##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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



for the quarterly period ended September 30, 2005



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



for the transition period from  to
.



Commission File No. 000  26505



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COMMUNITY BANCORP INC.

(Name of issuer in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 33-0859334                         
|(State or other jurisdictionof incorporation or organization) |  | (I.R.S. EmployerIdentification No.)



|                                                       |  |           
|------------------------------------------------------ |  | ----------
|900 Canterbury Place, Suite 300, Escondido, California |  | 92025     
|(Address of principal executive offices)               |  | (Zip Code)



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



(Former
Address)

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



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



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



Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



Number of shares of common
stock outstanding as of October 31, 2005: 5,936,788



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##### Table of Contents

COMMUNITY BANCORP INC.

2005 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



|                                                                                              |  |   
|--------------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION                                                                |  | 3 
|ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)                                                      |  | 3 
|                                                                                              | 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 18
|                                                                                              | 
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 44
|                                                                                              | 
|ITEM 4. CONTROLS AND PROCEDURES                                                               |  | 47
|                                                                                              | 
|PART II - OTHER INFORMATION                                                                   |  |   
|ITEM 1. LEGAL PROCEEDINGS                                                                     |  | 48
|                                                                                              | 
|ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 48
|                                                                                              | 
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                       |  | 48
|                                                                                              | 
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 48
|                                                                                              | 
|ITEM 5. OTHER INFORMATION                                                                     |  | 48
|                                                                                              | 
|ITEM 6. EXHIBITS                                                                              |  | 48
|                                                                                              | 
|SIGNATURES                                                                                    |  | 48
|                                                                                              | 
|CERTIFICATIONS                                                                                |  |   



2



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##### Table of Contents

PART 1: FINANCIAL INFORMATION



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



COMMUNITY
BANCORP INC.

CONSOLIDATED BALANCE SHEETS

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



|                                                                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                                                              |  | September 30,2005 |         |   | December 31,2004 |  
|ASSETS:                                                                                                                                                                                                                                       |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                                                                     |  | $                 | 18,850  |   |                  | $ | 14,842  |  
|Interest bearing deposits in financial institutions                                                                                                                                                                                           |  |                   | 717     |   |                  |   | 1,825   |  
|Federal funds sold                                                                                                                                                                                                                            |  |                   | 3,090   |   |                  |   | 9,565   |  
|Investments:                                                                                                                                                                                                                                  |  |                   |         |   |                  |   |         |  
|Held-to-maturity at amortized cost; pledged $720 (2005) and $2,111 (2004), estimated fair value of $6,870 (2005) and $4,251
(2004)                                                                                                            |  |                   | 6,976   |   |                  |   | 4,198   |  
|Available-for-sale, at estimated fair value; pledged $17,941 (2005) and $12,750 (2004)                                                                                                                                                        |  |                   | 42,613  |   |                  |   | 26,562  |  
|Federal Reserve Bank & Federal Home Loan Bank stock, at cost                                                                                                                                                                                  |  |                   | 5,284   |   |                  |   | 3,388   |  
|Loans held for investment                                                                                                                                                                                                                     |  |                   | 589,896 |   |                  |   | 437,932 |  
|Less allowance for loan losses                                                                                                                                                                                                                |  |                   | (10,124 | ) |                  |   | (7,508  | )
|                                                                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Net loans held for investment                                                                                                                                                                                                                 |  |                   | 579,772 |   |                  |   | 430,424 |  
|Loans held for sale                                                                                                                                                                                                                           |  |                   | 143,767 |   |                  |   | 101,588 |  
|Premises and equipment, net                                                                                                                                                                                                                   |  |                   | 6,976   |   |                  |   | 6,737   |  
|Other real estate owned and repossessed assets                                                                                                                                                                                                |  |                   | 68      |   |                  |   |        |  
|Affordable housing investments                                                                                                                                                                                                                |  |                   | 2,473   |   |                  |   | 2,579   |  
|Accrued interest                                                                                                                                                                                                                              |  |                   | 3,266   |   |                  |   | 2,086   |  
|Other assets                                                                                                                                                                                                                                  |  |                   | 10,162  |   |                  |   | 8,737   |  
|Income tax receivable                                                                                                                                                                                                                         |  |                   | 674     |   |                  |   |        |  
|Deferred tax asset, net                                                                                                                                                                                                                       |  |                   | 5,610   |   |                  |   | 5,928   |  
|Servicing assets, net                                                                                                                                                                                                                         |  |                   | 4,554   |   |                  |   | 4,011   |  
|Interest-only strips, at fair value                                                                                                                                                                                                           |  |                   | 2,196   |   |                  |   | 1,749   |  
|Goodwill and other intangibles                                                                                                                                                                                                                |  |                   | 45,247  |   |                  |   | 17,387  |  
|                                                                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                                                                  |  | $                 | 882,295 |   |                  | $ | 641,606 |  
|                                                                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|Deposits                                                                                                                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Interest bearing                                                                                                                                                                                                                              |  | $                 | 576,109 |   |                  | $ | 438,995 |  
|Non-interest bearing                                                                                                                                                                                                                          |  |                   | 159,892 |   |                  |   | 110,771 |  
|                                                                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total deposits                                                                                                                                                                                                                                |  |                   | 736,001 |   |                  |   | 549,766 |  
|Short term borrowing                                                                                                                                                                                                                          |  |                   | 3,000   |   |                  |   | 1,000   |  
|Long term debt                                                                                                                                                                                                                                |  |                   | 38,655  |   |                  |   | 17,640  |  
|Accrued expenses and other liabilities                                                                                                                                                                                                        |  |                   | 11,797  |   |                  |   | 10,082  |  
|                                                                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                                                                             |  |                   | 789,453 |   |                  |   | 578,488 |  
|                                                                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Commitments and Contingencies (Note 8)                                                                                                                                                                                                        |  |                   |         |   |                  |   |         |  
|Stockholders equity                                                                                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|Common stock, $0.625 par value; authorized 10,000,000 shares, issued and outstanding; 5,936,578 (including 11,670 restricted stock awarded
under the equity based compensation plan) at September 30, 2005 and 5,162,725 at December 31, 2004 |  |                   | 3,703   |   |                  |   | 3,227   |  
|Additional paid-in capital                                                                                                                                                                                                                    |  |                   | 61,635  |   |                  |   | 38,994  |  
|Deferred compensation - restricted stock                                                                                                                                                                                                      |  |                   | (256    | ) |                  |   |         |  
|Accumulated other comprehensive loss, net of taxes of $270 (2005) and $66 (2004)                                                                                                                                                              |  |                   | (319    | ) |                  |   | (73     | )
|Retained earnings                                                                                                                                                                                                                             |  |                   | 28,079  |   |                  |   | 20,970  |  
|                                                                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                                                                    |  |                   | 92,842  |   |                  |   | 63,118  |  
|                                                                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                                                                    |  | $                 | 882,295 |   |                  | $ | 641,606 |  
|                                                                                                                                                                                                                                              |  |                   |         |   |                  |   |         |  



