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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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

for the quarterly period ended June 30, 2006



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

for the transition period from  to .

Commission File No. 000  26505



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COMMUNITY BANCORP INC.

(Exact name of registrant as specified in its charter)



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

Registrants telephone number, including area code: (760) 432-1100

Not Applicable

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



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer or large accelerated, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer ̈Accelerated
filer     x             Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

Yes ̈No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.

A total of 6,145,312 shares of Common Stock were outstanding as of July 28, 2006.



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COMMUNITY BANCORP INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2006

TABLE OF CONTENTS

PART I  FINANCIAL INFORMATION



|                            |  |                                                                                                                                  |  |   
|--------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | --
|ITEM 1.                     |  | FINANCIAL STATEMENTS                                                                                                             |  |   
|                            |  |                                                                                                                                 
|                            |  | CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2006 (UNAUDITED) AND DECEMBER 31, 2005                                                |  | 4 
|                            |  |                                                                                                                                 
|                            |  | CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED) |  | 5 
|                            |  |                                                                                                                                 
|                            |  | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)                                    |  | 6 
|                            |  |                                                                                                                                 
|                            |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                                                           |  | 8 
|                            |  |                                                                                                                                 
|ITEM 2.                     |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                            |  | 22
|                            |  |                                                                                                                                 
|ITEM 3.                     |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                       |  | 47
|                            |  |                                                                                                                                 
|ITEM 4.                     |  | CONTROLS AND PROCEDURES                                                                                                          |  | 50
|                           
|PART II  OTHER INFORMATION
|                            |  |                                                                                                                                 
|ITEM 1.                     |  | LEGAL PROCEEDINGS                                                                                                                |  | 51
|                            |  |                                                                                                                                 
|ITEM 1A.                    |  | RISK FACTORS                                                                                                                     |  | 51
|                            |  |                                                                                                                                 
|ITEM 2.                     |  | UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                       |  | 51
|                            |  |                                                                                                                                 
|ITEM 3.                     |  | DEFAULTS UPON SENIOR SECURITIES                                                                                                  |  | 51
|                            |  |                                                                                                                                 
|ITEM 4.                     |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS                                                                               |  | 51
|                            |  |                                                                                                                                 
|ITEM 5.                     |  | OTHER INFORMATION                                                                                                                |  | 51
|                            |  |                                                                                                                                 
|ITEM 6.                     |  | EXHIBITS                                                                                                                         |  | 51
|                            |  |                                                                                                                                 
|SIGNATURES                  |  |                                                                                                                                  |  | 52
|                            |  |                                                                                                                                 
|EXHIBITS                    |  |                                                                                                                                  |  |   



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FORWARD LOOKING INFORMATION

Certain statements contained in this Quarterly Report on Form 10-Q (Report), including, without limitation, statements containing the words
believes, anticipates, intends, expects, and words of similar import, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which we operate, demographic
changes, competition, fluctuations in interest rates, changes in business strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of our business, economic, political and
global changes arising from the war on terrorism, the conflict with Iraq and its aftermath, and other factors referenced in our 2005 Annual Report as filed on form 10-K, including in Item 1A. Risk Factors. When relying on forward-looking
statements to make decisions with respect to our Company, investors and others are cautioned to consider these and other risks and uncertainties. We disclaim any obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to reflect future events or developments, except as required by federal securities laws.



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COMMUNITY BANCORP INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)



|                                                                                                                                                                                                |  |              |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                |  | June 30,2006 |         |   | December 31,2005 |  
|                                                                                                                                                                                                |  | (unaudited)  |         |   |                  |  
|ASSETS:                                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                       |  | $            | 18,318  |   |                  | $ | 17,107  |  
|Interest bearing deposits in financial institutions                                                                                                                                             |  |              | 712     |   |                  |   | 430     |  
|Federal funds sold                                                                                                                                                                              |  |              | 2,990   |   |                  |   | 20,645  |  
|Investments:                                                                                                                                                                                    |  |              |         |   |                  |   |         |  
|Held-to-maturity at amortized cost; pledged $895 (2006) and $1,483 (2005), estimated fair value of $7,022 (2006) and $6,600
(2005)                                                              |  |              | 7,332   |   |                  |   | 6,753   |  
|Available-for-sale, at estimated fair value; pledged $11,988 (2006) and $19,342 (2005)                                                                                                          |  |              | 44,380  |   |                  |   | 49,660  |  
|Federal Reserve Bank & Federal Home Loan Bank stock, at cost                                                                                                                                    |  |              | 6,044   |   |                  |   | 4,866   |  
|Loans held for investment, net                                                                                                                                                                  |  |              | 584,038 |   |                  |   | 582,745 |  
|Less allowance for loan losses                                                                                                                                                                  |  |              | (9,780  | ) |                  |   | (9,773  | )
|                                                                                                                                                                                                |  |              |         |   |                  |   |         |  
|Net loans held for investment                                                                                                                                                                   |  |              | 574,258 |   |                  |   | 572,972 |  
|Loans held for sale, net                                                                                                                                                                        |  |              | 161,348 |   |                  |   | 154,327 |  
|Premises and equipment, net                                                                                                                                                                     |  |              | 6,743   |   |                  |   | 6,971   |  
|Other real estate owned and repossessed assets                                                                                                                                                  |  |              | 233     |   |                  |   | 68      |  
|Investments in real estate partnerships                                                                                                                                                         |  |              | 1,299   |   |                  |   |        |  
|Affordable housing investments                                                                                                                                                                  |  |              | 1,934   |   |                  |   | 2,395   |  
|Accrued interest                                                                                                                                                                                |  |              | 3,734   |   |                  |   | 3,822   |  
|Income tax receivable                                                                                                                                                                           |  |              |        |   |                  |   | 563     |  
|Deferred tax asset, net                                                                                                                                                                         |  |              | 6,418   |   |                  |   | 6,167   |  
|Servicing assets, net                                                                                                                                                                           |  |              | 3,734   |   |                  |   | 3,833   |  
|Interest-only strips, at fair value                                                                                                                                                             |  |              | 2,533   |   |                  |   | 2,622   |  
|Other assets                                                                                                                                                                                    |  |              | 9,321   |   |                  |   | 9,908   |  
|Goodwill and other intangibles                                                                                                                                                                  |  |              | 45,491  |   |                  |   | 45,441  |  
|                                                                                                                                                                                                |  |              |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                    |  | $            | 896,822 |   |                  | $ | 908,550 |  
|                                                                                                                                                                                                |  |              |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                            |  |              |         |   |                  |   |         |  
|Deposits                                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|Interest bearing                                                                                                                                                                                |  | $            | 529,998 |   |                  | $ | 545,517 |  
|Non-interest bearing                                                                                                                                                                            |  |              | 169,373 |   |                  |   | 164,956 |  
|                                                                                                                                                                                                |  |              |         |   |                  |   |         |  
|Total deposits                                                                                                                                                                                  |  |              | 699,371 |   |                  |   | 710,473 |  
|Short-term borrowing                                                                                                                                                                            |  |              | 47,540  |   |                  |   | 52,290  |  
|Long-term debt                                                                                                                                                                                  |  |              | 36,250  |   |                  |   | 37,203  |  
|Accrued expenses and other liabilities                                                                                                                                                          |  |              | 10,439  |   |                  |   | 12,326  |  
|                                                                                                                                                                                                |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                               |  |              | 793,600 |   |                  |   | 812,292 |  
|                                                                                                                                                                                                |  |              |         |   |                  |   |         |  
|Commitments and Contingencies (Note 9)                                                                                                                                                          |  |              |         |   |                  |   |         |  
|Stockholders equity                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|Common stock, $0.625 par value; authorized 10,000,000 shares, issued and outstanding; 6,067,816 at June 30, 2006 and 5,939,397 (including
11,670 restricted stock awarded) at December 31, 2005 |  |              | 3,792   |   |                  |   | 3,705   |  
|Additional paid-in capital                                                                                                                                                                      |  |              | 63,877  |   |                  |   | 61,696  |  
|Deferred compensation - restricted stock                                                                                                                                                        |  |              |        |   |                  |   | (85     | )
|Accumulated other comprehensive loss, net of taxes of $517 (2006) and $280 (2005)                                                                                                               |  |              | (713    | ) |                  |   | (386    | )
|Retained earnings                                                                                                                                                                               |  |              | 36,266  |   |                  |   | 31,328  |  
|                                                                                                                                                                                                |  |              |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                      |  |              | 103,222 |   |                  |   | 96,258  |  
|                                                                                                                                                                                                |  |              |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                      |  | $            | 896,822 |   |                  | $ | 908,550 |  
|                                                                                                                                                                                                |  |              |         |   |                  |   |         |  

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



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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



|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | --------- | -------------------------------- | ---- | - | --------- |  | - | --------- | - |  | - | --------- | -
|                                                                                                                                                                  |  | For the three monthsended June 30, |           | For the six monthsended June 30, |     
|                                                                                                                                                                  |  | 2006                               |           |                                  | 2005 |   | 2006      |  |   | 2005      |  
|Interest Income:                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Interest on loans                                                                                                                                                 |  | $                                  | 16,796    |                                  |      | $ | 11,607    |  | $ | 32,988    |   |  | $ | 21,809    |  
|Interest on fed funds sold                                                                                                                                        |  |                                    | 21        |                                  |      |   | 76        |  |   | 53        |   |  |   | 149       |  
|Interest on other investments                                                                                                                                     |  |                                    | 738       |                                  |      |   | 446       |  |   | 1,483     |   |  |   | 805       |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Total interest income                                                                                                                                             |  |                                    | 17,555    |                                  |      |   | 12,129    |  |   | 34,524    |   |  |   | 22,763    |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Interest Expense:                                                                                                                                                 |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Deposits                                                                                                                                                          |  |                                    | 3,773     |                                  |      |   | 2,266     |  |   | 7,346     |   |  |   | 3,870     |  
|Short term borrowing                                                                                                                                              |  |                                    | 513       |                                  |      |   | 255       |  |   | 1,002     |   |  |   | 387       |  
|Long term debt                                                                                                                                                    |  |                                    | 680       |                                  |      |   | 319       |  |   | 1,332     |   |  |   | 605       |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Total interest expense                                                                                                                                            |  |                                    | 4,966     |                                  |      |   | 2,840     |  |   | 9,680     |   |  |   | 4,862     |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Net interest income before provision for loan losses                                                                                                              |  |                                    | 12,589    |                                  |      |   | 9,289     |  |   | 24,844    |   |  |   | 17,901    |  
|Provision for loan losses                                                                                                                                         |  |                                    |          |                                  |      |   | 413       |  |   |          |   |  |   | 731       |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Net interest income after provision for loan losses                                                                                                               |  |                                    | 12,589    |                                  |      |   | 8,876     |  |   | 24,844    |   |  |   | 17,170    |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Other operating income:                                                                                                                                           |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Net gain on sale of loans                                                                                                                                         |  |                                    | 1,452     |                                  |      |   | 1,877     |  |   | 3,118     |   |  |   | 3,707     |  
|Loan servicing fees, net                                                                                                                                          |  |                                    | (30       | )                                |      |   | 255       |  |   | 76        |   |  |   | 479       |  
|Customer service charges                                                                                                                                          |  |                                    | 279       |                                  |      |   | 260       |  |   | 599       |   |  |   | 498       |  
|Gain on sale of repossessed assets                                                                                                                                |  |                                    |          |                                  |      |   | 157       |  |   |          |   |  |   | 157       |  
|Loss on swap                                                                                                                                                      |  |                                    | (908      | )                                |      |   |          |  |   | (908      | ) |  |   |          |  
|Other income                                                                                                                                                      |  |                                    | 485       |                                  |      |   | 172       |  |   | 857       |   |  |   | 463       |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Total other operating income                                                                                                                                      |  |                                    | 1,278     |                                  |      |   | 2,721     |  |   | 3,742     |   |  |   | 5,304     |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Other operating expenses:                                                                                                                                         |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Salaries and employee benefits                                                                                                                                    |  |                                    | 5,070     |                                  |      |   | 3,858     |  |   | 10,308    |   |  |   | 7,588     |  
|Occupancy                                                                                                                                                         |  |                                    | 682       |                                  |      |   | 576       |  |   | 1,350     |   |  |   | 1,121     |  
|Professional services                                                                                                                                             |  |                                    | 514       |                                  |      |   | 451       |  |   | 905       |   |  |   | 993       |  
|Depreciation and amortization                                                                                                                                     |  |                                    | 356       |                                  |      |   | 330       |  |   | 699       |   |  |   | 631       |  
|Data processing                                                                                                                                                   |  |                                    | 275       |                                  |      |   | 222       |  |   | 556       |   |  |   | 446       |  
|Office expenses                                                                                                                                                   |  |                                    | 291       |                                  |      |   | 217       |  |   | 554       |   |  |   | 427       |  
|Other expenses                                                                                                                                                    |  |                                    | 1,735     |                                  |      |   | 1,219     |  |   | 3,333     |   |  |   | 2,356     |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Total other operating expenses                                                                                                                                    |  |                                    | 8,923     |                                  |      |   | 6,873     |  |   | 17,705    |   |  |   | 13,562    |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Income before income tax provision                                                                                                                                |  |                                    | 4,944     |                                  |      |   | 4,724     |  |   | 10,881    |   |  |   | 8,912     |  
|Income tax provision                                                                                                                                              |  |                                    | 2,076     |                                  |      |   | 1,893     |  |   | 4,431     |   |  |   | 3,542     |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Net income                                                                                                                                                        |  |                                    | 2,868     |                                  |      |   | 2,831     |  |   | 6,450     |   |  |   | 5,370     |  
|Other comprehensive income (loss) - unrealized gain / (loss) on available for sale securities, net of income tax benefit (expense) of $(95),
$6, $(237) and $(77) |  |                                    | (130      | )                                |      |   | 11        |  |   | (327      | ) |  |   | (127      | )
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Comprehensive income                                                                                                                                              |  | $                                  | 2,738     |                                  |      | $ | 2,842     |  | $ | 6,123     |   |  | $ | 5,243     |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Basic earnings per share                                                                                                                                          |  | $                                  | 0.47      |                                  |      | $ | 0.54      |  | $ | 1.07      |   |  | $ | 1.02      |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Diluted earnings per share                                                                                                                                        |  | $                                  | 0.45      |                                  |      | $ | 0.51      |  | $ | 1.03      |   |  | $ | 0.97      |  
|                                                                                                                                                                  |  |                                    |           |                                  |      |   |           |  |   |           |   |  |   |           |  
|Average shares outstanding for basic earnings per share                                                                                                           |  |                                    | 6,044,358 |                                  |      |   | 5,268,996 |  |   | 6,008,706 |   |  |   | 5,248,279 |  
|Average shares outstanding for diluted earnings per share                                                                                                         |  |                                    | 6,303,873 |                                  |      |   | 5,564,696 |  |   | 6,286,706 |   |  |   | 5,561,324 |  

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



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30,

(dollars in thousands,
unaudited)



|                                                                              |  |      |          |   |      |   |          |  
|----------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                              |  | 2006 |          |   | 2005 |  
|Cash flows from operating activities:                                         |  |      |          |   |      |   |          |  
|Net income                                                                    |  | $    | 6,450    |   |      | $ | 5,370    |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |      |          |   |      |   |          |  
|Depreciation and amortization                                                 |  |      | 699      |   |      |   | 631      |  
|Provision for loan losses                                                     |  |      |         |   |      |   | 731      |  
|Stock option expense                                                          |  |      | 138      |   |      |   |         |  
|Net amortization of premiums on investment securities                         |  |      | 97       |   |      |   | 157      |  
|Amortization of affordable housing investments                                |  |      | 144      |   |      |   | 152      |  
|Amortization of core deposit intangibles                                      |  |      | 297      |   |      |   | 133      |  
|Amortization of deferred compensation - restricted stock                      |  |      | 88       |   |      |   |         |  
|Loan origination fees net of loan origination costs deferred                  |  |      | (259     | ) |      |   | 450      |  
|Gain on sale of loans held for sale                                           |  |      | (2,982   | ) |      |   | (3,501   | )
|Gain on sale of repossessed assets                                            |  |      |         |   |      |   | (157     | )
|Deferred income tax benefit                                                   |  |      | (13      | ) |      |   | (704     | )
|Capitalization of interest-only strips                                        |  |      | (245     | ) |      |   | (556     | )
|Amortization of interest-only strips                                          |  |      | 139      |   |      |   | 173      |  
|Change in unrealized loss on interest-only strips                             |  |      | 195      |   |      |   | 102      |  
|Capitalization of servicing asset                                             |  |      | (582     | ) |      |   | (695     | )
|Amortization of servicing asset                                               |  |      | 235      |   |      |   | 270      |  
|Impairment in valuation allowance for servicing asset                         |  |      | 446      |   |      |   |         |  
|Loss on disposal of premises and equipment                                    |  |      |         |   |      |   | 14       |  
|Unrealized loss on interest rate swap agreement                               |  |      | 297      |   |      |   | 377      |  
|Unrealized hedging gain on long term debt                                     |  |      | (297     | ) |      |   | (377     | )
|Realized loss on termination of swap                                          |  |      | 908      |   |      |   |         |  
|Gain on affordable housing investments                                        |  |      | (111     | ) |      |   |         |  
|Gain on other assets                                                          |  |      | (207     | ) |      |   |          |  
|Origination of loans held for sale                                            |  |      | (66,848  | ) |      |   | (87,365  | )
|Proceeds from sale of loans held for sale                                     |  |      | 45,102   |   |      |   | 49,262   |  
|Decrease (increase) in income tax receivable                                  |  |      | 563      |   |      |   | (1,243   | )
|Increase (decrease) in income tax payable                                     |  |      | 206      |   |      |   | (319     | )
|Decrease (increase) in accrued interest and other assets                      |  |      | 893      |   |      |   | (1,663   | )
|(Decrease) increase in accrued expenses and other liabilities                 |  |      | (1,763   | ) |      |   | 929      |  
|                                                                              |  |      |          |   |      |   |          |  
|Net cash used in operating activities                                         |  |      | (16,410  | ) |      |   | (37,829  | )
|                                                                              |  |      |          |   |      |   |          |  
|Cash flows from investing activities:                                         |  |      |          |   |      |   |          |  
|Origination of loans held for investment                                      |  |      | (176,976 | ) |      |   | (205,914 | )
|Proceeds from principal paid on loans held for investment                     |  |      | 193,233  |   |      |   | 141,736  |  
|Net change in interest bearing deposits in financial institutions             |  |      | (282     | ) |      |   | 917      |  
|Purchases of investments held-to-maturity                                     |  |      | (972     | ) |      |   | (4,091   | )
|Maturities of investments held-to-maturity                                    |  |      | 376      |   |      |   | 834      |  
|Purchases of available-for-sale investments                                   |  |      |         |   |      |   | (19,914  | )
|Maturities of available-for-sale investments                                  |  |      | 4,637    |   |      |   | 3,640    |  
|Purchases of Federal Reserve & Federal Home Loan Bank stocks                  |  |      | (1,178   | ) |      |   | (1,268   | )
|Cash paid for termination of swap                                             |  |      | (900     | ) |      |   |         |  
|Cash paid for acquisitions                                                    |  |      | (126     | ) |      |   | (66      | )
|Paydown of debt acquired through foreclosure                                  |  |      |         |   |      |   | (729     | )
|Proceeds from sale of repossessed assets                                      |  |      |         |   |      |   | 1,788    |  
|Increase in affordable housing investments                                    |  |      | (1,213   | ) |      |   | (123     | )
|Purchases of premises and equipment                                           |  |      | (491     | ) |      |   | (593     | )
|Proceeds from sale of premises and equipment                                  |  |      | 19       |   |      |   |         |  
|Decrease in restricted cash                                                   |  |      | 326      |   |      |   |         |  
|Net decrease in federal funds sold                                            |  |      | 17,655   |   |      |   | 7,885    |  
|                                                                              |  |      |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                           |  |      | 34,108   |   |      |   | (75,898  | )
|                                                                              |  |      |          |   |      |   |          |  



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COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30,

(dollars in thousands, unaudited)



|                                                                                                                                                |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                |  | 2006 |         |   | 2005 |  
|Cash flows from financing activities:                                                                                                           |  |      |         |   |      |   |         |  
|Net (decrease) increase in deposits:                                                                                                            |  |      |         |   |      |   |         |  
|Interest bearing                                                                                                                                |  | $    | (15,519 | ) |      | $ | 64,085  |  
|Non-interest bearing                                                                                                                            |  |      | 4,415   |   |      |   | 19,677  |  
|Proceeds from exercise of stock options                                                                                                         |  |      | 1,239   |   |      |   | 805     |  
|Excess tax benefits from exercise of stock options                                                                                              |  |      | 890     |   |      |   |         |  
|Cash dividends paid                                                                                                                             |  |      | (1,512  | ) |      |   | (1,053  | )
|Net change in short-term borrowings                                                                                                             |  |      | (6,000  | ) |      |   | 39,000  |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                                                                                             |  |      | (16,487 | ) |      |   | 122,514 |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                                                                                       |  |      | 1,211   |   |      |   | 8,787   |  
|Cash and cash equivalents at beginning of year                                                                                                  |  |      | 17,107  |   |      |   | 14,842  |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Cash and cash equivalents at end of year                                                                                                        |  | $    | 18,318  |   |      | $ | 23,629  |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                                                                               |  |      |         |   |      |   |         |  
|Cash paid during the year for:                                                                                                                  |  |      |         |   |      |   |         |  
|Interest on time deposits                                                                                                                       |  | $    | 7,618   |   |      | $ | 3,183   |  
|Interest on other borrowings                                                                                                                    |  |      | 2,326   |   |      |   | 987     |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Total interest paid                                                                                                                             |  | $    | 9,944   |   |      | $ | 4,170   |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Income Taxes                                                                                                                                    |  | $    | 3,079   |   |      | $ | 3,105   |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Supplemental disclosure of non-cash investing activities:                                                                                       |  |      |         |   |      |   |         |  
|Debt acquired on repossessed assets                                                                                                             |  | $    |        |   |      | $ | 729     |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Other repossessed assets acquired in foreclosure                                                                                                |  | $    | 165     |   |      | $ | 1,699   |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Loans held for sale transferred to held for investment                                                                                          |  | $    | 16,208  |   |      | $ |        |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Consolidation of affordable housing investments                                                                                                 |  | $    | 1,530   |   |      | $ |        |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Debt transferred from long-term to short-term                                                                                                   |  | $    | 1,250   |   |      | $ |        |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Release of restricted stock grants                                                                                                              |  | $    | (7      | ) |      | $ |        |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Restricted stock grants                                                                                                                         |  | $    | 3       |   |      | $ |        |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Tax benefit from options exercised                                                                                                              |  | $    |        |   |      | $ | 230     |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Assets acquired from acquisitions                                                                                                               |  | $    | 258     |   |      | $ | 904     |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Liabilities acquired from acquisitions                                                                                                          |  | $    | (37     | ) |      | $ |        |  
|                                                                                                                                                |  |      |         |   |      |   |         |  
|Supplemental disclosure of non-cash financing activities:                                                                                       |  |      |         |   |      |   |         |  
|Change in unrealized loss on available-for-sale securities net of income tax benefit of $(237) and $(77) recorded in Other Comprehensive
Income |  | $    | (327    | ) |      | $ | (127    | )
|                                                                                                                                                |  |      |         |   |      |   |         |  



7



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COMMUNITY BANCORP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED

JUNE 30, 2006 (UNAUDITED)

1. Basis of Presentation:

The accompanying unaudited consolidated financial statements have been prepared by Community Bancorp, Inc. pursuant to the rules and
regulations of the Securities and Exchange Commission (the SEC). The interim financials include the accounts of Community Bancorp Inc. and its wholly-owned subsidiary Community National Bank (the Bank), and the Banks
consolidated subsidiary Midland Corporate Tax Credit XVIII Limited Partnership (Midland), (collectively, the Company) as consolidated with the elimination of all intercompany transactions.

