when rates rise, the opposite of what is
indicated by the static Gap analysis.





39



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The following table shows the effects of changes in projected net interest income for the twelve months
ending September 30, 2004 under the interest rate shock scenarios stated. The table was prepared as of September 30, 2003, at which time prime was 4.00%.



|Changes in Rates       |  | ProjectedNet interestIncome |  | ChangefromBase Case |  | % Changefrom BaseCase
|---------------------- |  | --------------------------- |  | ------------------- |  | ---------------------
|(dollars in thousands)
|+ 300 bp               |  | $28,722                     |  | $4,219              |  | 17.22%               
|+ 200 bp               |  | $26,360                     |  | $1,857              |  | 7.58%                
|+ 100 bp               |  | $24,542                     |  | $     39            |  | 0.16%                
|0 bp                   |  | $24,503                     |  |                     |  |                      
|-    25 bp             |  | $24,569                     |  | $     66            |  | 0.27%                
|-    50 bp             |  | $24,633                     |  | $   130             |  | 0.53%                
|-  100 bp              |  | $24,747                     |  | $   244             |  | 1.00%                



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



|ITEM 4. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



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



There was no change in the Companys internal
controls over financial reporting during the quarter ended September 30, 2003 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
|------ |  | ---------------------



For a discussion of the Companys private placement of common stock during the quarter ended September 30, 2003, see ITEM 2. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Financial Condition  Capital.



|Item 3 |  | Defaults upon senior securities
|------ |  | -------------------------------



None to report.



|Item 4 |  | Submission of matters to security holders
|------ |  | -----------------------------------------



None to report.



|Item 5 |  | Other information
|------ |  | -----------------



None to report.



|Item 6 |  | Exhibits and Reports from 8-K
|------ |  | -----------------------------



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



|31.1 |  | Rule 13a-14(a) Certification
|---- |  | ----------------------------
|     | 
|31.2 |  | Rule 13a-14(a) Certification
|     | 
|32   |  | Section 1350 Certifications 



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



| |  | The Company filed an 8-K report under item 5, Other Events and Regulation FD Disclosure, on September 19, 2003 announcing the completion of an issuance of Trust Preferred Securities
on September 17, 2003.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company filed an 8-K report under item 5, Other Events and Regulation FD Disclosure, on August 18, 2003 which contained a power point presentation used for investor
presentations.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company filed an 8-K report under item 5, Other Events and Regulation FD Disclosure, on August 8, 2003 announcing the completion of an issuance of Common Stock on August 7,
2003.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company filed an 8-K report under item 9, Regulation FD Disclosure, on July 23, 2003 announcing earnings for the quarter ended June 30, 2003.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------



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 November 13, 2003 |  |  |  | /s/    THOMAS E. SWANSON                
|                       |  |  | 
|                       |  |  |  | Thomas E. SwansonChief Executive Officer



|                       |  |  |  |                                                               
|---------------------- |  |  |  | --------------------------------------------------------------
|                       |  | 
|Date November 13, 2003 |  |  |  | /s/    L. BRUCE MILLS, JR.                                    
|                       |  |  | 
|                       |  |  |  | L. Bruce Mills, Jr.Sr. Vice President, Chief Financial Officer



42



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EXHIBIT INDEX



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



43