See
accompanying notes to consolidated financial statements.



3



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##### Table of Contents

COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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



|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | --------- | - | -------------------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                                                                                  |  | For the three monthsended September 30, |           |   | For the nine monthsended September 30, |  
|                                                                                                                                                                  |  | 2005                                    |           |   | 2004                                   |   |           | 2005 |  |   | 2004      |  
|Interest Income:                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Interest on loans                                                                                                                                                 |  | $                                       | 14,231    |   |                                        | $ | 7,522     |      |  | $ | 36,040    |   |  | $ | 21,585    |  
|Interest on fed funds sold                                                                                                                                        |  |                                         | 59        |   |                                        |   | 52        |      |  |   | 208       |   |  |   | 124       |  
|Interest on other investments                                                                                                                                     |  |                                         | 573       |   |                                        |   | 233       |      |  |   | 1,378     |   |  |   | 729       |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Total interest income                                                                                                                                             |  |                                         | 14,863    |   |                                        |   | 7,807     |      |  |   | 37,626    |   |  |   | 22,438    |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Interest Expense:                                                                                                                                                 |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Deposits                                                                                                                                                          |  |                                         | 3,141     |   |                                        |   | 1,126     |      |  |   | 7,011     |   |  |   | 3,166     |  
|Short term borrowing                                                                                                                                              |  |                                         | 189       |   |                                        |   | 32        |      |  |   | 576       |   |  |   | 107       |  
|Long term debt                                                                                                                                                    |  |                                         | 472       |   |                                        |   | 235       |      |  |   | 1,077     |   |  |   | 687       |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Total interest expense                                                                                                                                            |  |                                         | 3,802     |   |                                        |   | 1,393     |      |  |   | 8,664     |   |  |   | 3,960     |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net interest income before provision for loan losses                                                                                                              |  |                                         | 11,061    |   |                                        |   | 6,414     |      |  |   | 28,962    |   |  |   | 18,478    |  
|Provision for loan losses                                                                                                                                         |  |                                         | 430       |   |                                        |   | 325       |      |  |   | 1,161     |   |  |   | 838       |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net interest income after provision for loan losses                                                                                                               |  |                                         | 10,631    |   |                                        |   | 6,089     |      |  |   | 27,801    |   |  |   | 17,640    |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Other operating income:                                                                                                                                           |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net gain on sale of loans                                                                                                                                         |  |                                         | 1,533     |   |                                        |   | 1,952     |      |  |   | 5,240     |   |  |   | 4,938     |  
|Loan servicing fees, net                                                                                                                                          |  |                                         | 221       |   |                                        |   | 221       |      |  |   | 700       |   |  |   | 614       |  
|Customer service charges                                                                                                                                          |  |                                         | 295       |   |                                        |   | 185       |      |  |   | 793       |   |  |   | 569       |  
|(Loss) gain on sale of repossessed assets                                                                                                                         |  |                                         |          |   |                                        |   | (160      | )    |  |   | 157       |   |  |   | (160      | )
|Other fee income                                                                                                                                                  |  |                                         | 418       |   |                                        |   | 335       |      |  |   | 881       |   |  |   | 956       |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Total other operating income                                                                                                                                      |  |                                         | 2,467     |   |                                        |   | 2,533     |      |  |   | 7,771     |   |  |   | 6,917     |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Other operating expenses:                                                                                                                                         |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Salaries and employee benefits                                                                                                                                    |  |                                         | 4,393     |   |                                        |   | 2,916     |      |  |   | 11,981    |   |  |   | 8,134     |  
|Occupancy                                                                                                                                                         |  |                                         | 574       |   |                                        |   | 340       |      |  |   | 1,695     |   |  |   | 1,033     |  
|Professional services                                                                                                                                             |  |                                         | 512       |   |                                        |   | 818       |      |  |   | 1,505     |   |  |   | 1,902     |  
|Depreciation and amortization                                                                                                                                     |  |                                         | 326       |   |                                        |   | 190       |      |  |   | 957       |   |  |   | 566       |  
|Data processing                                                                                                                                                   |  |                                         | 226       |   |                                        |   | 194       |      |  |   | 672       |   |  |   | 611       |  
|Office expenses                                                                                                                                                   |  |                                         | 217       |   |                                        |   | 155       |      |  |   | 644       |   |  |   | 483       |  
|Other expenses                                                                                                                                                    |  |                                         | 1,188     |   |                                        |   | 723       |      |  |   | 3,544     |   |  |   | 2,378     |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Total other operating expenses                                                                                                                                    |  |                                         | 7,436     |   |                                        |   | 5,336     |      |  |   | 20,998    |   |  |   | 15,107    |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Income before income tax provision                                                                                                                                |  |                                         | 5,662     |   |                                        |   | 3,286     |      |  |   | 14,574    |   |  |   | 9,450     |  
|Income tax provision                                                                                                                                              |  |                                         | 2,278     |   |                                        |   | 1,256     |      |  |   | 5,820     |   |  |   | 3,573     |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Net income                                                                                                                                                        |  |                                         | 3,384     |   |                                        |   | 2,030     |      |  |   | 8,754     |   |  |   | 5,877     |  
|Other comprehensive income (loss) - unrealized gain / (loss) on available for sale securities, net of income tax benefit (expense) of $(126),
$92, $(203) and $43 |  |                                         | (119      | ) |                                        |   | 136       |      |  |   | (246      | ) |  |   | 63        |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Comprehensive income                                                                                                                                              |  | $                                       | 3,265     |   |                                        | $ | 2,166     |      |  | $ | 8,508     |   |  | $ | 5,940     |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Basic earnings per share                                                                                                                                          |  | $                                       | 0.61      |   |                                        | $ | 0.46      |      |  | $ | 1.63      |   |  | $ | 1.34      |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Diluted earnings per share                                                                                                                                        |  | $                                       | 0.58      |   |                                        | $ | 0.43      |      |  | $ | 1.54      |   |  | $ | 1.25      |  
|                                                                                                                                                                  |  |                                         |           |   |                                        |   |           |      |  |   |           |   |  |   |           |  
|Average shares outstanding for basic earnings per share                                                                                                           |  |                                         | 5,575,725 |   |                                        |   | 4,402,605 |      |  |   | 5,358,627 |   |  |   | 4,385,565 |  
|Average shares outstanding for diluted earnings per share                                                                                                         |  |                                         | 5,880,850 |   |                                        |   | 4,705,546 |      |  |   | 5,669,122 |   |  |   | 4,685,097 |  