The Company invests in three wholly-owned special purpose entities: Community (CA) Capital Trust I (Trust I), Community (CA) Capital
Statutory Trust II (Trust II) and Community (CA) Capital Statutory Trust III (Trust III), (collectively, the Trusts). Net earnings of the Trusts are recognized in the Bancorps statement of income, pursuant
to Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 46R, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.

The preparation of these unaudited consolidated financial statements prepared in conformity with accounting principles generally accepted in the United
States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the end of the reporting period. Actual results
could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the valuation of loan servicing rights, interest-only strips and the allowance for estimated loan losses.
Operating results for the period ended June 30, 2006, are not necessarily indicative of the results that may be expected in subsequent quarters in or for the full year ending December 31, 2006.

In the opinion of management, the unaudited consolidated financial statements contain all adjustments, including normal recurring adjustments and
accruals necessary to present fairly the financial position of the Company for the interim period ended June 30, 2006. These financial statements do not include all of the disclosures required by generally accepted accounting principles and
have been condensed or omitted pursuant to such SEC rules and regulations and, accordingly, should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2005.

Certain prior year amounts, including segment and loan composition information, have
been reclassified to conform to the current periods presentation. The reclasses did not affect the Companys financial condition or results of operation.

2. Merger-related Activity

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

Under the terms of the Agreement, shareholders of Rancho Bernardo Community Bank common stock had the option to receive cash, shares of Community or a combination of the two. The transaction was valued at $36.8 million, or $33.15 per share,
including the fair value of options outstanding (the exchange ratio for stock consideration was 0.949 shares of Community common stock for each Rancho Bernardo share). The total consideration was paid in 638,921 shares of Community stock and $13.3
million in cash, in accordance with the provisions of the Agreement. Rancho Bernardo Community Bank operated one banking office in the north San Diego community of Rancho Bernardo. The banking office of Rancho Bernardo is currently being operated by
Community National Bank.



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##### Table of Contents

The Merger was accounted for under the purchase method of accounting in accordance with Statement
Financial Accounting Standards (SFAS) No. 141, Business Combinations. Accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the Merger date as
summarized below. The Company made a purchase price adjustment of approximately $255,000 related to loans during the six months ended June 30, 2006. The allocation of the purchase price may be modified over the next two months, as more
information is obtained about the fair value of assets acquired and liabilities assumed (dollars in thousands, except per data share).



|                                                                                        |  |   |         |  |   |        |  
|--------------------------------------------------------------------------------------- |  | - | ------- |  | - | ------ | -
|Purchase price                                                                          |  |   |         |  |   |        |  
|Rancho Bernardo Community Bank, N.A. common stock exchanged                             |  |   | 673,257 |  |   |        |  
|Exchange ratio                                                                          |  |   | 0.949   |  |   |        |  
|                                                                                        |  |   |         |  |   |        |  
|Total shares of the Companys common stock exchanged                                    |  |   | 638,921 |  |   |        |  
|Fair value per share of the Companys common stock(1)                                   |  | $ | 33.15   |  |   |        |  
|                                                                                        |  |   |         |  |   |        |  
|Total value of the Companys common stock exchanged                                     |  |   |         |  | $ | 21,180 |  
|Cash paid for Rancho Bernardo Bank, N. A common stock                                   |  |   |         |  |   | 13,313 |  
|Fair value of outstanding stock options and direct acquisition costs                    |  |   |         |  |   | 2,345  |  
|                                                                                        |  |   |         |  |   |        |  
|Total purchase price                                                                    |  |   |         |  | $ | 36,838 |  
|                                                                                        |  |   |         |  |   |        |  
|Allocation of the purchase price                                                        |  |   |         |  |   |        |  
|Rancho Bernardo Community Bank, N. A. stockholders equity                              |  |   |         |  | $ | 10,047 |  
|Estimated adjustments to reflect assets acquired and liabilities assumed at fair value: |  |   |         |  |   |        |  
|Loans                                                                                   |  |   |         |  |   | (194   | )
|Other assets and deferred income tax                                                    |  |   |         |  |   | (835   | )
|Deposits                                                                                |  |   |         |  |   | (110   | )
|Other liabilities                                                                       |  |   |         |  |   | 81     |  
|                                                                                        |  |   |         |  |   |        |  
|Estimated adjustment to fair value of net assets acquired                               |  |   |         |  |   | 8,989  |  
|                                                                                        |  |   |         |  |   |        |  
|Estimated gross goodwill and other intangibles resulting from the Merger (2)            |  |   |         |  | $ | 27,849 |  
|                                                                                        |  |   |         |  |   |        |  



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



|(2) | Includes $2.6 million allocated to core deposit intangibles. (See Footnote 6).
|--- | ------------------------------------------------------------------------------



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Pro Forma Condensed Combined Financial Information

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company had the Merger taken place at
January 1, 2005 (dollars in thousands, except per share data).

Pro Forma Condensed Combined Financial Information



|                                                          |  |                    |           |                  |   |          
|--------------------------------------------------------- |  | ------------------ | --------- | ---------------- | - | ---------
|                                                          |  | Three months ended |           | Six months ended
|                                                          |  | June 30, 2005      |           | June 30, 2005   
|Net interest income                                       |  | $                  | 10,869    |                  | $ | 20,767   
|Other operating income                                    |  |                    | 2,834     |                  |   | 5,467    
|Provision for loan losses                                 |  |                    | 512       |                  |   | 929      
|Other operating expense                                   |  |                    | 7,728     |                  |   | 15,375   
|                                                          |  |                    |           |                  |   |          
|Income before income tax provision                        |  |                    | 5,463     |                  |   | 9,930    
|Income tax provision                                      |  |                    | 2,199     |                  |   | 3,959    
|                                                          |  |                    |           |                  |   |          
|Net income                                                |  | $                  | 3,264     |                  | $ | 5,971    
|                                                          |  |                    |           |                  |   |          
|Earnings per share:                                       |  |                    |           |                  |   |          
|Basic                                                     |  | $                  | 0.55      |                  | $ | 1.01     
|                                                          |  |                    |           |                  |   |          
|Fully diluted                                             |  | $                  | 0.53      |                  | $ | 0.96     
|                                                          |  |                    |           |                  |   |          
|Average shares outstanding for basic earnings per share   |  |                    | 5,907,917 |                  |   | 5,883,670
|Average shares outstanding for diluted earnings per share |  |                    | 6,203,617 |                  |   | 6,199,018

First Community Bancorp Merger.On May 16, 2006, First Community Bancorp (Nasdaq:
FCBP) announced its Plan to acquire the Company for approximately $277.0 million in consideration of the Companys common stock and outstanding stock options. Upon completion of the acquisition, the Company will be merged into First
Community Bancorp and the Bank into First National Bank, a San Diego-based wholly-owned subsidiary of First Community Bancorp.

Pursuant to
the terms of the definitive agreement, shareholders will receive First Community common stock for their shares of Community Bancorp common stock in a tax-free transaction. The Companys stock option holders will receive cash, net of applicable
taxes withheld, for the value of their unexercised stock options. The definitive agreement provides for a fixed exchange ratio of 0.735 of a share of First Community common stock for each share of the Company, subject to adjustment as described in
the definitive agreement.

The transaction is subject to customary conditions, including the approval of bank regulatory authorities and
the Companys stockholders. First Community stockholders will be asked to approve an amendment to First Communitys bylaws to increase the size of the board of directors to accommodate the appointment of two directors from Community
Bancorp to First Communitys board. The transaction is expected to close in the fourth quarter of 2006.

3. Share-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payments which requires the Company to
measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. SFAS No. 123(R) eliminates the ability to account for stock-based compensation transactions using the
intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.

Prior to January 1, 2006, the Company accounted for stock options using the intrinsic value method under the provisions of APB No. 25 and provided pro forma net income and pro forma earnings per share disclosures for employee
stock option grants as if the fair-value-based method, defined in SFAS No. 123, Accounting for Stock-Based Compensation, had been applied. In applying the intrinsic value method, the Company did not record stock-based compensation cost
in net income. SFAS No. 123(R) requires that such transactions be accounted for using a fair-value based method. The Company uses the Black-Scholes option-pricing model to determine the fair value of



10



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stock-based awards under SFAS No. 123(R), which is consistent with that used for pro forma disclosures under SFAS No. 123 prior to adoption of SFAS
No. 123(R).

The Company adopted SFAS No. 123(R) using the modified prospective method, as permitted under SFAS No. 123(R),
and, accordingly, prior period amounts have not been restated. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options that are ultimately expected to vest as the
requisite service is rendered. The Company recorded $225,000 of stock-based compensation expense during the first half of 2006; of this amount $87,000 was related to awards which fully vested during the period and $138,000 related to the adoption of
SFAS 123(R).

The Company has one stock option plan, the 2005 Plan under which shares are available for grants of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted stock awards and performance share cash only awards. The Companys Board of Directors may grant stock awards to directors, officers and key employees of the
Company. Stock option awards are granted with an exercise price equal to the stocks fair market value at the date of grant. All stock option awards have a 10-year term and generally vest one-fifth annually over five years following the date of
grant, subject to certain restrictions.

Stock Options

SFAS No. 123(R) requires the use of a valuation model to calculate the fair value of stock options. The Company has elected to use the Black-Scholes option-pricing model, which incorporates various assumptions
including volatility, forfeiture rates, expected life, and interest rates. The Company uses historical data among other factors to estimate the expected volatility, expected option life, and the expected forfeiture rate. The risk free rate is based
on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The fair value of stock option awards was estimated at the date of grant using the Black-Scholes option-pricing model with the following
assumptions during the three and six months ended June 30, 2006 and 2005:



|                          |  |                            |  |       |                          |  |       |   |  |       |  
|------------------------- |  | -------------------------- |  | ----- | ------------------------ |  | ----- | - |  | ----- | -
|                          |  | Three Months EndedJune 30, |  |       | Six Months EndedJune 30, | 
|                          |  | 2006                       |  | 2005  |                          |  | 2006  |   |  | 2005  |  
|Dividend yield            |  | N/A                        |  | 1.41  | %                        |  | 1.51  | % |  | 1.49  | %
|Expected volatility       |  | N/A                        |  | 30.02 | %                        |  | 22.60 | % |  | 43.90 | %
|Risk free interest rates  |  | N/A                        |  | 3.69  | %                        |  | 4.57  | % |  | 4.10  | %
|Expected lives (in years) |  | N/A                        |  | 5.0   |                          |  | 1.0   |   |  | 5.0   |  

During the six months ended June 30, 2006, 10,750 options were granted to directors and vest
on December 31, 2006.

The following table summarizes stock option activity for the six months ended June 30, 2006: (dollars in
thousands, except shares, price per share and contractual term):



|                             |  |                 |   |  |                              |       |                                         |     |                         |   |       
|---------------------------- |  | --------------- | - |  | ---------------------------- | ----- | --------------------------------------- | --- | ----------------------- | - | ------
|Options                      |  | Numberof Shares |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |     | AggregateIntrinsicValue
|Balance - January 1, 2006    |  | 640,067         |   |  | $                            | 12.15 |                                         |     |                         |   |       
|Granted                      |  | 10,750          |   |  |                              | 36.06 |                                         |     |                         |   |       
|Exercised                    |  | (128,319        | ) |  |                              | 9.66  |                                         |     |                         |   |       
|Forfeited or expired         |  | (4,440          | ) |  |                              | 22.10 |                                         |     |                         |   |       
|                             |  |                 |   |  |                              |       |                                         |     |                         |   |       
|Outstanding at June 30, 2006 |  | 518,058         |   |  | $                            | 13.18 |                                         | 4.6 |                         | $ | 15,092
|Exercisable at June 30, 2006 |  | 401,846         |   |  | $                            | 9.41  |                                         | 3.6 |                         | $ | 13,222

There were no options granted during the three months ended June 30, 2006. The
weighted-average grant-date fair value of options granted during the three months ended June 30, 2005 was $11.97. The total intrinsic value of



11



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##### Table of Contents

options exercised was $1.1 million and $450,000 for the three months ended June 30, 2006 and June 30, 2005, respectively. During the six months
ended June 30, 2006 and 2005, the weighted-average grant-date fair value of options granted was $3.69 and $11.75, respectively. The total intrinsic value of options exercised was $3.5 million and $2.9 million for the six months ended
June 30, 2006 and 2005.

As of June 30, 2006, there was $696,000 of unrecognized share-based compensation cost related to stock
options. That cost is expected to be recognized over a weighted-average period of 2.7 years. The valuation model utilized in this calculation applies subjective assumptions that could possibly change over time. This includes the expected forfeiture
rates and performance targets over time. Thus, the amount of unrecognized share-based compensation mentioned above may not necessarily represent the value that will ultimately be realized by the Company.

Cash received from options exercises for the six months ended June 30, 2006 and 2005 was approximately $1.2 million and $805,000, respectively. The
actual tax benefit realized for the tax deductions from option exercises was approximately $890,000 and $230,000, respectively, for the six months ended June 30, 2006 and 2005.

Restricted Stock Awards

Restricted
stock awards are restricted shares of the Companys common stock granted with vesting terms established by the Companys Compensation Committee.

The fair value of nonvested share-based compensation is determined based on the closing price of the Companys Common Stock on the date of grant. During the three months ended June 30, 2006 and 2005, there
were no shares of restricted common stock awarded by the Company under the plan. For the six months ended June 30, 2006 and 2005 the weighted-average grant date fair value of nonvested shares granted were $35.95 and zero. Additionally, there
was no unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2005 Plan at June 30, 2006.

A summary of nonvested shares for the six months ended June 30, 2006 and changes during the period is presented below:



|                             |  |         |   |  |                                     |      
|---------------------------- |  | ------- | - |  | ----------------------------------- | -----
|Nonvested Shares             |  | Shares  |   |  | WeightedAverageGrant DateFair Value
|Nonvested at January 1, 2006 |  | 11,670  |   |  | $                                   | 32.25
|Granted                      |  | 100     |   |  |                                     | 35.95
|Vested                       |  | (11,770 | ) |  |                                     | 32.28
|Forfeited                    |  |        |   |  |                                     |     
|                             |  |         |   |  |                                     |      
|Nonvested at June 30, 2006   |  |        |   |  | $                                   |     
|                             |  |         |   |  |                                     |      



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The table below shows the amounts recognized in the Consolidated Statements of Income for the three and
six months ended June 30, 2006 for share-based compensation (dollars in thousands, except per share data).



|                                                                                      |  |                                 |       |   |                               |   |       |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ----------------------------- | - | ----- | -
|                                                                                      |  | Three Months EndedJune 30, 2006 |       |   | Six Months EndedJune 30, 2006 |  
|Total cost of employee share-based compensation included in income, before income tax |  | $                               | 74    |   |                               | $ | 225   |  
|Amount of income tax recognized in earnings                                           |  |                                 | (31   | ) |                               |   | (95   | )
|                                                                                      |  |                                 |       |   |                               |   |       |  
|Amount charged against income                                                         |  | $                               | 43    |   |                               | $ | 130   |  
|                                                                                      |  |                                 |       |   |                               |   |       |  
|Impact on net income per share:                                                       |  |                                 |       |   |                               |   |       |  
|Basic income per share                                                                |  | $                               | (0.01 | ) |                               | $ | (0.02 | )
|Diluted income per share                                                              |  | $                               | (0.01 | ) |                               | $ | (0.02 | )

Prior to January 1, 2006, the Company accounted for share-based employee compensation in
accordance with the provision and interpretations of APB No. 25. Had compensation cost for share-based compensation been determined consistent with SFAS No. 123(R), the net income and earnings per share would have been adjusted to the
following pro forma amounts (dollars in thousands, except per share data):



|                                                                                                                                                |  |                                 |       |   |                               |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ----------------------------- | - | ----- | -
|                                                                                                                                                |  | Three Months EndedJune 30, 2005 |       |   | Six Months EndedJune 30, 2005 |  
|Net income, as reported                                                                                                                         |  | $                               | 2,831 |   |                               | $ | 5,370 |  
|Add: Total stock-based employee compensation expense included in reported net income, net of related tax effects                                |  |                                 |       |   |                               |   |       |  
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                                 | (106  | ) |                               |   | (202  | )
|                                                                                                                                                |  |                                 |       |   |                               |   |       |  
|Proforma net income                                                                                                                             |  | $                               | 2,725 |   |                               | $ | 5,168 |  
|                                                                                                                                                |  |                                 |       |   |                               |   |       |  
|Basic income per share, as reported                                                                                                             |  | $                               | 0.54  |   |                               | $ | 1.02  |  
|Proforma basic income per share                                                                                                                 |  | $                               | 0.52  |   |                               | $ | 0.98  |  
|Diluted income per share, as reported                                                                                                           |  | $                               | 0.51  |   |                               | $ | 0.97  |  
|Proforma diluted income per share                                                                                                               |  | $                               | 0.49  |   |                               | $ | 0.93  |  



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4. Loans and Related Allowance for Loan Losses:

A summary of loans is as follows, (dollars in thousands):



|                                                       |  |                    |         |   |                         |   |         |            |  |   |                    |   |  |                         |         |   |            |   |         |   |  |   |         |  
|------------------------------------------------------ |  | ------------------ | ------- | - | ----------------------- | - | ------- | ---------- |  | - | ------------------ | - |  | ----------------------- | ------- | - | ---------- | - | ------- | - |  | - | ------- | -
|                                                       |  | June 30, 2006      |         |   | December 31, 2005       |  
|                                                       |  | Loans Heldfor Sale |         |   | Loans HeldforInvestment |   |         | TotalLoans |  |   | Loans Heldfor Sale |   |  | Loans HeldforInvestment |         |   | TotalLoans |  
|Construction loans                                     |  | $                  | 45,120  |   |                         | $ | 132,417 |            |  | $ | 177,537            |   |  | $                       | 24,809  |   |            | $ | 109,500 |   |  | $ | 134,309 |  
|Real estate one- to four-family                        |  |                    |        |   |                         |   | 20,419  |            |  |   | 20,419             |   |  |                         |        |   |            |   | 16,994  |   |  |   | 16,994  |  
|Real estate commercial                                 |  |                    | 115,894 |   |                         |   | 332,043 |            |  |   | 447,937            |   |  |                         | 129,240 |   |            |   | 356,571 |   |  |   | 485,811 |  
|Consumer home equity lines of credit                   |  |                    |        |   |                         |   | 9,477   |            |  |   | 9,477              |   |  |                         |        |   |            |   | 10,459  |   |  |   | 10,459  |  
|Other consumer                                         |  |                    |        |   |                         |   | 8,854   |            |  |   | 8,854              |   |  |                         |        |   |            |   | 10,620  |   |  |   | 10,620  |  
|Commercial                                             |  |                    |        |   |                         |   | 57,157  |            |  |   | 57,157             |   |  |                         |        |   |            |   | 53,552  |   |  |   | 53,552  |  
|Aircraft                                               |  |                    |        |   |                         |   | 27,030  |            |  |   | 27,030             |   |  |                         |        |   |            |   | 28,617  |   |  |   | 28,617  |  
|                                                       |  |                    |         |   |                         |   |         |            |  |   |                    |   |  |                         |         |   |            |   |         |   |  |   |         |  
|Total gross loans                                      |  |                    | 161,014 |   |                         |   | 587,397 |            |  |   | 748,411            |   |  |                         | 154,049 |   |            |   | 586,313 |   |  |   | 740,362 |  
|Deferred loan origination costs (fees)                 |  |                    | 549     |   |                         |   | (1,573  | )          |  |   | (1,024             | ) |  |                         | 499     |   |            |   | (1,671  | ) |  |   | (1,172  | )
|Discount on unguaranteed portion of SBA loans retained |  |                    | (215    | ) |                         |   | (1,786  | )          |  |   | (2,001             | ) |  |                         | (221    | ) |            |   | (1,897  | ) |  |   | (2,118  | )
|Allowance for loan losses                              |  |                    |        |   |                         |   | (9,780  | )          |  |   | (9,780             | ) |  |                         |        |   |            |   | (9,773  | ) |  |   | (9,773  | )
|                                                       |  |                    |         |   |                         |   |         |            |  |   |                    |   |  |                         |         |   |            |   |         |   |  |   |         |  
|Net loans                                              |  | $                  | 161,348 |   |                         | $ | 574,258 |            |  | $ | 735,606            |   |  | $                       | 154,327 |   |            | $ | 572,972 |   |  | $ | 727,299 |  
|                                                       |  |                    |         |   |                         |   |         |            |  |   |                    |   |  |                         |         |   |            |   |         |   |  |   |         |  

The Companys lending activities are concentrated primarily in the western Riverside and San
Diego Counties of Southern California. Although the Company seeks to avoid undue concentrations of loans to a single industry based upon a single class of collateral; 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.