See
accompanying notes to consolidated financial statements.



4



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##### Table of Contents

COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)(unaudited)



|                                                                                                                                        |  |      |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|For the nine months ended September 30,                                                                                                 |  | 2005 |          |   | 2004 |  
|Cash flows from operating activities:                                                                                                   |  |      |          |   |      |   |          |  
|Net income                                                                                                                              |  | $    | 8,754    |   |      | $ | 5,877    |  
|Adjustments to reconcile net income to net cash used in operating activities:                                                           |  |      |          |   |      |   |          |  
|Depreciation and amortization                                                                                                           |  |      | 957      |   |      |   | 566      |  
|Provision for loan losses                                                                                                               |  |      | 1,161    |   |      |   | 838      |  
|Net amortization of premiums on investment securities                                                                                   |  |      | 724      |   |      |   | 81       |  
|Amortization of affordable housing investment                                                                                           |  |      | 229      |   |      |   | 140      |  
|Amortization of core deposit intangibles                                                                                                |  |      | 199      |   |      |   |         |  
|Amortization of deferred compensation - restricted stock                                                                                |  |      | 121      |   |      |   |         |  
|Net change in deferred loan origination costs and fees, discount on unguaranteed portion of loans retained, and allowance for loan
loss |  |      | 102      |   |      |   | 668      |  
|Gain on sale of loans                                                                                                                   |  |      | (5,093   | ) |      |   | (3,944   | )
|(Gain) loss on sale of other repossessed assets                                                                                         |  |      | (157     | ) |      |   | 160      |  
|Deferred income tax benefit                                                                                                             |  |      | (955     | ) |      |   |         |  
|Capitalization of interest-only strips                                                                                                  |  |      | (681     | ) |      |   | (762     | )
|Amortization of interest-only strips                                                                                                    |  |      | 78       |   |      |   | 99       |  
|Change in unrealized loss on interest-only strips                                                                                       |  |      | 166      |   |      |   | 74       |  
|Capitalization of servicing asset                                                                                                       |  |      | (934     | ) |      |   | (759     | )
|Amortization of servicing asset                                                                                                         |  |      | 420      |   |      |   | 318      |  
|Change in valuation allowance for servicing asset                                                                                       |  |      | 19       |   |      |   | (10      | )
|Loss on disposal of premises and equipment                                                                                              |  |      | 38       |   |      |   |         |  
|Unrealized gain on interest rate swap agreement                                                                                         |  |      | 15       |   |      |   | 137      |  
|Unrealized hedging loss on long term debt                                                                                               |  |      | (15      | ) |      |   | (137     | )
|Origination of loans held for sale                                                                                                      |  |      | (115,747 | ) |      |   | (96,654  | )
|Proceeds from sale of loans held for sale                                                                                               |  |      | 78,670   |   |      |   | 57,636   |  
|Increase in income tax receivable                                                                                                       |  |      | (98      | ) |      |   | (681     | )
|(Decrease) increase in income tax payable                                                                                               |  |      | (319     | ) |      |   | 186      |  
|(Decrease) increase in accrued interest and other assets                                                                                |  |      | (1,960   | ) |      |   | 1,842    |  
|Increase (decrease) in accrued expenses and other liabilities                                                                           |  |      | 1,201    |   |      |   | (1,878   | )
|                                                                                                                                        |  |      |          |   |      |   |          |  
|Net cash used in operating activities                                                                                                   |  |      | (33,105  | ) |      |   | (36,203  | )
|                                                                                                                                        |  |      |          |   |      |   |          |  
|Cash flows from investing activities:                                                                                                   |  |      |          |   |      |   |          |  
|Origination of loans held for investment                                                                                                |  |      | (263,896 | ) |      |   | (216,366 | )
|Proceeds from principal paid on loans held for investment                                                                               |  |      | 191,275  |   |      |   | 203,502  |  
|Net change in interest bearing deposits in financial institutions                                                                       |  |      | 1,108    |   |      |   | 582      |  
|Purchases of investments held-to-maturity                                                                                               |  |      | (4,091   | ) |      |   |         |  
|Maturities of investments held-to-maturity                                                                                              |  |      | 1,273    |   |      |   | 3,190    |  
|Purchases of available-for-sale investments                                                                                             |  |      | (19,913  | ) |      |   |         |  
|Maturities of available-for-sale investments                                                                                            |  |      | 7,027    |   |      |   | 3,344    |  
|Purchases of Federal Reserve & Federal Home Loan Bank stocks                                                                            |  |      | (1,300   | ) |      |   | (789     | )
|Cash paid for acquisitions                                                                                                              |  |      | (14,527  | ) |      |   |         |  
|Cash and cash equivalents obtained from acquisitions                                                                                    |  |      | 40,524   |   |      |   |         |  
|Other repossessed assets acquired in foreclosure                                                                                        |  |      |         |   |      |   | (31      | )
|Paydown of debt acquired on other repossessed assets                                                                                    |  |      | (729     | ) |      |   |          |  
|Proceeds from sale of other real estate owned and repossessed assets                                                                    |  |      | 1,788    |   |      |   | 290      |  
|Increase in affordable housing investments                                                                                              |  |      | (122     | ) |      |   | (282     | )
|Purchases of premises and equipment                                                                                                     |  |      | (1,089   | ) |      |   | (865     | )
|Net decrease (increase) in Federal funds sold                                                                                           |  |      | 6,475    |   |      |   | (13,245  | )
|                                                                                                                                        |  |      |          |   |      |   |          |  
|Net cash used in investing activities                                                                                                   |  |      | (56,197  | ) |      |   | (20,670  | )
|                                                                                                                                        |  |      |          |   |      |   |          |  

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



5



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##### Table of Contents

COMMUNITY BANCORP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)(unaudited)



|                                                                                                                                                 |  |      |          |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -------- | - | ---- | - | ------ | -
|For the nine months ended September 30,                                                                                                          |  | 2005 |          |   | 2004 |  
|Cash flows from financing activities:                                                                                                            |  |      |          |   |      |   |        |  
|Net increase in deposits:                                                                                                                        |  |      |          |   |      |   |        |  
|Interest bearing                                                                                                                                 |  | $    | 44,882   |   |      | $ | 39,258 |  
|Non-interest bearing                                                                                                                             |  |      | 27,186   |   |      |   | 21,726 |  
|Proceeds from exercise of stock options                                                                                                          |  |      | 887      |   |      |   | 482    |  
|Cash dividends paid                                                                                                                              |  |      | (1,645   | ) |      |   | (659   | )
|Increase in obligation to affordable housing investment                                                                                          |  |      |         |   |      |   | 1,288  |  
|Issuance of trust preferred securities                                                                                                           |  |      | 20,000   |   |      |   |       |  
|Net change in short term borrowings                                                                                                              |  |      | 2,000    |   |      |   | (5,000 | )
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Net cash provided by financing activities                                                                                                        |  |      | 93,310   |   |      |   | 57,095 |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Net increase in cash and cash equivalents                                                                                                        |  |      | 4,008    |   |      |   | 222    |  
|Cash and cash equivalents at beginning of period                                                                                                 |  |      | 14,842   |   |      |   | 17,940 |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Cash and cash equivalents at end of period                                                                                                       |  | $    | 18,850   |   |      | $ | 18,162 |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Supplemental disclosure of cash flow information:                                                                                                |  |      |          |   |      |   |        |  
|Cash paid during the period for:                                                                                                                 |  |      |          |   |      |   |        |  
|Interest on time deposits                                                                                                                        |  | $    | 6,075    |   |      | $ | 3,038  |  
|Interest on other borrowings                                                                                                                     |  |      | 1,881    |   |      |   | 793    |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Total interest paid                                                                                                                              |  | $    | 7,956    |   |      | $ | 3,831  |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Income taxes                                                                                                                                     |  | $    | 5,524    |   |      | $ | 4,055  |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Supplemental disclosure of non-cash investing activities:                                                                                        |  |      |          |   |      |   |        |  
|Loans transferred to repossessed assets                                                                                                          |  | $    |         |   |      | $ | 39     |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Debt acquired on other repossessed assets                                                                                                        |  | $    | 729      |   |      | $ |       |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Other repossessed assets acquired in foreclosure                                                                                                 |  | $    | 1,699    |   |      | $ |       |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Loans held for sale transferred to held for investment                                                                                           |  | $    |         |   |      | $ | 689    |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Loans held for investment transferred to held for sale                                                                                           |  | $    |         |   |      | $ | 1,314  |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Tax benefit for options exercised                                                                                                                |  | $    | 241      |   |      | $ |       |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Assets acquired from acquisitions                                                                                                                |  | $    | (125,175 | ) |      | $ |       |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Liabilities acquired from acquisitions                                                                                                           |  | $    | 116,015  |   |      | $ |       |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  
|Supplemental disclosure of non-cash financing activities:                                                                                        |  |      |          |   |      |   |        |  
|Change in unrealized loss on available-for sale securities, net of income tax benefit of $(203) and $(43) recorded in other comprehensive
income |  | $    | (246     | ) |      | $ | 63     |  
|                                                                                                                                                 |  |      |          |   |      |   |        |  



See
accompanying notes to consolidated financial statements.



6



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##### Table of Contents

COMMUNITY BANCORP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

(unaudited)



Note 1 Basis of Presentation:



The interim financial statements included herein have been prepared by Community Bancorp Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC). The interim financial statements include the accounts of Community Bancorp Inc. and its wholly owned subsidiary Community National Bank (the Bank), (collectively, the
Company) as consolidated with the elimination of all intercompany transactions. We also have three unconsolidated subsidiaries, Community (CA) Capital Trust I (Trust I), Community (CA) Capital Statutory Trust II (Trust
II) and Community (CA) Capital Statutory Trust III (Trust III). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such SEC rules and regulations. Nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements
should be read in conjunction with the audited financial statements and notes thereto included in the Companys latest Annual Report as found on Form 10-K. In the opinion of management, all adjustments, including normal recurring adjustments
necessary to present fairly the financial position of the Company with respect to the interim financial statements and the results of its operations for the interim period ended September 30, 2005, have been included. Certain reclassifications
may have been made to prior year amounts to conform to the 2005 presentation. The results of operations for interim periods are not necessarily indicative of results for the full year.