5. Sales and Servicing of SBA 7a Loans:

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

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

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



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30, 2006 and December 31, 2005, the Company utilized a weighted-average prepayment assumption of 9.65% and 9.14%, respectively, and a discount rate of
11.25% for both periods.

Rights to future servicing income from serviced loans that exceed 100 basis points of contractually specified
servicing fees are classified as interest-only strips. Although collected as servicing income, management determined that any income received above 100 basis points is used solely as an offset to the premium received on the guaranteed portion sold
and therefore is essentially a financial instrument created separately that should be treated as an interest-only strip, which if need be, the Bank has the option to sell in the secondary market. At June 30, 2006 and December 31, 2005, the
fair value of interest-only strips was estimated using a weighted-average prepayment assumption of 9.65% and 9.14%, respectively, and a discount rate of 11.25% for both periods. The fair value of the portfolio is recalculated on a quarterly basis
with any unrealized gains or losses recorded in earnings in the period of change.

6. Goodwill and Intangibles

Goodwill and intangible assets arise from purchase accounting for business combinations. The gross carrying value and accumulated amortization related to
core deposit intangibles at June 30, 2006 and December 31, 2005 are presented below, (dollars in thousands):



|                         |  |                 |       |                     |   |      
|------------------------ |  | --------------- | ----- | ------------------- | - | -----
|                         |  | At June 30,2006 |       | At December 31,2005
|Gross Carrying Value     |  | $               | 4,846 |                     | $ | 4,846
|Accumulated Amortization |  |                 | 726   |                     |   | 429  
|                         |  |                 |       |                     |   |      
|Net Carrying Value       |  | $               | 4,120 |                     | $ | 4,417
|                         |  |                 |       |                     |   |      

As a result of the Cuyamaca Bank and Rancho Bernardo Community Bank mergers, the Company recorded
$2.3 and $2.6 million, respectively, of core deposit intangibles. The Cuyamaca and Rancho Bernardo core deposit intangibles amortization period is estimated to be 8.5 years and 7.8 years, respectively. Amortization expense on core deposit
intangibles was $149,000 and $66,000 for the three months ended June 30, 2006 and 2005, respectively and $297,000 and $132,000 for the six months ended June 30, 2006 and 2005, respectively. The Company estimates that the annual
amortization expense will be approximately $594,000 for 2006, 2007, 2008, 2009 and 2010.

7. Affordable Housing
Investments

The Company invests in limited partnerships formed to develop and operate affordable housing units for lower income tenants
throughout the state of California for which it receives affordable housing tax credits. The Company is the sole limited partner of one of its affordable housing investments, Midland, and owns 99.99% of the outstanding equity of the
partnership. The primary asset of Midland consists of a 25% interest in a separate limited liability partnership which owns 100% of an affordable housing complex in Escondido, CA. Due to its majority interest in Midland, the Company is deemed
to be the primary beneficiary of this variable interest entity and the Company consolidated the assets and liabilities of Midland effective June 30, 2006 under the guidance of FASB Interpretation No. 46R, Consolidation of Variable
Interest Entities, An Interpretation of ARB No. 51. Prior to June 30, 2006 the Company after making an exhaustive effort to obtain the information required to perform the accounting required to consolidate the entity was unable to
obtain the information. Therefore, the Company did not consolidate the entity and continued to hold the partnership at its amortized cost. At June 30, 2006, the Company discontinued its amortization of the investment and consolidated the
partnership investment which resulted in a one-time gain of $111,000. The Company will recognize the actual losses of the partnership as realized up to its total equity investment. The Company has no additional commitments to fund this partnership
nor does it have any obligation to absorb additional losses beyond its current equity investment. The carrying amount of the consolidated assets of this limited partnership at June 30, 2006 was $1,646,000.



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The following table presents the assets, which are restricted from use by the Company, and other balances
related to the consolidation of the limited partnership (dollars in thousands):



|                   |  |   |      
|------------------ |  | - | -----
|Assets:            |  |   |      
|Cash               |  | $ | 325  
|Investments        |  |   | 1,299
|Other Assets       |  |   | 22   
|                   |  |   |      
|Total assets:      |  |   | 1,646
|Total liabilities: |  |   | 5    
|                   |  |   |      
|Net Assets         |  | $ | 1,641
|                   |  |   |      

The Company has other affordable housing partnerships for which it is not considered the primary
beneficiary and therefore does not consolidate. The Company has invested in these limited partnerships formed to develop and operate affordable housing units for lower income tenants throughout the state of California. The costs associated with
these unconsolidated investments are being amortized on an equity method over the life of the partnerships ranging from 10.1 to 13.2 years. If the partnerships cease to qualify during the compliance period, the credits may be denied for any period
in which the projects are not in compliance and a portion of the credits previously taken is subject to recapture with interest. The remaining federal tax credits to be utilized over a multiple-year period are $4.8 million as of June 30,
2006. The Companys usage of tax credits approximated $274,000 and $179,000 during the periods ended June 30, 2006 and 2005, respectively. The Company had a commitment to fund an additional $1.8 million to these partnerships as of
June 30, 2006. The Company has no obligation to absorb any additional losses of these partnerships beyond its equity investment.

8. Income
Taxes:

The components of the Companys income tax provision for the three and six months ended June 30, 2006 and 2005,
respectively are as follows, (dollars in thousands):



|          |  |                                    |       |   |                                  |   |        |      |  |   |       |   |  |   |       |  
|--------- |  | ---------------------------------- | ----- | - | -------------------------------- | - | ------ | ---- |  | - | ----- | - |  | - | ----- | -
|          |  | For the three monthsended June 30, |       |   | For the six monthsended June 30, |  
|          |  | 2006                               |       |   | 2005                             |   |        | 2006 |  |   | 2005  |  
|Current:  |  |                                    |       |   |                                  |   |        |      |  |   |       |   |  |   |       |  
|Federal   |  | $                                  | 1,896 |   |                                  | $ | 2,296  |      |  | $ | 3,177 |   |  | $ | 3,211 |  
|State     |  |                                    | 577   |   |                                  |   | 731    |      |  |   | 1,267 |   |  |   | 1,119 |  
|          |  |                                    |       |   |                                  |   |        |      |  |   |       |   |  |   |       |  
|          |  |                                    | 2,473 |   |                                  |   | 3,027  |      |  |   | 4,444 |   |  |   | 4,330 |  
|          |  |                                    |       |   |                                  |   |        |      |  |   |       |   |  |   |       |  
|Deferred: |  |                                    |       |   |                                  |   |        |      |  |   |       |   |  |   |       |  
|Federal   |  |                                    | (368  | ) |                                  |   | (721   | )    |  |   | 71    |   |  |   | (264  | )
|State     |  |                                    | (29   | ) |                                  |   | (413   | )    |  |   | (84   | ) |  |   | (524  | )
|          |  |                                    |       |   |                                  |   |        |      |  |   |       |   |  |   |       |  
|          |  |                                    | (397  | ) |                                  |   | (1,134 | )    |  |   | (13   | ) |  |   | (788  | )
|          |  |                                    |       |   |                                  |   |        |      |  |   |       |   |  |   |       |  
|          |  | $                                  | 2,076 |   |                                  | $ | 1,893  |      |  | $ | 4,431 |   |  | $ | 3,542 |  
|          |  |                                    |       |   |                                  |   |        |      |  |   |       |   |  |   |       |  



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A reconciliation of the expected statutory income tax provision and the actual income tax provision is
shown below for the three and six months ended June 30, 2006 and 2005, respectively, (dollars in thousands):



|                                                      |  |                                    |       |   |                                  |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------------- |  | ---------------------------------- | ----- | - | -------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                      |  | For the three monthsended June 30, |       |   | For the six monthsended June 30, |  
|                                                      |  | 2006                               |       |   | 2005                             |   |       | 2006 |  |   | 2005  |  
|Computed expected federal income taxes              |  | $                                  | 1,730 |   |                                  | $ | 1,605 |      |  | $ | 3,808 |   |  | $ | 3,029 |  
|State income taxes, net of federal income tax benefit |  |                                    | 348   |   |                                  |   | 332   |      |  |   | 767   |   |  |   | 627   |  
|Affordable housing investment tax credits             |  |                                    | (134  | ) |                                  |   | (90   | )    |  |   | (267  | ) |  |   | (179  | )
|Other, net                                            |  |                                    | 132   |   |                                  |   | 46    |      |  |   | 123   |   |  |   | 65    |  
|                                                      |  |                                    |       |   |                                  |   |       |      |  |   |       |   |  |   |       |  
|                                                      |  | $                                  | 2,076 |   |                                  | $ | 1,893 |      |  | $ | 4,431 |   |  | $ | 3,542 |  
|                                                      |  |                                    |       |   |                                  |   |       |      |  |   |       |   |  |   |       |  

The tax effects of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities as of June 30, 2006 and December 31, 2005 are as follows, (dollars in thousands):



|                                                                      |  |                 |        |   |                     |   |        |  
|--------------------------------------------------------------------- |  | --------------- | ------ | - | ------------------- | - | ------ | -
|                                                                      |  | At June 30,2006 |        |   | At December 31,2005 |  
|Deferred tax assets:                                                  |  |                 |        |   |                     |   |        |  
|Loan loss allowance                                                   |  | $               | 4,021  |   |                     | $ | 3,803  |  
|Unrealized gains on loans held for sale                               |  |                 | 2,045  |   |                     |   | 1,801  |  
|Accrued compensation expenses                                         |  |                 | 801    |   |                     |   | 699    |  
|Unrealized loss on available for sale securities                      |  |                 | 517    |   |                     |   | 280    |  
|State income taxes                                                    |  |                 | 444    |   |                     |   | 869    |  
|Fair value adjustments on acquired assets and liabilities             |  |                 | 256    |   |                     |   | 279    |  
|Deferred loan costs                                                   |  |                 | 209    |   |                     |   | 266    |  
|Deferred rent                                                         |  |                 | 177    |   |                     |   | 154    |  
|Non-accrual interest recognized as income for taxes but not for books |  |                 | 171    |   |                     |   | 124    |  
|Restricted stock                                                      |  |                 |       |   |                     |   | 123    |  
|Depreciable assets - state                                            |  |                 | 11     |   |                     |   | 27     |  
|Other accrued expenses                                                |  |                 | 16     |   |                     |   | 15     |  
|                                                                      |  |                 |        |   |                     |   |        |  
|                                                                      |  |                 | 8,668  |   |                     |   | 8,440  |  
|                                                                      |  |                 |        |   |                     |   |        |  
|Deferred tax liabilities:                                             |  |                 |        |   |                     |   |        |  
|Fair value adjustments of core deposits intangible                    |  |                 | (1,732 | ) |                     |   | (1,857 | )
|Depreciable assets - federal                                          |  |                 | (323   | ) |                     |   | (263   | )
|Other liabilities                                                     |  |                 | (195   | ) |                     |   | (153   | )
|                                                                      |  |                 |        |   |                     |   |        |  
|                                                                      |  |                 | (2,250 | ) |                     |   | (2,273 | )
|                                                                      |  |                 |        |   |                     |   |        |  
|Deferred tax asset, net                                               |  | $               | 6,418  |   |                     | $ | 6,167  |  
|                                                                      |  |                 |        |   |                     |   |        |  

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

As of June 30, 2006 income taxes payable totaled $167,000 and is included in accrued expenses and other liabilities on the consolidated balance
sheet. At December 31, 2005 income taxes receivable totaled $563,000.



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9. Commitments and Contingencies:

The Company is 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. Additionally, 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 are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At June 30, 2006 and December 31,
2005, commitments to extend credit were outstanding and amounted to $3.7 million and $12.1 million, respectively.

The Company has
undisbursed portions of construction loans totaling $100.9 million and $102.6 million as of June 30, 2006 and December 31, 2005, respectively. These commitments are agreements to lend to a customer, subject to meeting certain construction
progress requirements. The underlying construction loans have fixed expiration dates.

The Company has undisbursed revolving and
non-revolving lines of credit which are agreements to lend to a customer up to a predetermined credit limit as needed by the customer. The underlying loans have fixed expiration dates. These lines of credit totaled $105.8 million and $107.1 million
as of June 30, 2006 and December 31, 2005, 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. Standby letters of credit
and financial guarantees amounting to $3.5 million and $3.8 million were outstanding at June 30, 2006 and December 31, 2005, 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.

On December 16, 2002, the Company entered into an interest rate swap
agreement with a third party. The terms of the agreement include, among other things, a collateral requirement which would offset any credit risk between the Company and the third party. The swap agreement aggregates a $10.0 million
notional principal amount and requires the Company to make fixed interest payments based on an effective rate of 11.0% and a variable rate, based upon six-month LIBOR plus spread to reduce the duration of the trust preferred security from over
twenty years to six months. During June 2006, the Company determined it had incorrectly applied the short cut method of hedge accounting. Consequently, the Company reversed the $675,000 of the mark to market adjustment on the debt as of April
1, 2006 into income. The Company recognized an additional loss of $233,000 due to a decline in the value of the swap for a total realized loss of $908,000 which is reported in other income in the accompanying consolidated income statements. Due to
the high interest rate environment, the Company believed the swap to no longer be beneficial to the net interest margin of the Company and terminated its variable interest rate swap agreement with this third party.

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

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



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liabilities arising out of their relationships. The duration of these indemnities and guarantees vary, 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.

In connection with the
$36.3 million in outstanding long-term debt primarily reflecting the issuance of trust preferred securities, the Company issued the full and unconditional payment guarantee of certain accrued distributions.

10. Earnings per share

The following table is 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 three months ended June 30, |      
|                                            |  | 2006                                |       |                     | 2005  |                 
|                                            |  | Income(numerator)                   |       | Shares(denominator) |       | Per ShareAmounts |   |       | Income(numerator) |  | Shares(denominator) |       | Per ShareAmounts |      
|Basic EPS                                   |  |                                     |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  
|Net income available to common shareholders |  | $                                   | 2,868 |                     | 6,044 |                  | $ | 0.47  |                   |  | $                   | 2,831 |                  | 5,269 |  | $ | 0.54  |  
|Effect of dilutive stock options            |  |                                     |      |                     | 260   |                  |   | (0.02 | )                 |  |                     |      |                  | 296   |  |   | (0.03 | )
|                                            |  |                                     |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  
|Diluted EPS                                 |  | $                                   | 2,868 |                     | 6,304 |                  | $ | 0.45  |                   |  | $                   | 2,831 |                  | 5,565 |  | $ | 0.51  |  
|                                            |  |                                     |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  



|                                            |  |                                  |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  
|------------------------------------------- |  | -------------------------------- | ----- | ------------------- | ----- | ---------------- | - | ----- | ----------------- |  | ------------------- | ----- | ---------------- | ----- |  | - | ----- | -
|                                            |  | For the six months ended June 30 |      
|                                            |  | 2006                             |       |                     | 2005  |                 
|                                            |  | Income(numerator)                |       | Shares(denominator) |       | Per ShareAmounts |   |       | Income(numerator) |  | Shares(denominator) |       | Per ShareAmounts |      
|Basic EPS                                   |  |                                  |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  
|Net income available to common shareholders |  | $                                | 6,450 |                     | 6,009 |                  | $ | 1.07  |                   |  | $                   | 5,370 |                  | 5,248 |  | $ | 1.02  |  
|Effect of dilutive stock options            |  |                                  |      |                     | 278   |                  |   | (0.04 | )                 |  |                     |      |                  | 313   |  |   | (0.05 | )
|                                            |  |                                  |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  
|Diluted EPS                                 |  | $                                | 6,450 |                     | 6,287 |                  | $ | 1.03  |                   |  | $                   | 5,370 |                  | 5,561 |  | $ | 0.97  |  
|                                            |  |                                  |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  



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11. Segment Information

The Company segregates its operations into two primary segments: Banking Division and Small Business Administration (SBA 7a) Division. Operating results of each segment is determined based on an internal
management system that allocates certain expenses to each division. The following table is prepared in accordance with the requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, for the three
and six months ended June 30, 2006 and 2005, respectively, (dollars in thousands).