The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the end of the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the valuation of loan servicing rights, interest only strips and the allowance for estimated loan losses



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



Note 2
Merger-related Activity:



Cuyamaca Bank, N.A.
Merger - Pursuant to the Agreement and Plan of Merger, dated June 28, 2004, by and between the Company and Cuyamaca Bank, N.A. (the Merger Agreement), the Company acquired all the assets and assumed the liabilities of Cuyamaca Bank, N.A.
Cuyamacas results of operations were included in the Companys results beginning October 1, 2004.



Under the terms of the Merger Agreement, shareholders of Cuyamaca Bank common stock had the choice to receive cash, shares of Community or a combination
of the two. The transaction was valued at $26.6 million, or $25.56 per share, including the fair value of options outstanding (the exchange ratio for stock consideration was 1.0439 shares of Community common stock for each Cuyamaca share). The total
consideration was paid in 678,939 shares of CMBC stock and $7.4 million in cash, in accordance with the provisions of the Merger Agreement. Cuyamaca Bank operated banking offices in the east San Diego County cities of Santee, El Cajon and La Mesa
and in the north San Diego County city of Encinitas. All of the banking offices of Cuyamaca are being operated by Community National Bank.



7



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##### Table of Contents

The Merger was accounted for under the purchase method of accounting. 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 $890,000 related to the tax effects of the Core
Deposit Intangibles during the nine months ended September 30, 2005.



|                                                                                        |  |   |         |  |   |        |  
|--------------------------------------------------------------------------------------- |  | - | ------- |  | - | ------ | -
|(dollars in thousands, except per share data)                                           |  |   |         |  |  
|Purchase price                                                                          |  |   |         |  |   |        |  
|Cuyamaca Bank, N.A. common stock exchanged                                              |  |   | 650,387 |  |   |        |  
|Exchange ratio                                                                          |  |   | 1.0439  |  |   |        |  
|                                                                                        |  |   |         |  |   |        |  
|Total shares of the Companys common stock exchanged                                    |  |   | 678,939 |  |   |        |  
|Fair value per share of the Companys common stock (1)                                  |  | $ | 25.56   |  |   |        |  
|                                                                                        |  |   |         |  |   |        |  
|Total value of the Companys common stock exchanged                                     |  |   |         |  | $ | 17,352 |  
|Cash paid for Cuyamaca Bank, N. A common stock                                          |  |   |         |  |   | 7,445  |  
|Direct acquisition costs                                                                |  |   |         |  |   | 1,823  |  
|                                                                                        |  |   |         |  |   |        |  
|Total purchase price                                                                    |  |   |         |  | $ | 26,620 |  
|                                                                                        |  |   |         |  |   |        |  
|Allocation of the purchase price                                                        |  |   |         |  |   |        |  
|Cuyamaca Bank, N.A. stockholders equity                                                |  |   |         |  | $ | 9,108  |  
|Estimated adjustments to reflect assets acquired and liabilities assumed at fair value: |  |   |         |  |   |        |  
|Investments                                                                             |  |   |         |  |   | 2      |  
|Loans                                                                                   |  |   |         |  |   | (919   | )
|Premises and equipment                                                                  |  |   |         |  |   | 61     |  
|Other assets and deferred income tax                                                    |  |   |         |  |   | (158   | )
|Deposits                                                                                |  |   |         |  |   | (126   | )
|Other liabilities                                                                       |  |   |         |  |   | 284    |  
|                                                                                        |  |   |         |  |   |        |  
|Estimated fair value of net assets acquired                                             |  |   |         |  |   | 8,252  |  
|                                                                                        |  |   |         |  |   |        |  
|Estimated gross goodwill resulting from the Merger (2)                                  |  |   |         |  | $ | 18,368 |  
|                                                                                        |  |   |         |  |   |        |  



|(1) | The value of the shares of common stock exchanged with Cuyamaca Bank, N.A. stockholders was based upon the 20 day average closing price of the Company shares ending on
September 24, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes $2.3 million allocated to core deposit intangibles. (See Footnote 6).
|--- | ------------------------------------------------------------------------------



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 beginning August 19, 2005.



Under the terms of the
Agreement, shareholders of Rancho Bernardo Community Bank common stock had the choice to receive cash, shares of Community or a combination of the two. The transaction was valued at $36.1 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 CMBC 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 being operated by Community National Bank.



The Merger was accounted for under the purchase method of accounting.
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 allocation of the purchase price will be modified over the next eleven
months, as more information is obtained about the fair value of assets acquired and liabilities assumed.



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|                                                                                        |  |   |         |  |   |        |  
|--------------------------------------------------------------------------------------- |  | - | ------- |  | - | ------ | -
|(dollars in thousands, except per share data)                                           |  |   |         |  |  
|Purchase price                                                                          |  |   |         |  |   |        |  
|Rancho Bernardo Community Bank, N.A. common stock exchanged                             |  |   | 673,257 |  |   |        |  
|Exchange ratio                                                                          |  |   | 0.9490  |  |   |        |  
|                                                                                        |  |   |         |  |   |        |  
|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                                    |  |   |         |  |   | 13,312 |  
|Fair value of outstanding stock options and direct acquisition costs                    |  |   |         |  |   | 1,600  |  
|                                                                                        |  |   |         |  |   |        |  
|Total purchase price                                                                    |  |   |         |  | $ | 36,092 |  
|                                                                                        |  |   |         |  |   |        |  
|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: |  |   |         |  |   |        |  
|Other assets and deferred income tax                                                    |  |   |         |  |   | (1,077 | )
|                                                                                        |  |   |         |  |   |        |  
|Estimated fair value of net assets acquired                                             |  |   |         |  |   | 8,970  |  
|                                                                                        |  |   |         |  |   |        |  
|Estimated gross goodwill resulting from the Merger (2)                                  |  |   |         |  | $ | 27,122 |  
|                                                                                        |  |   |         |  |   |        |  



|(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).
|--- | ------------------------------------------------------------------------------



Unaudited Pro Forma Condensed Combined Financial Information



The following unaudited pro forma condensed combined financial information presents the results of operations of the Company had both mergers taken place
at January 1, 2004.



Unaudited Pro Forma Condensed Combined Financial
Information



|                                                          |  |                                      |           |                                     |   |          
|--------------------------------------------------------- |  | ------------------------------------ | --------- | ----------------------------------- | - | ---------
|                                                          |  | Three months endedSeptember 30, 2004 |           | Nine months endedSeptember 30, 2004
|(dollars in thousands, except per share amounts)          |  |                                      |           |                                    
|Net interest income                                       |  | $                                    | 9,110     |                                     | $ | 26,313   
|Other operating income                                    |  |                                      | 3,011     |                                     |   | 8,232    
|Provision for loan losses                                 |  |                                      | 621       |                                     |   | 1,259    
|Other operating expense                                   |  |                                      | 7,734     |                                     |   | 21,663   
|                                                          |  |                                      |           |                                     |   |          
|Income before income tax provision                        |  |                                      | 3,766     |                                     |   | 11,623   
|Income tax provision                                      |  |                                      | 1,498     |                                     |   | 4,490    
|                                                          |  |                                      |           |                                     |   |          
|Net income                                                |  | $                                    | 2,268     |                                     | $ | 7,133    
|                                                          |  |                                      |           |                                     |   |          
|Earnings per share:                                       |  |                                      |           |                                     |   |          
|Basic                                                     |  | $                                    | 0.40      |                                     | $ | 1.25     
|                                                          |  |                                      |           |                                     |   |          
|Fully diluted                                             |  | $                                    | 0.38      |                                     | $ | 1.19     
|                                                          |  |                                      |           |                                     |   |          
|Average shares outstanding for basic earnings per share   |  |                                      | 5,720,465 |                                     |   | 5,703,425
|Average shares outstanding for diluted earnings per share |  |                                      | 6,023,406 |                                     |   | 6,002,957



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The following unaudited pro forma condensed combined financial information presents the results of operations of the
Company had the Rancho Bernardo Merger taken place at January 1, 2005.



|                                                          |  |                                      |           |                                     |   |          
|--------------------------------------------------------- |  | ------------------------------------ | --------- | ----------------------------------- | - | ---------
|                                                          |  | Three months endedSeptember 30, 2005 |           | Nine months endedSeptember 30, 2005
|(dollars in thousands, except per share amounts)          |  |                                      |           |                                    
|Net interest income                                       |  | $                                    | 11,923    |                                     | $ | 32,690   
|Other operating income                                    |  |                                      | 2,529     |                                     |   | 7,996    
|Provision for loan losses                                 |  |                                      | 529       |                                     |   | 1,458    
|Other operating expense                                   |  |                                      | 8,033     |                                     |   | 23,408   
|                                                          |  |                                      |           |                                     |   |          
|Income before income tax provision                        |  |                                      | 5,890     |                                     |   | 15,820   
|Income tax provision                                      |  |                                      | 2,368     |                                     |   | 6,328    
|                                                          |  |                                      |           |                                     |   |          
|Net income                                                |  | $                                    | 3,522     |                                     | $ | 9,492    
|                                                          |  |                                      |           |                                     |   |          
|Earnings per share:                                       |  |                                      |           |                                     |   |          
|Basic                                                     |  | $                                    | 0.60      |                                     | $ | 1.61     
|                                                          |  |                                      |           |                                     |   |          
|Fully diluted                                             |  | $                                    | 0.57      |                                     | $ | 1.53     
|                                                          |  |                                      |           |                                     |   |          
|Average shares outstanding for basic earnings per share   |  |                                      | 5,922,835 |                                     |   | 5,896,783
|Average shares outstanding for diluted earnings per share |  |                                      | 6,227,959 |                                     |   | 6,207,278



Note 3 Stock Option Plans



At September 30, 2005, the Company had three stock
option plans which are described more fully in Note 14 in the Companys 2004 Annual Report on Form 10-K as well as the 2005 Equity Based Compensation Plan. On May 25, 2005, the shareholders of the Company approved the Community
Bancorp Inc. 2005 Equity Based Compensation Plan, which authorized 316,554 stock options to become available for grant and reduced the 2003 Plan options available by the same amount. The Company accounts for stock options using the intrinsic value
method under the provisions of Accounting Principles Board (APB) Opinion No. 25 and provides proforma net income and proforma earnings per share disclosures for employee stock option grants as if the fair-value-based method, defined
in Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, had been applied. Had the Company determined compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Companys net income would have been reduced to the pro forma amounts indicated below for the three months and nine months ended September 30:



|                                                                                                                                                |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ----- | - | --------------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                                                                |  | For the three months ended September 30, |       |   | For the nine months ended September 30, |  
|                                                                                                                                                |  | 2005                                     |       |   | 2004                                    |   |       | 2005 |  |   | 2004  |  
|(dollars in thousands, except per share amounts)                                                                                                |  |                                          |       |   |                                         |   |       |      |  |   |       |  
|Net income, as reported                                                                                                                         |  | $                                        | 3,384 |   |                                         | $ | 2,030 |      |  | $ | 8,754 |   |  | $ | 5,877 |  
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax
effects |  |                                          | (119  | ) |                                         |   | (65   | )    |  |   | (321  | ) |  |   | (181  | )
|                                                                                                                                                |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Proforma net income                                                                                                                             |  | $                                        | 3,265 |   |                                         | $ | 1,965 |      |  | $ | 8,433 |   |  | $ | 5,696 |  
|                                                                                                                                                |  |                                          |       |   |                                         |   |       |      |  |   |       |   |  |   |       |  
|Basic income per share, as reported                                                                                                             |  | $                                        | 0.61  |   |                                         | $ | 0.46  |      |  | $ | 1.63  |   |  | $ | 1.34  |  
|Proforma basic income per share                                                                                                                 |  | $                                        | 0.59  |   |                                         | $ | 0.45  |      |  | $ | 1.57  |   |  | $ | 1.30  |  
|Diluted income per share, as reported                                                                                                           |  | $                                        | 0.58  |   |                                         | $ | 0.43  |      |  | $ | 1.54  |   |  | $ | 1.25  |  
|Proforma diluted income per share                                                                                                               |  | $                                        | 0.56  |   |                                         | $ | 0.42  |      |  | $ | 1.49  |   |  | $ | 1.22  |  