|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|--------------------------------------------------- |  | ----------------------------------- | ------- | -------------- | - | ------ | ----- |  | --------------- | ------- | -------------- | - | ------- | ----- | - | ------ | - |  | - | -------
|                                                    |  | For the three months ended June 30,
|                                                    |  | 2006                                |         | 2005          
|                                                    |  | BankingDivision                     |         | SBA 7aDivision |   |        | Total |  | BankingDivision |         | SBA 7aDivision |   |         | Total
|Interest income                                     |  | $                                   | 15,298  |                | $ | 2,257  |       |  | $               | 17,555  |                | $ | 10,179  |       | $ | 1,950  |   |  | $ | 12,129 
|Interest expense                                    |  |                                     | 3,295   |                |   | 1,671  |       |  |                 | 4,966   |                |   | 925     |       |   | 1,915  |   |  |   | 2,840  
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Net interest income                                 |  |                                     | 12,003  |                |   | 586    |       |  |                 | 12,589  |                |   | 9,254   |       |   | 35     |   |  |   | 9,289  
|Provision (recovery) for loan losses                |  |                                     | 48      |                |   | (48    | )     |  |                 |        |                |   | 573     |       |   | (160   | ) |  |   | 413    
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Net interest income after provision for loan losses |  |                                     | 11,955  |                |   | 634    |       |  |                 | 12,589  |                |   | 8,681   |       |   | 195    |   |  |   | 8,876  
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Other operating income                              |  |                                     | 255     |                |   | 1,023  |       |  |                 | 1,278   |                |   | 849     |       |   | 1,872  |   |  |   | 2,721  
|Other operating expenses                            |  |                                     | 8,081   |                |   | 842    |       |  |                 | 8,923   |                |   | 5,197   |       |   | 1,676  |   |  |   | 6,873  
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Income before income tax provision                  |  |                                     | 4,129   |                |   | 815    |       |  |                 | 4,944   |                |   | 4,333   |       |   | 391    |   |  |   | 4,724  
|Income tax provision                                |  |                                     | 1,727   |                |   | 349    |       |  |                 | 2,076   |                |   | 1,723   |       |   | 170    |   |  |   | 1,893  
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Net income                                          |  | $                                   | 2,402   |                | $ | 466    |       |  | $               | 2,868   |                | $ | 2,610   |       | $ | 221    |   |  | $ | 2,831  
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Assets employed at year end                         |  | $                                   | 807,980 |                | $ | 88,842 |       |  | $               | 896,822 |                | $ | 679,747 |       | $ | 90,453 |   |  | $ | 770,200
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|                                                    | 
|                                                    |  | For the six months ended June 30,  
|                                                    |  | 2006                                |         | 2005          
|                                                    |  | BankingDivision                     |         | SBA 7aDivision |   |        | Total |  | BankingDivision |         | SBA 7aDivision |   |         | Total
|Interest income                                     |  | $                                   | 29,903  |                | $ | 4,621  |       |  | $               | 34,524  |                | $ | 19,022  |       | $ | 3,741  |   |  | $ | 22,763 
|Interest expense                                    |  |                                     | 6,402   |                |   | 3,278  |       |  |                 | 9,680   |                |   | 2,416   |       |   | 2,446  |   |  |   | 4,862  
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Net interest income                                 |  |                                     | 23,501  |                |   | 1,343  |       |  |                 | 24,844  |                |   | 16,606  |       |   | 1,295  |   |  |   | 17,901 
|Provision (recovery) for loan losses                |  |                                     | 33      |                |   | (33    | )     |  |                 |        |                |   | 918     |       |   | (187   | ) |  |   | 731    
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Net interest income after provision for loan losses |  |                                     | 23,468  |                |   | 1,376  |       |  |                 | 24,844  |                |   | 15,688  |       |   | 1,482  |   |  |   | 17,170 
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Other operating income                              |  |                                     | 1,182   |                |   | 2,560  |       |  |                 | 3,742   |                |   | 1,381   |       |   | 3,923  |   |  |   | 5,304  
|Other operating expenses                            |  |                                     | 16,136  |                |   | 1,569  |       |  |                 | 17,705  |                |   | 10,934  |       |   | 2,628  |   |  |   | 13,562 
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Income before income tax provision                  |  |                                     | 8,514   |                |   | 2,367  |       |  |                 | 10,881  |                |   | 6,135   |       |   | 2,777  |   |  |   | 8,912  
|Income tax provision                                |  |                                     | 3,432   |                |   | 999    |       |  |                 | 4,431   |                |   | 2,381   |       |   | 1,161  |   |  |   | 3,542  
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Net income                                          |  | $                                   | 5,082   |                | $ | 1,368  |       |  | $               | 6,450   |                | $ | 3,754   |       | $ | 1,616  |   |  | $ | 5,370  
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        
|Assets employed at period end                       |  | $                                   | 807,980 |                | $ | 88,842 |       |  | $               | 896,822 |                | $ | 679,747 |       | $ | 90,453 |   |  | $ | 770,200
|                                                    |  |                                     |         |                |   |        |       |  |                 |         |                |   |         |       |   |        |   |  |   |        



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12. Recent Accounting Developments:

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetswhich amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 156 relates to the accounting for separately recognized servicing assets and servicing liabilities. This statement establishes standards for recognizing a servicing asset or servicing liability when an entity
undertakes an obligation to service a financial asset by entering into a servicing contract. A servicing contract may result from the transfer of the servicers financial assets that meet the requirement for sale accounting, a qualifying
special purpose entity or in an acquisition or assumption of an obligation to service a financial asset that does not relate to the financial assets of the servicer or its consolidated affiliates. This statement is effective beginning
January 1, 2007 with earlier adoption permitted. The Company is currently evaluating the effect of SFAS No. 156 on its consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. SFAS No. 155, amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS 140, Accounting for Transfers of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need
to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140 including
which interest-only strips are not subject to the requirements of SFAS No. 133. This statement is effective for all financial instruments acquired or issued after January 1, 2007 with earlier adoption permitted. The Company is currently
evaluating the effect of SFAS No. 155 on its consolidated financial statements.

In December 2005, the FASB issued Statement of
Position (SOP) No. 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk. The FASB staff position is intended to emphasize the requirement to assess the adequacy of disclosures for all lending products and
the effect of changes in market or economic conditions on the adequacy of those disclosures. We expect that the adoption of this SOP will not have a significant effect on our financial condition or results of operation.

In November 2005, FASB issued FASB Staff Position (FSP) 115-1/124-1,The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments. This FSP provides additional guidance on when an investment in a debt or equity security should be considered impaired and when that impairment should be considered other-than-temporary and recognized as a loss in earnings.
Specifically, the guidance clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. The FSP also requires certain disclosures
about unrealized losses that have not been recognized as other-than-temporary impairments. Companies are required to apply the guidance in this FSP to reporting periods beginning after December 15, 2005. Adoption of this FSP on
January 1, 2006 did not have a significant effect on our financial condition or results of operation.

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

In December 2004, the FASB issued SFAS
No. 123(R), Accounting for Stock-Based Compensation, which supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation



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guidance. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services.
It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. This
statement focuses primarily on accounting for transactions in which any entity obtains employee services in share-based payment transactions. This statement requires a public entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award  the
requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. This statement is effective for public entities that do not file as small
business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company adopted SFAS No. 123(R) as of January 1, 2006 using a modified prospective approach. The adoption of
SFAS No. 123(R) resulted in a $138,000 decrease in pre-tax net income for the six month period ended June 30, 2006.



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

The following is managements discussion and analysis and is intended to provide additional information regarding the significant changes and
trends which influenced our financial performance for the three and six month period ended June 30, 2006. This analysis should be read in conjunction with our 2005 Annual Report as filed on Form 10-K and with the unaudited financial statements
and notes as set forth in this report. Unless the context requires otherwise, the terms Company, us, we, and our refers to Community Bancorp Inc. on a consolidated basis.

Certain statements contained in this Quarterly Report on Form 10-Q (Report), including, without limitation, statements containing the words
believes, anticipates, intends, expects, and words of similar import, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such forward looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such forward-looking statements.

Overview:

We are a Southern California-based Company focused on community banking, providing commercial banking services including real estate, commercial, and SBA
loans to small and medium-sized businesses. Our core strategy is to build long-term customer relationships in our targeted communities and service all aspects of the banking relationship to small and medium-sized businesses including individuals in
San Diego and western Riverside Counties.

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



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



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



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



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



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



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

The comparability of our financial
information is affected by our acquisition of Rancho Bernardo Community Bank. Operating results include the operations of acquired entities from the date of acquisition. We acquired Rancho Bernardo Community Bank on August 19, 2005. For a
further discussion of this acquisition see Item 1 Financial Statements, Note 2, Merger-related Activity of this Report.



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Return to Our Stockholders.Our return to our stockholders is measured in the form of
return on average tangible equity (ROTE). Return on average tangible equity is calculated as net income divided by average stockholders equity less average goodwill. Return on average tangible equity is a non-GAAP financial measure
within the meaning of Regulation G promulgated by the SEC. For a reconciliation of ROTE to the most directly comparable GAAP measure, return on average equity, see Results of Operations  Net Income within this section of the
Report. Management believes that the presentation of return on average tangible equity provides useful information to investors regarding financial performance because this measure excludes goodwill created from the purchase business combinations.
Our ROTE was 23.13% for the six months ended June 30, 2006 compared to 22.04% for the six months ended June 30, 2005. The increase in ROTE is due to the increase in net income, partially offset by the increase in average equity outstanding
as a result of the Rancho Bernardo Community Bank acquisition in the third quarter of 2005. Our net income for the six months ended June 30, 2006 increased 20.1% to $6.5 million compared to $5.4 million for the six months ended June 30,
2005. Net income increased due to an increase in net interest income, partially offset by an increase in operating expenses and a decrease in non-interest income. Basic EPS increased to $1.07 for the six months ended June 30, 2006 compared to
$1.02 for the six months ended June 30, 2005. Diluted EPS increased to $1.03 for the six months ended June 30, 2006 compared to $0.97 for the six months ended June 30, 2005. The increase in EPS was due to the increase in net income,
partially offset by the increase in average shares outstanding as a result of the Rancho Bernardo Community Bank acquisition in the third quarter of 2005.

In June 2006 and February 2006, we declared a $0.125 per share quarterly cash dividend which was paid on the last day of each quarter to stockholders on record at June 15, 2006 and March 15, 2006,
respectively.

Return on Average Assets. Our return on average assets (ROA) is a measure we use to compare our
performance with other banks and bank holding companies. Our ROA for the six months ended June 30, 2006 was 1.44% compared to 1.52% for the six months ended June 30, 2005. The decrease in ROA is due to our increase in average assets
exceeding the increase in our net income.

Development of Core Revenue Streams. Over the past few years, we have focused on
not only improving net income, but improving the consistency of our revenue streams in order to create more foreseeable future earnings and reduce the effect of changes in our operating environment on our net income. Specifically, we have focused on
net interest income through a variety of processes, including increases in average interest earning assets as a result of loan generation and retention, and improved net interest margin by focusing on core deposit growth. As a result, our net
interest income before provision for loan losses increased 38.8% to $24.8 million for the six months ended June 30, 2006 compared to $17.9 million for the six months ended June 30, 2005. Our net interest margin has also improved to 6.18%
for the six months ended June 30, 2006 compared to 5.64% for the six months ended June 30, 2005.

Non-interest income for the six
months ended June 30, 2006 decreased to $3.7 million compared to $5.3 million for the six months ended June 30, 2005. Gain on sale of loans decreased to $3.1 million for the six months ended June 30, 2006 compared to $3.7 million for the six months
ended June 30, 2005. Due to the high interest rate environment, we believed the interest rate swap agreement we entered into in 2002 to no longer be beneficial to the net interest margin and terminated our variable interest rate swap agreement
during the second quarter 2006. As a result of the swap termination, we realized a loss of $908,000.

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

Asset Quality.For all bank and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations. Asset quality is measured in terms of
percentage of total loans and total assets, and is a key element in estimating the future performance of a company. Non-performing loans totaled $5.8 million as of June 30, 2006 compared to $3.6 million as of December 31, 2005. Management
maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on non-accrual status until such time management has determined that the loans are likely to remain current in future periods. Non-performing loans



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as a percentage of gross loans increased to 0.77% as of June 30, 2006 compared to 0.49% as of December 31, 2005. Net of government guarantees,
non-performing loans totaled $3.6 million, or 0.49% of gross loans as of June 30, 2006 compared to $2.1 million, or 0.28%, as of December 31, 2005.

Asset Growth. As revenues from both net interest income and non-interest income are a function of asset size, the growth in assets has a direct impact in increasing net income and therefore ROTE and ROA.
The majority of our assets are loans, and the majority of our liabilities are deposits, and therefore the ability to generate loans and deposits are fundamental to our asset growth. Total assets decreased 1.3% during the first half of 2006 from
$908.6 million as of December 31, 2005 to $896.8 million as of June 30, 2006. Loan production has been exceptional for us, but commercial real estate and construction payoffs have been coming in faster than expected. Total gross loans
increased slightly to $748.4 million as of June 30, 2006 compared to $740.4 million as of December 31, 2005. Total deposits decreased 1.6% to $699.4 million as of June 30, 2006 compared to $710.5 million as of December 31, 2005,
whereas, total retail banking deposits increased 1.0% to $650.3 million as of June 30, 2006 compared to $643.9 million as of December 31, 2005.

Operating Efficiency. Operating efficiency is the measure of how efficiently earnings before taxes are generated as a percentage of revenue. Our efficiency ratio (operating expenses divided by net
interest income plus non-interest income, excluding gains or losses on repossessed assets) was 61.94% for the first half of 2006 compared to 58.84% for the first half of 2005. The increase in the efficiency ratio is due to the increase in operating
expenses exceeding the increase in revenue. Net operating expenses increased 30.5% to $17.7 million as of June 30, 2006, while interest income before provision plus non-interest income increased 23.2% to $28.6 million for the same period as the
result of the acquisition of Rancho Bernardo Community Bank and normal increases in operating expenses. In addition, due to the high interest rate environment, we believed the interest rate swap used to hedge our fixed rate trust preferred debt to
no longer be beneficial to the net interest income and terminated the interest rate swap agreement during the second quarter 2006. As a result of the swap termination, the Company realized a one-time loss of $908,000 contributing to lower
revenue.

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,
servicing liabilities and interest-only strips, the valuation of goodwill and intangible assets, and share based compensation. Actual results could differ from those estimates.

Allowance for loan losses. We have established a methodology for the determination of our provision for loan losses. The methodology is set forth
in a formal written 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 includes a formula allowance and a specific allowance for identified problem loans.

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

The allowance for loan loss is maintained to cover estimated loan losses in the loan portfolio. Management and our Directors Loan Committee are responsible for the review of our assets and the determination of
the adequacy of the general valuation allowance. They assign the loss reserve ratio for each type of loan and review the adequacy of the allowance at least quarterly based on an evaluation of the portfolio, past experience,



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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 which cannot be reasonably assured of their full collection as
prescribed in SFAS No. 114, Accounting by Creditors for Impairment of a Loan (as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures). 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, delinquent reports, periodic updates to financial statements, public records, and industry reports. All loan types are subject to specific allowances once identified as impaired or a non-performing loan. Loans not subject to
specific allowances are placed into pools in 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.

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

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

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

Goodwill and Intangibles.Net assets of companies acquired in purchase business combination transactions are recorded at their fair
value at the date of acquisition. The historical cost basis of individual assets and liabilities are adjusted to reflect their fair value. Identified intangibles are amortized on an accelerated or straight-line basis over the period benefited.
Goodwill is not amortized but reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment. Intangible assets subject to amortization are evaluated for impairment in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment loss is recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. If the carrying amount of the intangible
exceeds the sum of the undiscounted cash flows expected to result from the use of the asset it is considered not recoverable.



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Accounting for Share-Based Compensation.The Company accounts for stock-based
compensation in accordance with SFAS No. 123(R), Share-Based Payments. Under the provisions of SFAS No. 123(R), stock-based compensation cost is estimated at the grant date based on the fair-value as calculated by the Black-Scholes
option-pricing model. Stock-based compensation cost is recognized ratably over the requisite service period. The Black-Scholes model requires various highly judgmental assumptions including volatility, forfeiture rates, and expected option life. If
any of the assumptions change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. Further information regarding stock-based compensation can be found in Note 3,
Share-Based Compensation within this Report.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005

Net Income

Net income increased to $6.5 million for the six months ended June 30, 2006 compared to $5.4 million for the six months ended June 30, 2005.
Basic earnings per share were $1.07 and $1.02 for the six months ended June 30, 2006 and 2005, respectively. Diluted earnings per share were $1.03 and $0.97 for the six months ended June 30, 2006 and 2005, respectively. The ROA for the six
months ended June 30, 2006 was 1.44% compared to 1.52% for the six months ended June 30, 2005. ROTE was 23.13% for the six months ended June 30, 2006 compared to 22.04% for the six months ended June 30, 2005. ROTE is a non-GAAP
financial measure. As required by Regulation G, a reconciliation of return on average tangible equity to the most directly comparable measure under GAAP, which is return on average equity, is provided below for the six months ended June 30,
2006 and 2005.



|                        |  |                                |         |        |       |   |          |   |        |  |       |  
|----------------------- |  | ------------------------------ | ------- | ------ | ----- | - | -------- | - | ------ |  | ----- | -
|                        |  | At or for the Six Months Ended |        
|                        |  | June2006                       |         | Return |       |   | June2005 |   | Return | 
|Net income              |  | $                              | 6,450   |        |       |   |          | $ | 5,370  |  |       |  
|Average Equity          |  |                                | 101,110 |        | 12.76 | % |          |   | 66,582 |  | 16.13 | %
|Less: Average Goodwill  |  |                                | 45,329  |        |       |   |          |   | 17,846 |  |       |  
|Average Tangible Equity |  | $                              | 55,781  |        | 23.13 | % |          | $ | 48,736 |  | 22.04 | %

The increase in net income and profitability for the six months ended June 30, 2006 was
mainly due to the increase in net interest income, partially offset by a decrease in non-interest income and increase in non-interest expense, as a result of the acquisition of Rancho Bernardo Community Bank and increases in incentive compensation.
Net interest income increased due to a $169.8 million increase in average interest earning assets and a 54 basis point expansion in net interest margin. Non-interest income decreased primarily due to the termination of the swap agreement. Operating
expenses increased primarily as a result of the Companys expansion.

Net Interest Income

Net interest income is the most significant component of our income from operations. Net interest income is the difference between the gross interest and
fees earned on our loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume and interest earned on interest earning assets and the volume of and interest rate paid on interest
bearing liabilities. Our loan portfolio experienced a 146 basis point increase in average yield primarily due to the impact of the prime rate increasing to 8.25% at June 30, 2006 from 6.25% at June 30, 2005.



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##### Table of Contents

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



|                                              |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|--------------------------------------------- |  | -------------- | ------- | ------------------- | ---- | ----------------- |  | ---- | -------------- |  | ------------------- | ------- | ----------------- | - | ------ |  | ---- | -
|                                              |  | 2006           |         |                     | 2005 |                  
|For the six months ended June 30,             |  | AverageBalance |         | InterestEarned/Paid |      | AverageRate/Yield |  |      | AverageBalance |  | InterestEarned/Paid |         | AverageRate/Yield |  
|Average assets:                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Securities and time deposits at other banks   |  | $              | 63,056  |                     | $    | 1,483             |  | 4.74 | %              |  | $                   | 40,513  |                   | $ | 805    |  | 4.01 | %
|Fed funds sold                                |  |                | 2,292   |                     |      | 53                |  | 4.66 | %              |  |                     | 11,114  |                   |   | 149    |  | 2.71 | %
|Loans:                                        |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Commercial                                    |  |                | 51,538  |                     |      | 2,103             |  | 8.23 | %              |  |                     | 41,051  |                   |   | 1,383  |  | 6.79 | %
|Real Estate                                   |  |                | 645,693 |                     |      | 29,092            |  | 9.09 | %              |  |                     | 500,896 |                   |   | 18,749 |  | 7.55 | %
|Aircraft                                      |  |                | 28,227  |                     |      | 953               |  | 6.81 | %              |  |                     | 29,650  |                   |   | 992    |  | 6.75 | %
|Consumer                                      |  |                | 19,310  |                     |      | 840               |  | 8.77 | %              |  |                     | 17,116  |                   |   | 685    |  | 8.09 | %
|                                              |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total loans                                   |  |                | 744,768 |                     |      | 32,988            |  | 8.93 | %              |  |                     | 588,713 |                   |   | 21,809 |  | 7.47 | %
|                                              |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total earning assets                          |  |                | 810,116 |                     |      | 34,524            |  | 8.59 | %              |  |                     | 640,340 |                   |   | 22,763 |  | 7.17 | %
|Non earning assets                            |  |                | 87,100  |                     |      |                   |  |      |                |  |                     | 66,602  |                   |   |        |  |      |  
|                                              |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total average assets                          |  | $              | 897,216 |                     |      |                   |  |      |                |  | $                   | 706,942 |                   |   |        |  |      |  
|                                              |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Average liabilities and stockholders equity:  |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Interest bearing deposits:                    |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Savings and interest bearing accounts         |  | $              | 238,055 |                     |      | 1,682             |  | 1.42 | %              |  | $                   | 186,309 |                   |   | 574    |  | 0.62 | %
|Time deposits                                 |  |                | 299,796 |                     |      | 5,664             |  | 3.81 | %              |  |                     | 279,159 |                   |   | 3,296  |  | 2.38 | %
|                                              |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total interest bearing deposits               |  |                | 537,851 |                     |      | 7,346             |  | 2.75 | %              |  |                     | 465,468 |                   |   | 3,870  |  | 1.68 | %
|Short term borrowing                          |  |                | 43,086  |                     |      | 1,002             |  | 4.69 | %              |  |                     | 27,130  |                   |   | 387    |  | 2.88 | %
|Long term debt                                |  |                | 36,077  |                     |      | 1,332             |  | 7.45 | %              |  |                     | 17,762  |                   |   | 605    |  | 6.87 | %
|                                              |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total interest bearing liabilities            |  |                | 617,014 |                     |      | 9,680             |  | 3.16 | %              |  |                     | 510,360 |                   |   | 4,862  |  | 1.92 | %
|Demand deposits                               |  |                | 169,064 |                     |      |                   |  |      |                |  |                     | 120,567 |                   |   |        |  |      |  
|Accrued expenses and other liabilities        |  |                | 10,028  |                     |      |                   |  |      |                |  |                     | 9,433   |                   |   |        |  |      |  
|Net shareholders equity                       |  |                | 101,110 |                     |      |                   |  |      |                |  |                     | 66,582  |                   |   |        |  |      |  
|                                              |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total average liabilities stockholders equity |  | $              | 897,216 |                     | $    | 24,844            |  |      |                |  | $                   | 706,942 |                   | $ | 17,901 |  |      |  
|                                              |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Net interest spread                           |  |                |         |                     |      |                   |  | 5.43 | %              |  |                     |         |                   |   |        |  | 5.25 | %
|                                              |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Net interest margin                           |  |                |         |                     |      |                   |  | 6.18 | %              |  |                     |         |                   |   |        |  | 5.64 | %
|                                              |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  

Interest income for the six months ended June 30, 2006 increased to $34.5 million compared to
$22.8 million for the six months ended June 30, 2005. The increase was due to the 26.5% increase in the average balance of interest earning assets, combined with the increase in the yield on those assets. Average interest earning assets
increased to $810.1 million for the six months ended June 30, 2006 compared to $640.3 million for the six months ended June 30, 2005. The yield on interest earning assets increased to 8.59% for the six months ended June 30, 2006
compared to 7.17% for the six months ended June 30, 2005. The single largest component of interest earning assets was real estate loans, which had an average balance of $645.7 million with a yield of 9.09% for the six months ended June 30,
2006 compared to $500.9 million with a yield of 7.55% for the six months ended June 30, 2005.

Interest expense for the six months
ended June 30, 2006 increased to $9.7 million compared to $4.9 million for the six months ended June 30, 2005. This increase was due to the increase in average interest bearing liabilities, combined with the increase in the cost of those
liabilities. Average interest-bearing liabilities increased to $617.0 million for the six months ended June 30, 2006 compared to $510.4 million for the six months ended June 30, 2005. Average time deposits, the largest component of
interest bearing liabilities, increased to $299.8 million with a cost of 3.81% for the six months ended June 30, 2006 compared to $279.2 million with a cost of 2.38% for the six months ended June 30, 2005.

Other average borrowings increased to $79.2 million with a cost of 5.95% for the six months ended June 30, 2006 compared to $44.9 million with a
cost of 4.46% for the six months ended June 30, 2005 primarily due to the $20.0 million trust preferred debt issued in August of 2005.



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##### Table of Contents

Average demand deposits increased 40.2% to $169.1 million for the six months ended June 30, 2006
from an average $120.6 million for the six months ended June 30, 2005. The cost of deposits, including demand deposits and interest bearing deposits, increased to 2.10% for the six months ended June 30, 2006 compared to 1.33% for the six
months ended June 30, 2005. Average transaction accounts (including interest bearing checking, demand deposits, money market accounts and savings accounts), increased 32.7% to $407.1 million for the six months ended June 30, 2006 compared
to $306.9 million for the six months ended June 30, 2005. The cost of funds, including interest bearing liabilities and demand deposits, increased 93 basis points to 2.48% for the six months ended June 30, 2006 compared to 1.55% for the
six months ended June 30, 2005.

Net Interest Income before Provision for Estimated Loan Losses

Net interest income before provision for estimated loan losses for the six months ended June 30, 2006 was $24.8 million compared to $17.9 million for
the six months ended June 30, 2005. 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 $810.1 million for the six months
ended June 30, 2006 with a net interest margin of 6.18% compared to $640.3 million with a net interest margin of 5.64% for the six months ended June 30, 2005.

For the six months ended June 30, 2006, the increase in the net interest margin was primarily due to the increase in interest rates. For a discussion of repricing of our assets and liabilities, see Item 3,
Quantitative and Qualitative Disclosure about Market Risk of this Report.

Provision for Estimated Loan Losses

The provision for estimated loan losses was zero for the six months ended June 30, 2006 compared to $731,000 for the six months ended June 30,
2005. For further information, please see the Loans discussion in the Financial Condition portion of this section of the Report.

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 income. Other operating income was $3.7 million for the six months ended June 30, 2006 compared to $5.3 million for the six months ended June 30, 2005. The decrease in
other operating income for the six months ended June 30, 2006 was primarily due to the reversal of the mark to market on the trust preferred debt, the termination of the swap agreement, which was used to hedge our fixed rate trust preferred
debt, a combined impairment on the servicing asset and I/O Strip, and a decrease in the gain on sale of loans. As a result of the rise in interest rates, the Company believed that the swap would no longer benefit net interest margin and therefore
elected to terminate the swap during the second quarter of 2006. Pursuant to the Agreement and Plan of Merger dated as of May 15, 2006 by and between the Company and First Community Bancorp, the Company received First Communitys written
consent of the unwinding of the swap agreement. For a further discussion of gain on sale of loans and loan servicing fees, see SBA 7a Division in this section of the Report. For a further discussion of customer service charges and other
fee income, see Banking Division in this section of the Report.

Operating Expenses

Operating expenses are non-interest types of expenses and are incurred in our normal course of business. Salaries and employee benefits, occupancy,
professional services, depreciation and amortization, data processing, office and other expenses are the major categories of operating expenses. Operating expenses increased to $17.7 million for the six months ended June 30, 2006 compared to
$13.6 million for the six months ended June 30, 2005.

The efficiency ratio, measured as the percentage of operating expenses to net
interest income before provision for loan losses plus non-interest income, excluding gains or losses on repossessed assets was 61.94% for the six months ended June 30, 2006 compared to 58.84% for the six months ended June 30, 2005. The
increase in operating expense was due to growth and expansion, including the acquisition of Rancho Bernardo Community Bank, with one banking office and the addition of a de novo banking office in Corona, California.



28



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##### Table of Contents

Salaries and employee benefits increased to $10.3 million for the six months ended June 30, 2006
compared to $7.6 million for the six months ended June 30, 2005. The increase in salaries and employee benefits for the six month period ended June 30, 2006 can be attributed to the addition of two bank branches, including one acquired in
the Rancho Bernardo Community Bank acquisition, the implementation of SFAS 123(R), and normal cost increases for salaries and benefits.

Occupancy expense increased to $1.4 million for the six months ended June 30, 2006 compared to $1.1 million for the six months ended June 30, 2005. The increase in occupancy expense for the six months ended June 30, 2006 was
due to normal increases in rent, the acquisition of Rancho Bernardo Community Bank, and the addition of a de novo branch in Corona, California.

Professional services, including legal, accounting, regulatory and consulting, decreased to $905,000 for the six months ended June 30, 2006 compared to $993,000 for the six months ended June 30, 2005. The decrease in professional
services for the six months ended June 30, 2006 was due to a decline in consulting fees compared to the six months ended June 30, 2005.

Depreciation and amortization expense increased to $699,000 for the six months ended June 30, 2006 compared to $631,000 for the six months ended June 30, 2005. The increase in depreciation and amortization expense for the six
months ended June 30, 2006 was due to the increase in the amount of premises and equipment, which increased to an average of $7.0 million for the first half of 2006 from an average $6.8 million during the first half of 2005 as a result of the
acquisition of Rancho Bernardo Community Bank and increases in premises and equipment from normal additions.

Data processing expense
increased to $556,000 for the six months ended June 30, 2006 compared to $446,000 for the six months ended June 30, 2005. Data processing expense for the six months ended June 30, 2006 increased due to the increase in retail deposits
as well as normal cost increases.

Office expenses were $554,000 for the six months ended June 30, 2006 compared to $427,000 for the
six months ended June 30, 2005. The increase in office expenses for the six months ended June 30, 2006 was due to growth and expansion, including the acquisition of Rancho Bernardo Community Bank, with one banking office, and the addition
of a de novo banking in Corona, California.

Other expenses increased to $3.3 million for the six months ended June 30, 2006 compared
to $2.4 million for the six months ended June 30, 2005. Increases in other operating expenses are due to the expansion of our operations, including the acquisition of Rancho Bernardo Community Bank and the addition of a de novo branch in
Corona, California.

Provision for Income Taxes

The effective income tax rate was 40.7% for the six months ended June 30, 2006 compared to 39.7% for the six months ended June 30, 2005. The effective tax rate increase for the six months ended June 30, 2006 was relative to
the increase in pretax income combined with the effect of stock option expense. Provisions for income taxes totaled $4.4 million and $3.5 million for the six months ended June 30, 2006 and 2005, respectively.

Divisions of the Company

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



29



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##### Table of Contents

Banking Division

Performance in the Banking Division is measured in terms of profitability, asset growth, asset quality, deposit growth, market share and other standards.
For the six months ended June 30, 2006, the Banking Division had a pre-tax profit of $8.5 million, with net interest income of $23.5 million, other operating income of $1.2 million, and other operating expenses of $16.1 million. Total assets of
the Banking Division increased to $808.0 million at June 30, 2006 due to the strong loan growth.

Customer service charges increased
to $599,000 for the six months ended June 30, 2006 compared to $498,000 for the six months ended June 30, 2005 due to an increase in transaction accounts.

Other operating income, including the loss on swap, gain on affordable housing partnerships and gain on other assets, decreased to $(51,000) for the six months ended June 30, 2006 compared to $463,000 for the six
months ended June 30, 2005. The decrease in other operating income for the six months ended June 30, 2006 is primarily a result of a realized loss of $908,000 from the termination of the Companys interest rate swap, which was used to
hedge its fixed rate trust preferred debt.

Other operating expenses were $16.1 million for the six months ended June 30, 2006
compared to $10.9 million for the six months ended June 30, 2005. The increase in other operating expense is due to the expansion of our operations, including the acquisition of Rancho Bernardo Community Bank with one banking office, and the
addition of a de novo branch in Corona, California, as well as increases in third party analysis expenses paid for on behalf of the divisions business customers. Additional increases were a result of the recognition of expense of stock options
associated with the adoption of SFAS No. 123(R) and the expense related to restricted stock grants which fully vested in February 2006.

The following table shows the total assets and results of operations for the Banking Division (dollars in thousands):



|                                                     |  |      |         |      |   |        
|---------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|Six months ended June 30,                            |  | 2006 |         | 2005
|Interest income                                      |  | $    | 29,903  |      | $ | 19,022 
|Interest expense                                     |  |      | 6,402   |      |   | 2,416  
|                                                     |  |      |         |      |   |        
|Net interest income before provision for loan losses |  |      | 23,501  |      |   | 16,606 
|Provision for loan losses                            |  |      | 33      |      |   | 918    
|Other operating income                               |  |      | 1,182   |      |   | 1,381  
|Other operating expense                              |  |      | 16,136  |      |   | 10,934 
|                                                     |  |      |         |      |   |        
|Income before income tax provision                   |  |      | 8,514   |      |   | 6,135  
|Income tax provision                                 |  |      | 3,432   |      |   | 2,381  
|                                                     |  |      |         |      |   |        
|Net income                                           |  | $    | 5,082   |      | $ | 3,754  
|                                                     |  |      |         |      |   |        
|Assets employed at quarter end                       |  | $    | 807,980 |      | $ | 679,747
|                                                     |  |      |         |      |   |        

SBA 7a Division

The SBA 7a Division performance is measured in terms of profitability, asset quality, asset size, loan production and servicing revenue. SBA 7a loans have
provided a recurring revenue stream from three sources  interest earned on retained loans, gain on sale of loans sold and servicing of loans sold to others. For the six months ended June 30, 2006, the SBA 7a Division had a pre-tax profit
of $2.4 million, with net interest income of $1.3 million, other operating income of $2.6 million, and other operating expenses of $1.6 million. Net income declined due to a decrease in the amount of 7a loans sold combined with a decline in loan
servicing income, partially offset by lower cost of operations. During the normal course of business, each quarter the amount of 7a loans sold can vary due to normal market timing. 7a loan production increased 1.8% to $32.7 million for the six
months ended June 30, 2006 from $32.1 million for the same period in 2005. As a result of the loan payoff activity, total assets of the SBA 7a Division decreased to $88.8 million at June 30, 2006.



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##### Table of Contents

Loan servicing income decreased to $76,000 for the six months ended June 30, 2006 compared to
$479,000 for the six months ended June 30, 2005 due to an impairment of the servicing asset following significant payoff activity above forecasted rates in the prior quarter and an increase in forecasted prepayment assumptions in the discounted
cash flow model.

The following table illustrates the earnings, asset and loan production growth of the SBA 7a Division, (dollars in
thousands).



|                                                     |  |      |        |   |      |   |        |  
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|Six months ended June 30,                            |  | 2006 |        |   | 2005 |  
|Interest income                                      |  | $    | 4,621  |   |      | $ | 3,741  |  
|Interest expense                                     |  |      | 3,278  |   |      |   | 2,446  |  
|                                                     |  |      |        |   |      |   |        |  
|Net interest income before provision for loan losses |  |      | 1,343  |   |      |   | 1,295  |  
|Provision (recovery) for loan losses                 |  |      | (33    | ) |      |   | (187   | )
|Other operating income                               |  |      | 2,560  |   |      |   | 3,923  |  
|Other operating expense                              |  |      | 1,569  |   |      |   | 2,628  |  
|                                                     |  |      |        |   |      |   |        |  
|Income before income tax provision                   |  |      | 2,367  |   |      |   | 2,777  |  
|Income tax provision                                 |  |      | 999    |   |      |   | 1,161  |  
|                                                     |  |      |        |   |      |   |        |  
|Net income                                           |  | $    | 1,368  |   |      | $ | 1,616  |  
|                                                     |  |      |        |   |      |   |        |  
|Assets employed at quarter end                       |  | $    | 88,842 |   |      | $ | 90,453 |  
|                                                     |  |      |        |   |      |   |        |  

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2005

Net Income

Net income increased to $2.9 million for the three months ended June 30, 2006 compared to $2.8 million for the three months ended June 30, 2005.
Basic earnings per share were $0.47 and $0.54 for the three months ended June 30, 2006 and 2005, respectively. Diluted earnings per share were $0.45 and $0.51 for the three months ended June 30, 2006 and 2005, respectively. The ROA for the
three months ended June 30, 2006 was 1.29% compared to 1.54% for the three months ended June 30, 2005. ROTE was 20.02% for the three months ended June 30, 2006 compared to 22.76% for the three months ended June 30, 2005. ROTE is
a non-GAAP financial measure. As required by Regulation G, a reconciliation of return on average tangible equity to the most directly comparable measure under GAAP, which is return on average equity, is provided below for the three months ended
June 30, 2006 and 2005.



|                        |  |                                  |         |        |       |   |          |   |        |  |       |  
|----------------------- |  | -------------------------------- | ------- | ------ | ----- | - | -------- | - | ------ |  | ----- | -
|                        |  | At or for the Three Months Ended |        
|                        |  | June2006                         |         | Return |       |   | June2005 |   | Return | 
|Net income              |  | $                                | 2,868   |        |       |   |          | $ | 2,831  |  |       |  
|Average Equity          |  |                                  | 102,568 |        | 11.18 | % |          |   | 68,033 |  | 16.64 | %
|Less: Average Goodwill  |  |                                  | 45,273  |        |       |   |          |   | 18,269 |  |       |  
|                        |  |                                  |         |        |       |   |          |   |        |  |       |  
|Average Tangible Equity |  | $                                | 57,295  |        | 20.02 | % |          | $ | 49,764 |  | 22.76 | %
|                        |  |                                  |         |        |       |   |          |   |        |  |       |  

The increase in net income and profitability for the three months ended June 30, 2006 was
mainly due to the increase in net interest income, partially offset by a decrease in non-interest income and increase in non-interest expense, as a result of the acquisition of Rancho Bernardo Community Bank. Net interest income increased due to a
$142.0 million increase in average interest earning assets and a 66 basis point expansion in net interest margin. Non-interest income decreased primarily due to the termination of the swap agreement. Additionally, during the quarter the Company
recorded a combined impairment on the servicing asset and I/O Strip of $504,000 which was partially offset by gains of $207,000 from the sale of the merchant card portfolio. Operating expenses increased primarily as a result of the Companys
expansion.



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##### Table of Contents

Net Interest Income

Net interest income is the most significant component of our income from operations. Net interest income is the difference between the gross interest and fees earned on the loan and investment portfolios and the
interest paid on deposits and other borrowings. Net interest income depends on the volume of and interest earned on interest earning assets and the volume of and interest rate paid on interest bearing liabilities. Our loan portfolio experienced a
144 basis point increase in average yield primarily due to the impact of the prime rate increasing to 8.25% at June 30, 2006 from 6.25% at June 30, 2005.

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 included as interest earning assets for purposes of this table (dollars in thousands).



|                                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|---------------------------------------------- |  | -------------- | ------- | ------------------- | ---- | ----------------- |  | ---- | -------------- |  | ------------------- | ------- | ----------------- | - | ------ |  | ---- | -
|                                               |  | 2006           |         |                     | 2005 |                  
|For the three months ended June 30,            |  | AverageBalance |         | InterestEarned/Paid |      | AverageRate/Yield |  |      | AverageBalance |  | InterestEarned/Paid |         | AverageRate/Yield |  
|Average assets:                                |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Securities and time deposits at other banks    |  | $              | 62,406  |                     | $    | 738               |  | 4.75 | %              |  | $                   | 44,159  |                   | $ | 446    |  | 4.04 | %
|Fed funds sold                                 |  | $              | 1,725   |                     | $    | 21                |  | 4.88 | %              |  |                     | 10,513  |                   |   | 76     |  | 2.92 | %
|Loans:                                         |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Commercial                                     |  |                | 50,230  |                     | $    | 1,054             |  | 8.42 | %              |  |                     | 42,473  |                   |   | 736    |  | 6.95 | %
|Real Estate                                    |  |                | 645,198 |                     |      | 14,863            |  | 9.24 | %              |  |                     | 519,797 |                   |   | 10,024 |  | 7.73 | %
|Aircraft                                       |  |                | 27,634  |                     |      | 467               |  | 6.78 | %              |  |                     | 29,920  |                   |   | 503    |  | 6.75 | %
|Consumer                                       |  |                | 18,656  |                     |      | 412               |  | 8.86 | %              |  |                     | 16,941  |                   |   | 344    |  | 8.15 | %
|                                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total loans                                    |  |                | 741,718 |                     |      | 16,796            |  | 9.08 | %              |  |                     | 609,131 |                   |   | 11,607 |  | 7.64 | %
|                                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total earning assets                           |  |                | 805,849 |                     |      | 17,555            |  | 8.74 | %              |  |                     | 663,803 |                   |   | 12,129 |  | 7.33 | %
|Non earning assets                             |  |                | 86,763  |                     |      |                   |  |      |                |  |                     | 70,141  |                   |   |        |  |      |  
|                                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total average assets                           |  | $              | 892,612 |                     |      |                   |  |      |                |  | $                   | 733,944 |                   |   |        |  |      |  
|                                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Average liabilities and shareholders equity:  |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Interest bearing deposits:                     |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Savings and interest bearing accounts          |  | $              | 242,863 |                     |      | 910               |  | 1.50 | %              |  | $                   | 188,150 |                   |   | 320    |  | 0.68 | %
|Time deposits                                  |  |                | 287,641 |                     |      | 2,863             |  | 3.99 | %              |  |                     | 289,873 |                   |   | 1,946  |  | 2.69 | %
|                                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total interest bearing deposits                |  |                | 530,504 |                     |      | 3,773             |  | 2.85 | %              |  |                     | 478,023 |                   |   | 2,266  |  | 1.90 | %
|Short-term borrowing                           |  |                | 41,665  |                     |      | 513               |  | 4.94 | %              |  |                     | 33,441  |                   |   | 254    |  | 3.04 | %
|Long-term debt                                 |  |                | 35,559  |                     |      | 680               |  | 7.67 | %              |  |                     | 17,837  |                   |   | 320    |  | 7.17 | %
|                                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total interest bearing liabilities             |  |                | 607,728 |                     |      | 4,966             |  | 3.28 | %              |  |                     | 529,301 |                   |   | 2,840  |  | 2.15 | %
|Demand deposits                                |  |                | 172,650 |                     |      |                   |  |      |                |  |                     | 127,045 |                   |   |        |  |      |  
|Accrued expenses and other liabilities         |  |                | 9,666   |                     |      |                   |  |      |                |  |                     | 9,565   |                   |   |        |  |      |  
|Net shareholders equity                       |  |                | 102,568 |                     |      |                   |  |      |                |  |                     | 68,033  |                   |   |        |  |      |  
|                                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total average liabilities shareholders equity |  | $              | 892,612 |                     | $    | 12,589            |  |      |                |  | $                   | 733,944 |                   | $ | 9,289  |  |      |  
|                                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Net interest spread                            |  |                |         |                     |      |                   |  | 5.46 | %              |  |                     |         |                   |   |        |  | 5.18 | %
|                                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Net interest margin                            |  |                |         |                     |      |                   |  | 6.27 | %              |  |                     |         |                   |   |        |  | 5.61 | %
|                                               |  |                |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  

Interest income for the three months ended June 30, 2006 increased to $17.6 million compared
to $12.1 million for the three months ended June 30, 2005. The increase was due to the 21.4% increase in the average balance of interest earning assets, combined with the increase in the yield on those assets. Average interest earning assets
increased to $805.8 million for the three months ended June 30, 2006 compared to $663.8 million for the three months ended June 30, 2005. The yield on interest earning assets increased to 8.74% for the three months ended June 30, 2006
compared to 7.33% for the three months ended June 30, 2005. The largest single component of interest earning assets was real estate loans, which had an average balance of $645.2 million with a yield of 9.24%



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for the three months ended June 30, 2006 compared to $519.8 million with a yield of 7.73% for the three months ended June 30, 2005.