The per share weighted
average fair value of stock options granted under the plans during the three months ended September 30, 2005 was $6.01 compared to $10.42 for the three months ended September 30, 2004. The fair value of the options were estimated at grant
date using a Black-Scholes single option pricing model with the following weighted average assumptions: Three months ended September 30, 2005 - expected dividend yield of 1.32%, a weighted average risk free interest rate of 4.08%, an expected
life of 3.3 years and a volatility of 29.07%;



10



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##### Table of Contents

Three months ended September 30, 2004expected dividend yield of 0.90%, a weighted average risk free interest rate of 3.41%, an expected life of
5.0 years and a volatility of 46.09%.



The per share weighted
average fair value of stock options granted under the plans during the nine months ended September 30, 2005 was $7.68 compared to $9.92 for the nine months ended September 30, 2004. The fair value of the options were estimated at grant
date using a Black-Scholes single option pricing model with the following weighted average assumptions: Nine months ended September 30, 2005 - expected dividend yield of 1.37%, a weighted average risk free interest rate of 4.09%, an expected
life of 3.8 years and a volatility of 33.38%; Nine months ended September 30, 2004 - expected dividend yield of 0.97%, a weighted average risk free interest rate of 3.40%, an expected life of 5.0 years and a volatility of 46.68%.



Note 4 Loans and Related Allowance for Loan Losses:



A summary of loans is as follows:



|                                       |  |                        |         |   |                         |   |         |            |  |   |                    |   |  |                         |         |   |             |   |         |   |  |   |         |  
|-------------------------------------- |  | ---------------------- | ------- | - | ----------------------- | - | ------- | ---------- |  | - | ------------------ | - |  | ----------------------- | ------- | - | ----------- | - | ------- | - |  | - | ------- | -
|                                       |  | September 30, 2005     |         |   | December 31, 2004       |  
|                                       |  | Loans Heldfor Sale     |         |   | Loans HeldforInvestment |   |         | TotalLoans |  |   | Loans Heldfor Sale |   |  | Loans HeldforInvestment |         |   | Total Loans |  
|                                       |  | (dollars in thousands) |        
|Construction loans                     |  | $                      |        |   |                         | $ | 121,080 |            |  | $ | 121,080            |   |  | $                       |        |   |             | $ | 75,200  |   |  | $ | 75,200  |  
|Real estate one- to four-family        |  |                        |        |   |                         |   | 16,961  |            |  |   | 16,961             |   |  |                         |        |   |             |   | 8,690   |   |  |   | 8,690   |  
|Real estate commercial                 |  |                        | 143,689 |   |                         |   | 351,597 |            |  |   | 495,286            |   |  |                         | 101,385 |   |             |   | 276,724 |   |  |   | 378,109 |  
|Consumer home equity lines of credit   |  |                        |        |   |                         |   | 11,538  |            |  |   | 11,538             |   |  |                         |        |   |             |   | 8,027   |   |  |   | 8,027   |  
|Other consumer                         |  |                        |        |   |                         |   | 10,151  |            |  |   | 10,151             |   |  |                         |        |   |             |   | 9,473   |   |  |   | 9,473   |  
|Commercial                             |  |                        |        |   |                         |   | 51,744  |            |  |   | 51,744             |   |  |                         |        |   |             |   | 35,213  |   |  |   | 35,213  |  
|Aircraft                               |  |                        |        |   |                         |   | 31,181  |            |  |   | 31,181             |   |  |                         |        |   |             |   | 28,819  |   |  |   | 28,819  |  
|                                       |  |                        |         |   |                         |   |         |            |  |   |                    |   |  |                         |         |   |             |   |         |   |  |   |         |  
|Total gross loans                      |  |                        | 143,689 |   |                         |   | 594,252 |            |  |   | 737,941            |   |  |                         | 101,385 |   |             |   | 442,146 |   |  |   | 543,531 |  
|Deferred loan origination costs (fees) |  |                        | 412     |   |                         |   | (2,036  | )          |  |   | (1,624             | ) |  |                         | 447     |   |             |   | (2,052  | ) |  |   | (1,605  | )
|Discount on unguaranteed portion of    |  |                        |         |   |                         |   |         |            |  |   |                    |   |  |                         |         |   |             |   |         |   |  |   |         |  
|SBA loans retained                     |  |                        | (334    | ) |                         |   | (2,320  | )          |  |   | (2,654             | ) |  |                         | (244    | ) |             |   | (2,162  | ) |  |   | (2,406  | )
|Allowance for loan losses              |  |                        |        |   |                         |   | (10,124 | )          |  |   | (10,124            | ) |  |                         |        |   |             |   | (7,508  | ) |  |   | (7,508  | )
|                                       |  |                        |         |   |                         |   |         |            |  |   |                    |   |  |                         |         |   |             |   |         |   |  |   |         |  
|Net loans                              |  | $                      | 143,767 |   |                         | $ | 579,772 |            |  | $ | 723,539            |   |  | $                       | 101,588 |   |             | $ | 430,424 |   |  | $ | 532,012 |  
|                                       |  |                        |         |   |                         |   |         |            |  |   |                    |   |  |                         |         |   |             |   |         |   |  |   |         |  



The Companys
lending activities are concentrated primarily in 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.