Interest expense for the three months ended June 30, 2006 increased to $5.0 million compared to $2.8 million for the three months ended
June 30, 2005. This increase was due to the increase in average interest bearing liabilities, combined with the increase in the cost of those liabilities. Average interest-bearing liabilities increased to $607.7 million for the three months
ended June 30, 2006 compared to $529.3 million for the three months ended June 30, 2005. Average time deposits, the largest component of interest bearing liabilities, decreased to $287.6 million with a cost of 3.99% for the three months
ended June 30, 2006 compared to $289.9 million with a cost of 2.69% for the three months ended June 30, 2005.

Other average
borrowings increased to $77.2 million with a cost of 6.20% for the three months ended June 30, 2006 compared to $51.3 million with a cost of 4.49% for the three months ended June 30, 2005.

Average demand deposits increased 35.9% to $172.7 million for the three months ended June 30, 2006 from an average $127.0 million for the three
months ended June 30, 2005. The cost of deposits, including demand deposits and interest bearing deposits, increased to 2.15% for the three months ended June 30, 2006 compared to 1.50% for the three months ended June 30, 2005. Average
transaction accounts (including interest bearing checking, demand deposits, money market accounts and savings accounts), increased 31.8% to $415.5 million for the three months ended June 30, 2006 compared to $315.2 million for the three months
ended June 30, 2005. The cost of funds, including interest bearing liabilities and demand deposits, increased 81 basis points to 2.55% for the three months ended June 30, 2006 compared to 1.74% for the three months ended June 30,
2005.

Net Interest Income before Provision for Estimated Loan Losses

Net interest income before provision for estimated loan losses for the three months ended June 30, 2006 was $12.6 million compared to $9.3 million for the three months ended June 30, 2005. 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 $805.8 million for the three months ended June 30, 2006 with a net interest margin of
6.27% compared to $663.8 million with a net interest margin of 5.61% for the three months ended June 30, 2005.

For the three months
ended June 30, 2006, the increase in the net interest margin was primarily due to the increase in interest rates. For a discussion of the repricing of our assets and liabilities, see Item 3, Quantitative and Qualitative Disclosure
about Market Risk of this Report.

Provision for Estimated Loan Losses

The provision for estimated loan losses was zero for the three months ended June 30, 2006 compared to $413,000 for the three months ended
June 30, 2005. For further information, please see the Loans discussion in the Financial Condition portion of this section of the Report.

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 income. Other operating income was $1.3 million for the three months ended June 30, 2006 compared to $2.7 million for the three months ended
June 30, 2005. The decrease in other operating income for the three months ended June 30, 2006 was primarily due to the reversal of the mark to market on the trust preferred debt, the termination of the swap agreement, used to hedge our
fixed rate trust preferred debt, and a decrease in gain on sale of loans. For a further discussion of gain on sale of loans and loan servicing fees, see SBA 7a Division in this section. For a further discussion of customer service
charges and other fee income, see Banking Division in this section of the Report.

Operating Expenses

Operating expenses are non-interest types of expenses and are incurred in our normal course of business. Salaries and employee benefits, occupancy,
professional services, depreciation and amortization, data processing, office and other expenses are the major categories of operating expenses. Operating expenses increased to $8.9



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million for the three months ended June 30, 2006 compared to $6.9 million for the three months ended June 30, 2005.

The efficiency ratio, measured as the percentage of operating expenses to net interest income before provision for loan losses plus non-interest income,
excluding gains or losses on repossessed assets was 64.35% for the three months ended June 30, 2006 compared to 57.99% for the three months ended June 30, 2005. The increase in operating expense was due to significant growth and expansion,
including the acquisition of Rancho Bernardo Community Bank, with one banking office and the addition of a de novo banking office in Corona, California.

Salaries and employee benefits increased to $5.1 million for the quarter ended June 30, 2006 compared to $3.9 million for the quarter ended June 30, 2005. The increase in salaries and employee benefits for
the three month period ended June 30, 2006 can be attributed to the addition of two bank branches, including one acquired in the Rancho Bernardo Community Bank acquisition, the implementation of SFAS 123(R), and normal cost increases for
salaries and benefits.

Occupancy expense increased to $682,000 for the quarter ended June 30, 2006 compared to $576,000 for the
quarter ended June 30, 2005. The increase in occupancy expense for the three months ended June 30, 2006 was due to normal increases in rent, the acquisition of Rancho Bernardo Community Bank, and the addition of a de novo branch in Corona,
California.

Professional services, including legal, accounting, regulatory and consulting, increased to $514,000 for the quarter ended
June 30, 2006 compared to $451,000 for the quarter ended June 30, 2005. The increase in professional services for the three months ended June 30, 2006 was due to an increase in consulting fees compared to June 30, 2005.

Depreciation and amortization expense increased to $356,000 for the quarter ended June 30, 2006 compared to $330,000 for the quarter
ended June 30, 2005. The increase in depreciation and amortization expense for the three months ended June 30, 2006 was due to the increase in the amount of premises and equipment, which increased to an average of $7.0 million for the
quarter ended June 30, 2006 from an average $6.8 million during the quarter ended June 30, 2005 as a result of the acquisition of Rancho Bernardo Community Bank and the increase in premises and equipment from normal additions.

Data processing expense increased to $275,000 for the quarter ended June 30, 2006 compared to $222,000 for the quarter ended June 30, 2005.
Data processing expense for the three months ended June 30, 2006 increased due to the increase in retail deposits as well as normal cost increases.

Office expenses were $291,000 for the quarter ended June 30, 2006 compared to $217,000 for the quarter ended June 30, 2005. Increases in office expenses are due to the expansion of our operations, including
the acquisition of Rancho Bernardo Community Bank and the addition of a de novo branch in Corona, California.

Other expenses increased to
$1.7 million for the quarter ended June 30, 2006 compared to $1.2 million for the quarter ended June 30, 2005. Increases in other operating expenses are due to the expansion of our operations, including the acquisition of Rancho Bernardo
Community Bank and the addition of a de novo branch in Corona, California.

Provision for Income Taxes

The effective income tax rate was 42.0% for the three months ended June 30, 2006 compared to 40.1% for the three months ended June 30, 2005. The
effective tax rate increase for the three months ended June 30, 2006 was relative to the increase in pretax income combined with the effect of stock option expense. Provisions for income taxes totaled $2.1 million and $1.9 million for the three
months ended June 30, 2006 and 2005, respectively.



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Divisions of the Company

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

Banking Division

Performance in the Banking Division is measured in terms of profitability, asset growth, asset quality, deposit growth, market share and other standards.
For the quarter ended June 30, 2006, the Banking Division had a pre-tax profit of $4.1 million, with net interest income of $12.0 million, other operating income of $255,000, and other operating expenses of $8.1 million. Total assets of the
Banking Division increased to $808.0 million at June 30, 2006 due to the strong loan growth.

Customer service charges increased to
$279,000 for the three months ended June 30, 2006 compared to $260,000 for the three months ended June 30, 2005 due to an increase in transaction accounts.

Other operating income, including the loss on swap, gain on affordable housing partnerships and gain on other assets, decreased to $(423,000) for the three months ended June 30, 2006 compared to $172,000 for the
three months ended June 30, 2005. The decrease in other operating income for the six months ended June 30, 2006 is primarily a result of a realized loss of $908,000 from the termination of the Companys interest rate swap, used to
hedge its fixed rate trust preferred debt.

Other operating expenses were $8.1 million for the three months ended June 30, 2006
compared to $5.2 million for the three months ended June 30, 2005. The increase in other operating expense is due to the expansion of our operations, including the acquisition of Rancho Bernardo Community Bank with one banking office, and the
addition of a de novo branch in Corona, California, and increases in third party analysis expenses paid for on behalf of the divisions business customers.

The following table shows the total assets and results of operations for the Banking Division (dollars in thousands):



|                                                     |  |      |         |      |   |        
|---------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|Three months ended June 30,                          |  | 2006 |         | 2005
|Interest income                                      |  | $    | 15,298  |      | $ | 10,179 
|Interest expense                                     |  |      | 3,295   |      |   | 925    
|                                                     |  |      |         |      |   |        
|Net interest income before provision for loan losses |  |      | 12,003  |      |   | 9,254  
|Provision for loan losses                            |  |      | 48      |      |   | 573    
|Other operating income                               |  |      | 255     |      |   | 849    
|Other operating expense                              |  |      | 8,081   |      |   | 5,197  
|                                                     |  |      |         |      |   |        
|Income before income tax provision                   |  |      | 4,129   |      |   | 4,333  
|Income tax provision                                 |  |      | 1,727   |      |   | 1,723  
|                                                     |  |      |         |      |   |        
|Net income                                           |  | $    | 2,402   |      | $ | 2,610  
|                                                     |  |      |         |      |   |        
|Assets employed at quarter end                       |  | $    | 807,980 |      | $ | 679,747
|                                                     |  |      |         |      |   |        

SBA 7a Division

The SBA 7a Division performance is measured in terms of profitability, asset quality, asset size, loan production and servicing revenue. SBA 7a loans have
provided a recurring revenue stream from three sources  interest earned on retained loans, gain on sale of loans sold and servicing of loans sold to others. For the quarter ended June 30, 2006, the SBA 7a Division had a pre-tax profit of
$815,000, with net interest income of $586,000, other operating income of $1.0 million, and other operating expenses of $842,000. Net income increased due to an increase in net interest income and a lower cost of operations partially offset by a
decrease in the amount of 7a loans sold combined with a decline in loan servicing income. 7a loan production decreased 29.7% to $14.1 million for the three months



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ended June 30, 2006 from $20.0 million for the same period in 2005. As a result of the loan payoff activity, total assets of the SBA 7a Division
decreased to $88.8 million at June 30, 2006.

Loan servicing income decreased to $(30,000) for the three months ended June 30,
2006 compared to $255,000 for the three months ended June 30, 2005 due to an impairment of the servicing asset following significant payoff activity above forecasted rates in the prior quarter and an increase in forecasted prepayment
assumptions in the discounted cash flow model.

The following table illustrates the earnings, asset and loan production growth of the SBA
7a Division, (dollars in thousands).



|                                                     |  |      |        |   |      |   |        |  
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|Three months ended June 30,                          |  | 2006 |        |   | 2005 |  
|Interest income                                      |  | $    | 2,257  |   |      | $ | 1,950  |  
|Interest expense                                     |  |      | 1,671  |   |      |   | 1,915  |  
|                                                     |  |      |        |   |      |   |        |  
|Net interest income before provision for loan losses |  |      | 586    |   |      |   | 35     |  
|Provision (recovery) for loan losses                 |  |      | (48    | ) |      |   | (160   | )
|Other operating income                               |  |      | 1,023  |   |      |   | 1,872  |  
|Other operating expense                              |  |      | 842    |   |      |   | 1,676  |  
|                                                     |  |      |        |   |      |   |        |  
|Income before income tax provision                   |  |      | 815    |   |      |   | 391    |  
|Income tax provision                                 |  |      | 349    |   |      |   | 170    |  
|                                                     |  |      |        |   |      |   |        |  
|Net income                                           |  | $    | 466    |   |      | $ | 221    |  
|                                                     |  |      |        |   |      |   |        |  
|Assets employed at quarter end                       |  | $    | 88,842 |   |      | $ | 90,453 |  
|                                                     |  |      |        |   |      |   |        |  

FINANCIAL CONDITION

Summary of Changes in Consolidated Balance Sheets

June 30, 2006 compared to December 31, 2005

As of June 30, 2006, total assets were $896.8 million, a decrease of 1.3% compared to $908.6 million as of December 31, 2005. Total gross loans
increased to $748.4 million as of June 30, 2006 compared to $740.4 million as of December 31, 2005. Despite strong loan production, the Company has experienced higher than expected principal payoffs on commercial real estate and
construction loans. Total deposits decreased to $699.4 million as of June 30, 2006 compared to $710.5 million as of December 31, 2005. Deposits decreased primarily due to the planned runoff of wholesale deposits which contributed to the
lack of balance sheet growth during 2006. Tangible equity (stockholders equity, net of goodwill) increased to $57.7 million as of June 30, 2006 compared to $50.8 million as of December 31, 2005.

Investments

Our investment portfolio consists
primarily of U.S. Treasury and agency securities, mortgage backed securities, SBA pass through securities and overnight investments in the Federal Funds market. Our held to maturity portfolio rose to $7.3 million as of June 30, 2006 compared to
$6.8 million as of December 31, 2005. The increase in held to maturity securities was due to the purchase of $972,000 in mortgage backed securities. Of the $7.3 million, $895,000 were held as collateral for public funds, treasury, tax and loan
deposits and for other purposes at June 30, 2006.

Our available for sale portfolio declined to $44.4 million as of June 30, 2006
compared to $49.7 million as of December 31, 2005. The available for sale portfolio is made up of agency mortgage backed securities that are readily marketable and are marked to market on a monthly basis. Of the $44.4 million, $12.0 million
were held as collateral for public funds, treasury, tax and loan deposits and for other purposes at June 30, 2006.



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Average Federal Funds sold for the six months ended June 30, 2006 decreased to $2.3 million compared
to $11.1 million for the six months ended June 30, 2005 due to a decrease in excess cash primarily due to loan growth year over year.

We held $2.8 million and $1.9 million in Federal Reserve Bank stock as of June 30, 2006 and December 31, 2005, respectively. We held $3.3 million in Federal Home Loan Bank stock as of June 30, 2006 compared to $3.0 million as
of December 31, 2005.

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



|                                  |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|--------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------ | - |  | - | ------
|                                  |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFairValue
|At June 30, 2006                  |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Held-to-Maturity                  |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities |  | $             | 1,934  |                      | $ | 8                     |  | $ | (55                | ) |  | $ | 1,887 
|SBA loan pools                    |  |               | 5,398  |                      |   |                      |  |   | (263               | ) |  |   | 5,135 
|                                  |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Total held-to-maturity            |  | $             | 7,332  |                      | $ | 8                     |  | $ | (318               | ) |  | $ | 7,022 
|                                  |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Available-for-sale                |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities |  | $             | 45,610 |                      | $ |                      |  | $ | (1,230             | ) |  | $ | 44,380
|                                  |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|At December 31, 2005              |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Held-to-Maturity                  |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities |  | $             | 2,049  |                      | $ | 10                    |  | $ | (163               | ) |  | $ | 1,896 
|SBA loan pools                    |  |               | 4,704  |                      |   | 6                     |  |   | (6                 | ) |  |   | 4,704 
|                                  |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Total held-to-maturity            |  | $             | 6,753  |                      | $ | 16                    |  | $ | (169               | ) |  | $ | 6,600 
|                                  |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Available-for-sale                |  |               |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities |  | $             | 50,327 |                      | $ |                      |  | $ | (667               | ) |  | $ | 49,660
|                                  |  |               |        |                      |   |                       |  |   |                    |   |  |   |       

The contractual maturities of investment securities held to maturity at June 30, 2006 were as
follows (dollars in thousands):



|                                                      |  |               |       |                     |   |                               |  |      |  
|----------------------------------------------------- |  | ------------- | ----- | ------------------- | - | ----------------------------- |  | ---- | -
|                                                      |  | AmortizedCost |       | Estimated FairValue |   | WeightedAverage InterestYield | 
|Mortgage-backed securities                            |  |               |       |                     |   |                               |  |      |  
|Due greater than one year through five years          |  | $             | 124   |                     | $ | 123                           |  | 5.23 | %
|Due greater than five years through ten years         |  |               | 5,705 |                     |   | 5,404                         |  | 4.68 | %
|Mortgage-backed securities due greater than ten years |  |               | 898   |                     |   | 888                           |  | 4.47 | %
|                                                      |  |               |       |                     |   |                               |  |      |  
|Subtotal mortgage-backed securities                   |  |               | 6,727 |                     |   | 6,415                         |  | 4.66 | %
|SBA pass through securities                           |  |               |       |                     |   |                               |  |      |  
|Due greater than ten years                            |  |               | 605   |                     |   | 607                           |  | 4.76 | %
|                                                      |  |               |       |                     |   |                               |  |      |  
|Total                                                 |  | $             | 7,332 |                     | $ | 7,022                         |  | 4.67 | %
|                                                      |  |               |       |                     |   |                               |  |      |  



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The contractual maturities of investment securities available-for-sale at June 30, 2006 were as
follows (dollars in thousands):



|                                                      |  |                |        |                     |   |                               |  |      |  
|----------------------------------------------------- |  | -------------- | ------ | ------------------- | - | ----------------------------- |  | ---- | -
|                                                      |  | Amortized Cost |        | Estimated FairValue |   | WeightedAverage InterestYield | 
|Mortgage-backed securities                            |  |                |        |                     |   |                               |  |      |  
|Due greater than one year through five years          |  | $              |       |                     | $ |                              |  | 0.00 | %
|Due greater than five years through ten years         |  |                | 4,616  |                     |   | 4,492                         |  | 5.29 | %
|Mortgage-backed securities due greater than ten years |  |                | 40,994 |                     |   | 39,888                        |  | 4.07 | %
|                                                      |  |                |        |                     |   |                               |  |      |  
|Total                                                 |  | $              | 45,610 |                     | $ | 44,380                        |  | 4.19 | %
|                                                      |  |                |        |                     |   |                               |  |      |  

As of June 30, 2006, the Company held investments with unrealized holding losses totaling
$1.5 million, consisting of the following (dollars in thousands):



|                                                             |  |                     |        |                  |                   |      |            |       |                  |        |  |            |      |                  |  |   |        |  |   |        |  
|------------------------------------------------------------ |  | ------------------- | ------ | ---------------- | ----------------- | ---- | ---------- | ----- | ---------------- | ------ |  | ---------- | ---- | ---------------- |  | - | ------ |  | - | ------ | -
|                                                             |  | Less than 12 Months |        |                  | 12 Months or More |      |            | Total |                 
|Description of Securities                                    |  | Fair Value          |        | UnrealizedLosses |                   |      | Fair Value |       | UnrealizedLosses |        |  | Fair Value |      | UnrealizedLosses | 
|Mortgage-backed securities, classified as held-to-maturity   |  |                     |        |                  |                   |      |            |       |                  |        |  |            |      |                  |  |   |        |  |   |        |  
|FHLMC                                                        |  | $                   | 1,010  |                  | $                 | (16  | )          |       | $                |       |  | $          |     |                  |  | $ | 1,010  |  | $ | (16    | )
|FNMA                                                         |  |                     | 939    |                  |                   | (29  | )          |       |                  | 4,192  |  |            | (270 | )                |  |   | 5,131  |  |   | (299   | )
|SBA                                                          |  |                     |       |                  |                   |     |            |       |                  | 410    |  |            | (3   | )                |  |   | 410    |  |   | (3     | )
|                                                             |  |                     |        |                  |                   |      |            |       |                  |        |  |            |      |                  |  |   |        |  |   |        |  
|                                                             |  | $                   | 1,949  |                  | $                 | (45  | )          |       | $                | 4,602  |  | $          | (273 | )                |  | $ | 6,551  |  | $ | (318   | )
|                                                             |  |                     |        |                  |                   |      |            |       |                  |        |  |            |      |                  |  |   |        |  |   |        |  
|Mortgage-backed securities, classified as available-for-sale |  |                     |        |                  |                   |      |            |       |                  |        |  |            |      |                  |  |   |        |  |   |        |  
|FHLMC                                                        |  | $                   | 3,502  |                  | $                 | (79  | )          |       | $                | 16,892 |  | $          | (554 | )                |  | $ | 20,394 |  | $ | (633   | )
|FNMA                                                         |  |                     | 9,153  |                  |                   | (231 | )          |       |                  | 14,833 |  |            | (365 | )                |  |   | 23,986 |  |   | (596   | )
|                                                             |  |                     |        |                  |                   |      |            |       |                  |        |  |            |      |                  |  |   |        |  |   |        |  
|                                                             |  | $                   | 12,655 |                  | $                 | (310 | )          |       | $                | 31,725 |  | $          | (919 | )                |  | $ | 44,380 |  | $ | (1,229 | )
|                                                             |  |                     |        |                  |                   |      |            |       |                  |        |  |            |      |                  |  |   |        |  |   |        |  

As of June 30, 2006, the unrealized holding losses related to variable rate mortgage-backed
securities. Such unrealized holding losses are the result of an increase in market interest rates in the second half of 2005 and the first half of 2006 and are not the result of credit or principal risk. Based on the nature of the investments, as
well as managements intent and ability to hold these securities until the unrealized loss is recovered, management concluded that such unrealized losses were not other than temporary as of June 30, 2006.

Affordable Housing Investments

The Company is the sole limited partner of one of its affordable housing investments and owns 99.99% of the outstanding equity of the partnership. The Company has other affordable housing partnerships for which it is
not considered the primary beneficiary and therefore does not consolidate. The Company has invested in these limited partnerships formed to develop and operate affordable housing units for lower income tenants throughout the state of California. The
costs associated with these unconsolidated investments are being amortized on an equity method over the life of the partnerships ranging from 10.1 to 13.2 years. If the partnerships cease to qualify during the compliance period, the credits may be
denied for any period in which the projects are not in compliance and a portion of the credits previously taken is subject to recapture with interest. The remaining federal tax credits to be utilized over a 7 to 11 year period are $4.8 million as of
June 30, 2006. As of June 30, 2006 and December 31, 2005, the investment in these partnerships totaled $1.9 million and $2.4 million, respectively. The Company had a commitment to fund an additional $1.8 million to these partnerships
as of June 30, 2006. Further information regarding these investments can be found in Note 7, Affordable Housing Investments within Part I of this Report.



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Loans

Total gross loans increased to $748.4 million as of June 30, 2006 compared to $740.4 million as of December 31, 2005 primarily due to an increase in payoffs in commercial real estate and construction loans and to a slowing in
originations year over year. Our total servicing portfolio increased to $946.0 million as of June 30, 2006 from $936.7 million as of December 31, 2005. We service sold loans for others, primarily consisting of SBA 7a loans, which increased
from $196.4 million as of December 31, 2005 to $197.6 million as of June 30, 2006.

Loan Origination and Sale. Although
loan production was still good, the Company experienced a decrease in loan demand compared to the same period last year due to overall economic pressures and uncertainty as well as an increase in rate competition in the industry. The following table
sets forth our loan originations by category, sales and principal repayments of loans for the periods indicated (dollars in thousands):



|                       |  |                                           |         |                                         |      |   |         |  |      |         |  |   |        
|---------------------- |  | ----------------------------------------- | ------- | --------------------------------------- | ---- | - | ------- |  | ---- | ------- |  | - | -------
|                       |  | At and for the three monthsended June 30, |         | At and for the six monthsended June 30,
|                       |  | 2006                                      |         |                                         | 2005 |   | 2006    |  | 2005
|Beginning balance      |  | $                                         | 722,807 |                                         |      | $ | 584,947 |  | $    | 727,299 |  | $ | 532,012
|Loans originated:      |  |                                           |         |                                         |      |   |         |  |      |         |  |   |        
|Commercial loans       |  |                                           | 12,635  |                                         |      |   | 13,775  |  |      | 16,986  |  |   | 21,557 
|Aircraft               |  |                                           | 233     |                                         |      |   | 4,308   |  |      | 2,504   |  |   | 8,415  
|Real estate:           |  |                                           |         |                                         |      |   |         |  |      |         |  |   |        
|Construction loans     |  |                                           | 30,330  |                                         |      |   | 46,135  |  |      | 80,957  |  |   | 69,966 
|One- to four-family    |  |                                           | 1,436   |                                         |      |   |        |  |      | 2,614   |  |   | 476    
|Commercial             |  |                                           | 56,092  |                                         |      |   | 103,758 |  |      | 138,766 |  |   | 187,648
|Consumer               |  |                                           | 696     |                                         |      |   | 2,199   |  |      | 1,997   |  |   | 5,217  
|                       |  |                                           |         |                                         |      |   |         |  |      |         |  |   |        
|Total loans originated |  |                                           | 101,422 |                                         |      |   | 170,175 |  |      | 243,824 |  |   | 293,279
|Loans sold             |  |                                           |         |                                         |      |   |         |  |      |         |  |   |        
|Real estate:           |  |                                           |         |                                         |      |   |         |  |      |         |  |   |        
|One- to four-family    |  |                                           |        |                                         |      |   |        |  |      |        |  |   | 535    
|Commercial             |  |                                           | 20,329  |                                         |      |   | 25,316  |  |      | 42,120  |  |   | 45,227 
|                       |  |                                           |         |                                         |      |   |         |  |      |         |  |   |        
|Total loans sold       |  |                                           | 20,329  |                                         |      |   | 25,316  |  |      | 42,120  |  |   | 45,762 
|Less:                  |  |                                           |         |                                         |      |   |         |  |      |         |  |   |        
|Principal repayments   |  |                                           | 68,513  |                                         |      |   | 93,819  |  |      | 193,234 |  |   | 141,806
|Other net changes (1)  |  |                                           | (219    | )                                       |      |   | 358     |  |      | 163     |  |   | 2,094  
|                       |  |                                           |         |                                         |      |   |         |  |      |         |  |   |        
|Total loans            |  | $                                         | 735,606 |                                         |      | $ | 635,629 |  | $    | 735,606 |  | $ | 635,629
|                       |  |                                           |         |                                         |      |   |         |  |      |         |  |   |        

---

|(1) | Other net changes include changes in allowance for loan losses and deferred loan fees
|--- | -------------------------------------------------------------------------------------

Loans held for sale are accounted for at the lower of cost or market at any given reporting date. Market is determined by obtaining estimated pricing from third party investors in similar classification of product and
considers loan type, maturity, interest rate, margin (if applicable) and other factors. As of June 30, 2006, loans held for sale totaled $161.3 million compared to $154.3 million as of December 31, 2005. For the six months ended
June 30, 2006 and 2005, there were no lower of cost or market adjustments to loans held for sale.



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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 (dollars in thousands):



|                              |  |                 |         |   |                     |        |   |        |   |         |         |  |        |  
|----------------------------- |  | --------------- | ------- | - | ------------------- | ------ | - | ------ | - | ------- | ------- |  | ------ | -
|                              |  | At June 30,2006 |         |   | At December 31,2005 |       
|                              |  | Amount          |         |   | Percent             |        |   | Amount |   |         | Percent | 
|Loan portfolio composition:   |  |                 |         |   |                     |        |   |        |   |         |         |  |        |  
|Commercial loans              |  | $               | 57,157  |   |                     | 7.64   | % |        | $ | 53,552  |         |  | 7.23   | %
|Aircraft loans                |  |                 | 27,030  |   |                     | 3.61   | % |        |   | 28,617  |         |  | 3.87   | %
|Real estate:                  |  |                 |         |   |                     |        |   |        |   |         |         |  |        |  
|Construction loans HFI        |  |                 | 132,417 |   |                     | 17.69  | % |        |   | 109,500 |         |  | 14.79  | %
|Construction loans HFS        |  |                 | 45,120  |   |                     | 6.03   | % |        |   | 24,809  |         |  | 3.35   | %
|Secured by:                   |  |                 |         |   |                     |        |   |        |   |         |         |  |        |  
|One- to four-family HFI       |  |                 | 20,419  |   |                     | 2.73   | % |        |   | 16,994  |         |  | 2.30   | %
|Commercial HFI                |  |                 | 332,043 |   |                     | 44.37  | % |        |   | 356,571 |         |  | 48.16  | %
|Commercial HFS                |  |                 | 115,894 |   |                     | 15.49  | % |        |   | 129,240 |         |  | 17.46  | %
|Consumer:                     |  |                 |         |   |                     |        |   |        |   |         |         |  |        |  
|Home equity lines of credit   |  |                 | 9,477   |   |                     | 1.27   | % |        |   | 10,459  |         |  | 1.41   | %
|Other                         |  |                 | 8,854   |   |                     | 1.17   | % |        |   | 10,620  |         |  | 1.43   | %
|                              |  |                 |         |   |                     |        |   |        |   |         |         |  |        |  
|Total gross loans outstanding |  |                 | 748,411 |   |                     | 100.00 | % |        |   | 740,362 |         |  | 100.00 | %
|Deferred loan fees            |  |                 | (3,025  | ) |                     |        |   |        |   | (3,290  | )       |  |        |  
|Allowance for loan losses     |  |                 | (9,780  | ) |                     |        |   |        |   | (9,773  | )       |  |        |  
|                              |  |                 |         |   |                     |        |   |        |   |         |         |  |        |  
|Net loans                     |  | $               | 735,606 |   |                     |        |   |        | $ | 727,299 |         |  |        |  
|                              |  |                 |         |   |                     |        |   |        |   |         |         |  |        |  

Loan Maturity

The following table sets forth the contractual maturities of our gross loans at June 30, 2006 (dollars in thousands):



|                                                        |  |                 |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|------------------------------------------------------- |  | --------------- | ------- | ------------------------ | - | ------------------------- |  | ---------------- | ------ | ---------- | - | ------- |  | - | -------
|                                                        |  | One yearor less |         | Morethan 1year to 3years |   | Morethan 3years to5 years |  | More than5 years |        | TotalLoans
|Loan portfolio composition:                             |  |                 |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Commercial loans                                        |  | $               | 35,054  |                          | $ | 5,925                     |  | $                | 13,335 |            | $ | 2,843   |  | $ | 57,157 
|Aircraft loans                                          |  |                 | 229     |                          |   | 90                        |  |                  | 158    |            |   | 26,553  |  |   | 27,030 
|Real estate:                                            |  |                 |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Construction loans                                      |  |                 | 116,910 |                          |   | 5,600                     |  |                  |       |            |   | 55,027  |  |   | 177,537
|Secured by one- to four-family residential properties   |  |                 | 12,354  |                          |   | 5,701                     |  |                  | 604    |            |   | 1,760   |  |   | 20,419 
|Secured by commercial properties                        |  |                 | 94,227  |                          |   | 28,332                    |  |                  | 43,086 |            |   | 282,292 |  |   | 447,937
|Consumer:                                               |  |                 |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Home equity lines of credit                             |  |                 | 43      |                          |   | 69                        |  |                  | 854    |            |   | 8,512   |  |   | 9,478  
|Other                                                   |  |                 | 2,096   |                          |   | 380                       |  |                  | 653    |            |   | 5,724   |  |   | 8,853  
|                                                        |  |                 |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Total gross loans held for investment and held for sale |  | $               | 260,913 |                          | $ | 46,097                    |  | $                | 58,690 |            | $ | 382,711 |  | $ | 748,411
|                                                        |  |                 |         |                          |   |                           |  |                  |        |            |   |         |  |   |        



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Non-performing assets.Non-performing assets consist of non-performing loans, Other Real Estate
Owned (OREO) and repossessed assets. Non-performing loans are those loans which have (i) been placed on non-accrual status, (ii) been subject to troubled debt restructurings, (iii) been classified as doubtful under our
asset classification system, or (iv) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on non-accrual status.

The following table sets forth our non-performing assets at the dates indicated (dollars in thousands):



|                                                                                                                      |  |              |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                      |  | June 30,2006 |         |   | December 31,2005 |  
|Non-accrual loans                                                                                                     |  | $            | 5,765   |   |                  | $ | 3,647   |  
|Troubled debt restructurings                                                                                          |  |              | 4       |   |                  |   |        |  
|Loans contractually past due 90 days or more with respect to either principal or interest and still accruing interest |  |              |        |   |                  |   |        |  
|                                                                                                                      |  |              |         |   |                  |   |         |  
|Total non-performing loans                                                                                            |  |              | 5,769   |   |                  |   | 3,647   |  
|Repossessed assets                                                                                                    |  |              | 233     |   |                  |   | 68      |  
|                                                                                                                      |  |              |         |   |                  |   |         |  
|Total non-performing assets                                                                                           |  | $            | 6,002   |   |                  | $ | 3,715   |  
|                                                                                                                      |  |              |         |   |                  |   |         |  
|SUPPLEMENTAL DATA                                                                                                     |  |              |         |   |                  |   |         |  
|Total loans held for investment, net                                                                                  |  | $            | 584,038 |   |                  | $ | 582,745 |  
|Undisbursed portion of construction and other loans                                                                   |  | $            | 210,223 |   |                  | $ | 177,783 |  
|Government guaranteed portion of total loans                                                                          |  | $            | 31,694  |   |                  | $ | 32,375  |  
|Non-performing loans, net of government guarantees                                                                    |  | $            | 3,643   |   |                  | $ | 2,092   |  
|Total non-performing loans/gross loans                                                                                |  |              | 0.77    | % |                  |   | 0.49    | %
|Total non-performing assets/total assets                                                                              |  |              | 0.67    | % |                  |   | 0.41    | %
|Total non-performing loans, net of guarantees/gross loans                                                             |  |              | 0.49    | % |                  |   | 0.28    | %
|Total non-performing assets, net of guarantees/total assets                                                           |  |              | 0.43    | % |                  |   | 0.24    | %
|Allowance for loan losses                                                                                             |  | $            | 9,780   |   |                  | $ | 9,773   |  
|Loan loss allowance/loans, gross                                                                                      |  |              | 1.31    | % |                  |   | 1.32    | %
|Loan loss allowance/loans held for investment                                                                         |  |              | 1.67    | % |                  |   | 1.68    | %
|Loan loss allowance/non-performing loans                                                                              |  |              | 169.53  | % |                  |   | 267.97  | %
|Loan loss allowance/non-performing assets                                                                             |  |              | 162.95  | % |                  |   | 263.07  | %
|Loan loss allowance/non-performing loans, net of guarantees                                                           |  |              | 268.46  | % |                  |   | 467.16  | %
|Loan loss allowance/non-performing assets, net of guarantees                                                          |  |              | 252.32  | % |                  |   | 452.45  | %

Non-accrual Loans.Non-accrual loans are impaired loans where the original contractual
amount may not be fully collectible. We measure our impaired loans using the fair value of the collateral if the loan is collateral-dependent and the present value of the expected future cash flows discounted at the loans effective interest
rate if the loan is not collateral-dependent. As of June 30, 2006 and December 31, 2005 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 collection of interest and principal. As of June 30, 2006 we had twenty loans to fourteen borrowers on non-accrual status totaling $5.8 million with $2.1 million, or 36.9%, guaranteed by the government. As of
December 31, 2005, we had twenty-two loans to nine borrowers on non-accrual status, totaling $3.6 million with $1.6 million, or 42.6%, guaranteed by the government. Management maintains certain loans that have been brought current by the
borrower (less than 30 days delinquent) on non-accrual status until such time as management has determined that the loans are likely to remain current in future periods.

Troubled Debt Restructurings. Troubled debt restructurings are loans where changes need to be made to the terms to collect the principal amount outstanding but under revised terms management deems the balance
to be collectable. As of June 30, 2006 we had one troubled debt restructuring totaling $4,000 of which the loan was made solely for the purpose of collecting a customers overdraft on their checking account.



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Classified Assets.From time to time, management has reason to believe that certain borrowers may
not be able to repay their loans within the parameters of the present repayment terms, even though, in some cases, the loans are current at the time. These loans are graded in the classified loan grades of substandard,
doubtful, or loss and include non-performing loans. Each classified loan is monitored on a monthly basis. Classified assets, net of government guarantees, consisting of non-accrual loans, loans graded as substandard or lower,
other real estate owned and repossessed assets, totaled $15.9 million as of June 30, 2006 compared to $12.0 million as of December 31, 2005. The increase was primarily due to the addition of one substandard loan totaling $3.5 million and
one repossessed asset valued at $164,000 during the six months ended June 30, 2006.

Allowance for Loan Losses. We have
established a methodology for determining the provision 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 includes a formula allowance and a specific allowance for identified problem loans.

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

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

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

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



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The following table sets forth information regarding our allowance for loan losses at the dates and for
the periods indicated (dollars in thousands):



|                                              |  |                                           |       |   |                                        |   |       |                        |  |   |       |   |  |   |       |  
|--------------------------------------------- |  | ----------------------------------------- | ----- | - | -------------------------------------- | - | ----- | ---------------------- |  | - | ----- | - |  | - | ----- | -
|                                              |  | At and for the three monthsended June 30, |       |   | At or for the six monthsended June 30, |  
|                                              |  | 2006                                      |       |   | 2005                                   |   |       | 2006                   |  |   | 2005  |  
|                                              |  |                                           |       |   |                                        |   |       | (dollars in thousands) | 
|Balance at beginning of period                |  | $                                         | 9,856 |   |                                        | $ | 7,917 |                        |  | $ | 9,773 |   |  | $ | 7,508 |  
|Reserve acquired in merger                    |  |                                           |      |   |                                        |   |      |                        |  |   |      |   |  |   |      |  
|Chargeoffs:                                   |  |                                           |       |   |                                        |   |       |                        |  |   |       |   |  |   |       |  
|Real estate loans:                            |  |                                           |       |   |                                        |   |       |                        |  |   |       |   |  |   |       |  
|Commercial                                    |  |                                           | 66    |   |                                        |   |      |                        |  |   | 66    |   |  |   |      |  
|One- to four- family                          |  |                                           |      |   |                                        |   |      |                        |  |   |      |   |  |   |      |  
|Commercial                                    |  |                                           | 12    |   |                                        |   |      |                        |  |   | 12    |   |  |   |      |  
|Aircraft                                      |  |                                           |      |   |                                        |   |      |                        |  |   | 15    |   |  |   |      |  
|Consumer                                      |  |                                           |      |   |                                        |   | 3     |                        |  |   | 1     |   |  |   | 9     |  
|                                              |  |                                           |       |   |                                        |   |       |                        |  |   |       |   |  |   |       |  
|Total chargeoffs                              |  |                                           | 78    |   |                                        |   | 3     |                        |  |   | 94    |   |  |   | 9     |  
|Recoveries:                                   |  |                                           |       |   |                                        |   |       |                        |  |   |       |   |  |   |       |  
|Real estate loans:                            |  |                                           |       |   |                                        |   |       |                        |  |   |       |   |  |   |       |  
|Commercial                                    |  |                                           |      |   |                                        |   |      |                        |  |   | 21    |   |  |   |      |  
|Commercial                                    |  |                                           |      |   |                                        |   | 65    |                        |  |   | 1     |   |  |   |      |  
|Aircraft                                      |  |                                           |      |   |                                        |   |      |                        |  |   | 76    |   |  |   | 161   |  
|Consumer                                      |  |                                           | 2     |   |                                        |   |      |                        |  |   | 3     |   |  |   | 1     |  
|                                              |  |                                           |       |   |                                        |   |       |                        |  |   |       |   |  |   |       |  
|Total recoveries                              |  |                                           | 2     |   |                                        |   | 65    |                        |  |   | 101   |   |  |   | 162   |  
|                                              |  |                                           |       |   |                                        |   |       |                        |  |   |       |   |  |   |       |  
|Net chargeoffs (recoveries)                   |  |                                           | 76    |   |                                        |   | (62   | )                      |  |   | (7    | ) |  |   | (153  | )
|Provision for loan losses                     |  |                                           |      |   |                                        |   | 413   |                        |  |   |      |   |  |   | 731   |  
|                                              |  |                                           |       |   |                                        |   |       |                        |  |   |       |   |  |   |       |  
|Balance at end of period                      |  | $                                         | 9,780 |   |                                        | $ | 8,392 |                        |  | $ | 9,780 |   |  | $ | 8,392 |  
|                                              |  |                                           |       |   |                                        |   |       |                        |  |   |       |   |  |   |       |  
|Net charge offs (recoveries) to average loans |  |                                           | 0.04  | % |                                        |   | -0.04 | %                      |  |   | 0.00  | % |  |   | -0.05 | %

As of June 30, 2006 and December 31, 2005, the balance in the allowance for loan losses
was $9.8 million.

As of June 30, 2006 the allowance was 1.31% of total gross loans compared to 1.32% as of December 31, 2005. As
a percent of loans held for investment, the allowance was 1.67% as of June 30, 2006 compared to 1.68% as of December 31, 2005. During the six months June 30, 2006, there were no major changes in loan concentrations that affected the
allowance for loan losses and no changes in estimation methods. 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 169.53% as of June 30, 2006 compared to 267.97%
as of December 31, 2005, reflecting the increase in non-performing loans. Management believes the allowance at June 30, 2006 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors.

We perform on a quarterly basis a migration analysis using an eight quarter history of charge offs to average loans by collateral type.
Net chargeoffs for the three months ended June 30, 2006 totaled $76,000 compared to net recoveries of $62,000 for the three months ended June 30, 2005. Net recoveries for the six months ended June 30, 2006 totaled $7,000 compared to
net recoveries of $153,000 for the six months ended June 30, 2005. Our management and Directors Loan Committee have also established reserve levels for each category based upon loan classification, as certain loan types may not have
incurred losses or perhaps had minimal losses in the eight quarter migration analysis. Our management and Directors Loan Committee considers trends in delinquent loans, potential charge offs by loan class, market for the underlying real estate
or other collateral, trends in industry, economic changes and other potential risks. In general, no reserves are established for the government guaranteed portion of loans outstanding.



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Other real estate owned and repossessed assets.As of June 30, 2006, there were two
repossessed assets totaling $233,000 consisting of an aircraft and a single mobile home property and were valued using the collateral method based on recent appraisals of the underlying collateral. As of December 31, 2005, there was one
repossessed asset in the amount of $68,000 consisting of a single mobile home property and was valued using the collateral method based on a recent appraisal of the underlying collateral. As of June 30, 2006 and December 31, 2005, there
were no OREOs.

Deposits

Total
deposits decreased to $699.4 million as of June 30, 2006 compared to $710.5 million as of December 31, 2005 due to a decrease in loan demand and higher than expected payoffs. Interest bearing deposits decreased to $530.0 million as of
June 30, 2006 compared to $545.5 million as of December 31, 2005. Non-interest bearing deposits increased to $169.4 million as of June 30, 2006 compared to $165.0 million as of December 31, 2005. Total wholesale deposits were
$39.7 million as of June 30, 2006 compared to $60.5 million as of December 31, 2005. Total retail banking deposits increased to $650.3 million as of June 30, 2006 compared to $643.9 million as of December 31, 2005.

Borrowings

Short term borrowings decreased to $47.5
million as of June 30, 2006 compared to $52.3 million as of December 31, 2005 as a result of the decrease in federal funds sold and increase in equity. We established a line of credit with the FHLB collateralized by commercial loans and
government securities.

Long term debt, consisting primarily of trust preferred securities, totaled $36.3 million as of June 30, 2006
compared to $37.2 million as of December 31, 2005.

The Company had the following borrowing facilities as of June 30, 2006 and
December 31, 2005 (dollars in thousands):



|                           |  |                  |         |                        |              |                     |                    |                         |                        |   |        |                    |       |   |  |   |       
|-------------------------- |  | ---------------- | ------- | ---------------------- | ------------ | ------------------- | ------------------ | ----------------------- | ---------------------- | - | ------ | ------------------ | ----- | - |  | - | ------
|                           |  | Maximumborrowing |         | Expiration date        |              | As of June 30, 2006 |                    | As of December 31, 2005
|                           |  |                  |         | Month-endinterest rate |              |                     | Outstandingbalance |                         | Month-endinterest rate |   |        | Outstandingbalance
|Trust Preferred I          |  | $                | 10,000  |                        | Sep 30, 2030 |                     | 11.00              | %                       |                        | $ | 10,000 |                    | 11.00 | % |  | $ | 10,000
|Trust Preferred II         |  |                  | 5,000   |                        | Sep 01, 2033 |                     | 8.35               | %                       |                        |   | 5,000  |                    | 7.45  | % |  |   | 5,000 
|Trust Preferred III        |  |                  | 20,000  |                        | Aug 31, 2035 |                     | 5.85               | %                       |                        |   | 20,000 |                    | 5.85  | % |  |   | 20,000
|Federal Home Loan Bank     |  |                  | 122,032 |                        | Open ended   |                     | 5.29               | %                       |                        |   | 48,790 |                    | 4.05  | % |  |   | 54,790
|Pacific Coast Bankers Bank |  |                  | 20,000  |                        | Jun 30, 2007 |                     | N/A                |                         |                        |   |       |                    | N/A   |   |  |   |      
|Wells Fargo                |  |                  | 15,000  |                        | Open ended   |                     | N/A                |                         |                        |   |       |                    | N/A   |   |  |   |      
|U.S. Bank                  |  |                  | 20,000  |                        | Open ended   |                     | N/A                |                         |                        |   |       |                    | N/A   |   |  |   |       
|                           |  |                  |         |                        |              |                     |                    |                         |                        |   |        |                    |       |   |  |   |       
|                           |  | $                | 212,032 |                        |              |                     |                    |                         |                        | $ | 83,790 |                    |       |   |  | $ | 89,790
|                           |  |                  |         |                        |              |                     |                    |                         |                        |   |        |                    |       |   |  |   |       



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Capital

Our stockholders equity increased to $103.2 million at June 30, 2006 compared to $96.3 million as of December 31, 2005. The increase in stockholders equity is a result of net income of $6.5 million for the six months
ended June 30, 2006 combined with proceeds from the exercise of stock options, less the cash dividends paid during the six months, effects of the implementation of SFAS 123(R) expense of stock options and the effects of the amortization on
restricted stock.

During the first half of 2005, the Company paid $0.10 per share for the quarter ended March 31, 2005 and
June 30, 2005. For the quarter ended March 31, 2006 and June 30, 2006, the Company paid $0.125 per share. Whether or not any cash dividends will be paid in the future will be determined by our Board of Directors after consideration of
various factors.Community Bancorps and the Banks profitability and regulatory capital ratios, in addition to other financial conditions, will be key factors considered by our Board of Directors in making such determinations
regarding the payment of dividends. In connection with the $35.0 million in outstanding trust preferred securities, we have the right to defer the payment of interest on these securities. If we were to exercise such right of deferral, we are
restricted during such deferral period from paying any dividends on our common stock.

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

At June 30, 2006 and December 31, 2005, all capital ratios were above all current Federal capital guidelines for a well capitalized bank.



|                                         |  |              |   |  |                  |  
|---------------------------------------- |  | ------------ | - |  | ---------------- | -
|CAPITAL RATIOS                           |  | June 30,2006 |   |  | December 31,2005 |  
|Holding Company Ratios                   |  |              |   |  |                  |  
|Total capital (to risk-weighted assets)  |  | 12.83        | % |  | 11.79            | %
|Tier 1 capital (to risk-weighted assets) |  | 11.53        | % |  | 10.55            | %
|Tier 1 capital (to average assets)       |  | 10.94        | % |  | 10.18            | %
|Tangible equity to tangible assets       |  | 6.78         | % |  | 5.89             | %
|Bank only Ratios                         |  |              |   |  |                  |  
|Total capital (to risk-weighted assets)  |  | 12.55        | % |  | 11.49            | %
|Tier 1 capital (to risk-weighted assets) |  | 11.30        | % |  | 10.25            | %
|Tier 1 capital (to average assets)       |  | 10.68        | % |  | 9.91             | %

Financial Borrowings and Commitments

As of June 30, 2006 the financial borrowings and commitments are as follows (dollars in thousands):



|                              |  |       |                 |                       |           |        |            |   |                  |  |   |       |  |   |       
|----------------------------- |  | ----- | --------------- | --------------------- | --------- | ------ | ---------- | - | ---------------- |  | - | ----- |  | - | ------
|                              |  | Total |                 | Payment Due by Period
|                              |  |       | Less than 1year |                       | 1- 3years |        | 3 - 5years |   | More than5 years
|Contractual Obligations:      |  |       |                 |                       |           |        |            |   |                  |  |   |       |  |   |       
|Trust Preferred Securities    |  | $     | 67,877          |                       | $         | 2,367  |            | $ | 4,571            |  | $ | 3,647 |  | $ | 57,292
|Other borrowings *            |  |       | 49,054          |                       |           | 46,384 |            |   | 1,375            |  |   | 795   |  |   | 500   
|Operating leases *            |  |       | 9,367           |                       |           | 1,636  |            |   | 2,852            |  |   | 2,556 |  |   | 2,323 
|                              |  |       |                 |                       |           |        |            |   |                  |  |   |       |  |   |       
|Total Contractual Obligations |  | $     | 126,298         |                       | $         | 50,387 |            | $ | 8,798            |  | $ | 6,998 |  | $ | 60,115
|                              |  |       |                 |                       |           |        |            |   |                  |  |   |       |  |   |       



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

In addition to the above, we have commitments to extend credit on undisbursed construction and other loans totaling $210.2 million as of June 30, 2006.



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The Company has a credit line with the FHLB with a limit of $122.0 million with a balance outstanding of
$48.8 million as of June 30, 2006. In addition, we have credit lines with other correspondent banks of $55.0 million. There were no advances against these credit lines as of June 30, 2006. Of the total advances from the FHLB, $47.5 million
have a remaining term of less than one year.

Off-Balance Sheet Arrangements

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

In the ordinary course of business, the
Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statement when they
are funded or related fees are incurred or received. For further discussion of these financial instruments, refer to Note 17 of the Companys consolidated financial statements contained in the Companys December 31, 2005 10-K.

In the ordinary course of business, the Company is party to various operating leases. For a discussion of these financial instruments,
refer to Note 16 of the Companys consolidated financial statements contained in the Companys December 31, 2005 10-K.

In
connection with the $35.0 million in debt securities discussed in Capital within this section, the Company issued the full and unconditional payment guarantee of certain accrued distributions.

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 and sales and participation of eligible loans.
Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans, purchases of investment securities, and payment of operating expenses.

We experienced net cash outflows from operating activities of $16.4 million during the six months ended June 30, 2006 compared to net cash outflows
of $37.8 million during the six months ended June 30, 2005. Net cash outflows from operating activities during the first six months of 2006 and 2005 were both primarily due to the origination of loans held for sale in excess of proceeds from
the sale of loans, partially offset by our net income. During the six months ended June 30, 2006, we experienced net cash inflows from investing activities of $34.1 million compared to net cash outflows from investing activities of $75.9
million during the six months ended June 30, 2005. Net cash inflows from investing activities for the first half of 2006 can be attributed primarily to the proceeds received from principal repayments on loans held for investment. Net cash
outflows from investing activities for the first half of 2005 can be attributed primarily to the growth in the Banks loan portfolio and the purchase of additional investments. During the six months ended June 30, 2006, we experienced net
cash outflows from financing activities of $16.5 million compared to net cash inflows from financing activities of $122.5 million during the six months ended June 30, 2005. During the first half of 2006, net cash outflows were primarily from a
net decrease in interest bearing deposits of $15.5 million and a net decrease in short term borrowings of $6.0 million, partially offset by an increase in non-interest bearing deposits of $4.4 million. During the first half of 2005, net cash



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inflows were primarily from increases in interest bearing and non-interest bearing deposits of $64.1 million and $19.7 million, respectively. This increase
was enhanced by a net increase in short term borrowing of $39.0 million.

As a means of augmenting our liquidity, we have established
federal funds lines with correspondent banks. At June 30, 2006 our available borrowing capacity includes approximately $55.0 million in federal funds line facilities and $73.2 million in unused FHLB advances. We believe our liquidity sources to
be stable and adequate. At June 30, 2006, 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 wholly-owned subsidiary, Community National Bank, subject to limitations imposed by the
National Bank Act. During the six months ended June 30, 2006, there was $500,000 in dividends paid by the Bank to Community Bancorp Inc. which was used primarily to fund the Companys first quarter dividend. During the six months ended
June 30, 2005, there were $500,000 in dividends paid by the Bank to Community Bancorp Inc. As of June 30, 2006, approximately $18.7 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, within this Report, for a discussion of our lending activities. IRR represents the impact that changes in absolute and relative levels of market interest rates may have
upon our net interest income (NII). Changes in the NII are the result of changes in the net interest spread between interest-earning assets and interest-bearing liabilities (timing risk), the relationship between various rates (basis
risk), and changes in the shape of the yield curve.

We realize income principally from the differential or spread between the interest
earned on loans, investments, other interest-earning assets and the interest incurred on deposits. The volumes and yields on loans, deposits and borrowings are affected by market interest rates. As of June 30, 2006, 86.9% of our loan portfolio
was tied to adjustable rate indices. Of our total loan portfolio, 59.5% are adjustable rate loans that are tied to prime and reprice within 90 days. As of June 30, 2006, 41.4% of our deposits were time deposits with a stated maturity (generally
one year or less) and a fixed rate of interest. As of June 30, 2006, 31.6% of our long term debt had a fixed rate with an average remaining term of 26.3 years.

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

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

The ALCO seeks to stabilize our NII by matching rate-sensitive assets and liabilities by 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 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



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based on actual cash flows and repricing characteristics for all of our financial instruments and incorporate market-based assumptions regarding the impact
of changing interest rates on current volumes of applicable financial instruments.

GAP ANALYSIS

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

At June 30, 2006, 40.6% 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 eight months at
June 30, 2006. 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 $240.2 million
in interest bearing transaction accounts (savings, money markets and interest bearing checking) as of June 30, 2006, with rates being paid between 0.15% and 3.44%. 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 zero percent, and there is a behavioral limit somewhere above zero percent as to how low the rates can be
reduced before our customers will no longer maintain the deposit with the bank. Therefore, the implied liability sensitivity in a declining rate environment may be overstated.

The following table sets forth information concerning repricing opportunities for our interest-earning assets and interest bearing liabilities as of
June 30, 2006. 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.



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Contractual Static GAP Position as of June 30, 2006



|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|------------------------------------------------------ |  | ---------------------- | ------- | - | ------------------------------- | - | ------- | -------------------------------- |  | - | ------------------------------- | - |  | ---------- | ------- | - | ------------- | - | -------- | - |  | - | ------- | -
|                                                       |  | 0 - 3months            |         |   | Greater than3 monthsto 6 months |   |         | Greater than6 monthsto 12 months |  |   | Greater than12 monthsto 5 years |   |  | Thereafter |         |   | Total balance |  
|                                                       |  | (dollars in thousands) |        
|Interest sensitive assets:                             |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Loans receivable:                                      |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Adjustable rate loans, gross                           |  | $                      | 454,926 |   |                                 | $ | 35,651  |                                  |  | $ | 60,658                          |   |  | $          | 91,691  |   |               | $ | 6,158    |   |  | $ | 649,084 |  
|Fixed rate loans, gross (1)(2)                         |  |                        | 8,201   |   |                                 |   | 6,489   |                                  |  |   | 7,366                           |   |  |            | 31,140  |   |               |   | 46,132   |   |  |   | 99,328  |  
|Investments:                                           |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Investment securities held-to-maturity                 |  |                        | 386     |   |                                 |   | 647     |                                  |  |   | 313                             |   |  |            | 1,194   |   |               |   | 4,792    |   |  |   | 7,332   |  
|Investment securities available-for-sale               |  |                        | 6,527   |   |                                 |   | 4,469   |                                  |  |   | 10,318                          |   |  |            | 20,930  |   |               |   | 3,135    |   |  |   | 45,379  |  
|Federal funds sold                                     |  |                        | 2,990   |   |                                 |   |        |                                  |  |   |                                |   |  |            |        |   |               |   |         |   |  |   | 2,990   |  
|Other investments                                      |  |                        | 2,836   |   |                                 |   | 145     |                                  |  |   | 96                              |   |  |            | 169     |   |               |   | 6,044    |   |  |   | 9,290   |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Total interest sensitive assets                        |  |                        | 475,866 |   |                                 |   | 47,401  |                                  |  |   | 78,751                          |   |  |            | 145,124 |   |               |   | 66,261   |   |  |   | 813,403 |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Interest sensitive liabilities:                        |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Deposits:                                              |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Non-interest bearing                                   |  |                        |        |   |                                 |   |        |                                  |  |   |                                |   |  |            |        |   |               |   | 169,373  |   |  |   | 169,373 |  
|Interest bearing (1)                                   |  |                        | 359,407 |   |                                 |   | 80,624  |                                  |  |   | 62,496                          |   |  |            | 27,472  |   |               |   |         |   |  |   | 529,999 |  
|Other borrowings                                       |  |                        | 50,540  |   |                                 |   | 750     |                                  |  |   | 1,250                           |   |  |            | 21,250  |   |               |   |         |   |  |   | 73,790  |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Total interest sensitive liabilities                   |  | $                      | 409,947 |   |                                 | $ | 81,374  |                                  |  | $ | 63,746                          |   |  | $          | 48,722  |   |               | $ | 169,373  |   |  | $ | 773,162 |  
|                                                       |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|GAP Analysis                                           |  |                        |         |   |                                 |   |         |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Interest rate sensitivity gap                          |  | $                      | 65,919  |   |                                 | $ | (33,973 | )                                |  | $ | 15,005                          |   |  | $          | 96,402  |   |               | $ | (103,112 | ) |  | $ | 40,241  |  
|GAP as % of total interest sensitive assets            |  |                        | 8.10    | % |                                 |   | -4.18   | %                                |  |   | 1.84                            | % |  |            | 11.85   | % |               |   | -12.68   | % |  |   | 4.95    | %
|Cumulative interest rate sensitivity gap               |  | $                      | 65,919  |   |                                 | $ | 31,946  |                                  |  | $ | 46,951                          |   |  | $          | 143,353 |   |               | $ | 40,241   |   |  | $ | 40,241  |  
|Cumulative gap as % of total interest sensitive assets |  |                        | 8.10    | % |                                 |   | 3.93    | %                                |  |   | 5.77                            | % |  |            | 17.62   | % |               |   | 4.95     | % |  |   | 4.95    | %

---

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



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

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 Company more asset sensitive than is
indicated in the static Gap analysis. Management expects to experience higher net interest income in the 0-12 month time horizon as rates continue to rise, the opposite of what is indicated by the static Gap analysis.



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INTEREST RATE SIMULATIONS

Interest rate simulations provide us with an estimate of both the dollar amount and percentage change in NII under various rate scenarios. All assets and liabilities are normally subjected up to a 300 basis point
increase and decrease in interest rates in 100 basis point increments. However, under the current interest rate environment, decreases in interest rates have been simulated at 100, 200 and 300 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.

The
following table shows the effects of changes in projected net interest income for the twelve months ending June 30, 2007 under the interest rate shock scenarios stated. The following table was prepared as of June 30, 2006, at which time
prime was 8.25%.



|                 |  |                             |        |                     |   |         |                       |  |        |  
|---------------- |  | --------------------------- | ------ | ------------------- | - | ------- | --------------------- |  | ------ | -
|Changes in Rates |  | ProjectedNet interestIncome |        | ChangefromBase Case |   |         | % Changefrom BaseCase | 
|                 |  | (dollars in thousands)      |        |                     |   |        
|+ 300 bp         |  | $                           | 67,649 |                     | $ | 13,068  |                       |  | 23.94  | %
|+ 200 bp         |  | $                           | 63,421 |                     | $ | 8,840   |                       |  | 16.20  | %
|+ 100 bp         |  | $                           | 59,161 |                     | $ | 4,580   |                       |  | 8.39   | %
|0 bp             |  | $                           | 54,581 |                     | $ |        |                       |  | 0.00   | %
|- 100 bp         |  | $                           | 50,420 |                     | $ | (4,161  | )                     |  | -7.62  | %
|- 200 bp         |  | $                           | 46,090 |                     | $ | (8,491  | )                     |  | -15.56 | %
|- 300 bp         |  | $                           | 42,174 |                     | $ | (12,407 | )                     |  | -22.73 | %

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 Controller, 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
Controller 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to
be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.

There was no change in the Companys internal
controls over financial reporting during the six months ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.

In designing and evaluating disclosure controls and procedures, the Companys management recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable, not absolute, assurances of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.



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##### Table of Contents

Part II OTHER INFORMATION



|Item 1 | Legal Proceedings
|------ | -----------------

As of June 30, 2006 the Company is not
party to any litigation that is considered likely to have a material adverse effect on the Company.



|Item 1A. | Risk Factors
|-------- | ------------

As of June 30, 2006, there were no material
changes from the risk factors as previously disclosed in our annual report on Form 10-K.Certain risk factors in connection with the merger of First Community Bancorp are discussed in an S-4 Registration Statement which First Community filed
with the SEC on July 26, 2006 as well as in a proxy statement which the Company will send to its stockholders in connection with the merger.



|Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds
|------ | -----------------------------------------------------------

None
to report.



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

None to report.



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

The following
item was submitted to the security holders for approval at the annual meeting held on May 17, 2006:



| | 1. | Election of the following four directors to the Board of Directors of the Company for terms expiring at the 2009 Annual Meeting of Shareholders or until their successors are elected
and have qualified.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The results of the vote were as follows:



|                         |  |           |  |         
|------------------------ |  | --------- |  | --------
|                         |  | For       |  | Withheld
|Mark N. Baker            |  | 4,981,827 |  | 7,470   
|Robert H. S. Kirkpatrick |  | 4,981,827 |  | 7,470   
|Thomas A. Page           |  | 4,982,441 |  | 6,856   
|Gary M. Youmans          |  | 4,981,827 |  | 7,470   



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

None to report.



|Item 6 | Exhibits
|------ | --------



|     |  |                                                        
|---- |  | -------------------------------------------------------
|31.1 |  | Rule 13a-14(a) Certification of Chief Executive Officer
|     | 
|31.2 |  | Rule 13a-14(a) Certification of Controller             
|     | 
|32   |  | Section 1350 Certifications                            



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##### Table of Contents

(SIGNATURES)

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.



|                   |  |  |  |                                      
|------------------ |  |  |  | -------------------------------------
|                   |  |  |  | Community Bancorp Inc. (Registrant)  
|                   |  | 
|Date July 28, 2006 |  |  |  | /s/ Michael J. Perdue                
|                   |  |  |  | Michael J. Perdue                    
|                   |  |  |  | President and Chief Executive Officer
|                   |  | 
|Date July 28, 2006 |  |  |  | /s/ Pamela D. Maes                   
|                   |  |  |  | Pamela D. Maes                       
|                   |  |  |  | Senior Vice President, Controller    



52