Note 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 70% to 85% of each loan. The Company sells a portion of the SBA 7a loans originated. On loans sold, the
Company allocates the carrying value of such loans between the portion sold and the portion retained, based upon estimates of their relative fair value at the time of sale. The difference between the adjusted carrying value and the face amount of
the portion retained is amortized to interest income over the life of the related loans using the interest method.



In accordance with FAS 140, the Company recognizes a servicing asset or liability at the time a loan is sold and the Company retains the servicing, based
on the present value of the estimated future cash flows. The servicing asset



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is amortized proportionately over the period based on the ratio of net servicing income received in the current period to total net servicing income
projected to be realized from the servicing rights. Projected net servicing income is determined on the basis of the estimated future balance of the underlying loan portfolio, which decreases over time from scheduled loan amortization and
prepayments. The Company estimates future prepayment rates based on relevant characteristics of the servicing portfolio, such as loan types, original terms to maturity and historical prepayment speeds, as well as current interest rate levels, market
forecasts and other economic conditions.



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. Changes in the valuation of the servicing asset were not material during the three months and nine months ended September 30, 2005 and 2004. In estimating fair values at September 30, 2005, the Company utilized a weighted
average prepayment assumption of approximately 8.85% and a discount rate of 10.75%. In estimating fair values at December 31, 2004, the Company utilized a weighted average prepayment assumption of approximately 8.53% and a discount rate of
10.00%.



Rights to future servicing income from serviced loans
that exceed contractually specified servicing fees are classified as interest-only strips. The interest-only strips are recorded at fair value with any unrealized gains or losses recorded in earnings in the period of change of fair value. Unrealized
gains or losses on interest-only strips were not material during the three months and nine months ended September 30, 2005 and 2004. At September 30, 2005, the fair value of interest-only strips was estimated using a weighted average
prepayment assumption of approximately 8.85% and a discount rate of 10.75%. At December 31, 2004, the fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 8.53% and a discount rate of
10.00%.



Note 6 Goodwill and Other Intangibles



The gross carrying value and accumulated amortization related to core
deposit intangibles at September 30, 2005 are presented below:



|                         |  |                        |       |                         |   |    
|------------------------ |  | ---------------------- | ----- | ----------------------- | - | ---
|                         |  | September 30, 2005    
|                         |  | Gross CarryingValue    |       | AccumulatedAmortization
|                         |  | (dollars in thousands)
|Core deposit intangibles |  | $                      | 4,846 |                         | $ | 243
|                         |  |                        |       |                         |   |    
|Total                    |  | $                      | 4,846 |                         | $ | 243
|                         |  |                        |       |                         |   |    



As a result of the
Cuyamaca merger, the Company recorded $2.3 million of core deposit intangibles. As of September 30, 2005, the amortization period for the Cuyamaca core deposit intangibles was approximately 8.5 years. As a result of the Rancho Bernardo merger,
the Company recorded $2.6 million of core deposit intangibles. As of September 30, 2005, the amortization period for the Rancho Bernardo core deposit intangibles was approximately 7.8 years. Amortization expense on core deposit intangibles was
$66,000 and $199,000 for the three months and nine months ended September 30, 2005, respectively. The Company estimates that the annual amortization expense will be $375,000 for 2005 and $595,000 for 2006, 2007, 2008 and 2009.



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Note 7 Income Taxes:



The components of income tax provision (benefit) for the three months and nine months ended September 30, 2005 and September 30, 2004 are as
follows:



|          |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|--------- |  | --------------------------------------- | ----- | -------------------------------------- | ---- | - | ----- |  | - | ------ | - |  | - | -----
|          |  | For the three monthsended September 30, |       | For the nine monthsended September 30,
|          |  | 2005                                    |       |                                        | 2004 |   | 2005  |  |   | 2004  
|          |  | (dollars inthousands)                   |       | (dollars inthousands)                 
|Current:  |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|Federal   |  | $                                       | 1,856 |                                        |      | $ | 1,060 |  | $ | 5,067  |   |  | $ | 3,026
|State     |  |                                         | 634   |                                        |      |   | 196   |  |   | 1,753  |   |  |   | 547  
|          |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|          |  |                                         | 2,490 |                                        |      |   | 1,256 |  |   | 6,820  |   |  |   | 3,573
|          |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|Deferred: |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|Federal   |  |                                         | (528  | )                                      |      |   |      |  |   | (792   | ) |  |   |     
|State     |  |                                         | 316   |                                        |      |   |      |  |   | (208   | ) |  |   |     
|          |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|          |  |                                         | (212  | )                                      |      |   |      |  |   | (1,000 | ) |  |   |     
|          |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      
|          |  | $                                       | 2,278 |                                        |      | $ | 1,256 |  | $ | 5,820  |   |  | $ | 3,573
|          |  |                                         |       |                                        |      |   |       |  |   |        |   |  |   |      



A reconciliation of
the difference between the expected federal statutory income tax provision (benefit) and the actual income tax provision (benefit) for the three months and nine months ended September 30, 2005 and 2004 is shown in the following table:



|                                                      |  |                                         |       |   |                                        |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------------------------- |  | --------------------------------------- | ----- | - | -------------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                      |  | For the three monthsended September 30, |       |   | For the nine monthsended September 30, |  
|                                                      |  | 2005                                    |       |   | 2004                                   |   |       | 2005 |  |   | 2004  |  
|                                                      |  | (dollars in thousands)                  |       |   | (dollars in thousands)                 |  
|Computed expected federal income taxes              |  | $                                       | 2,072 |   |                                        | $ | 1,117 |      |  | $ | 5,101 |   |  | $ | 3,213 |  
|State income taxes, net of federal income tax benefit |  |                                         | 400   |   |                                        |   | 232   |      |  |   | 1,027 |   |  |   | 666   |  
|Affordable housing investment tax credits             |  |                                         | (90   | ) |                                        |   | (108  | )    |  |   | (269  | ) |  |   | (323  | )
|Other, net                                            |  |                                         | (104  | ) |                                        |   | 15    |      |  |   | (39   | ) |  |   | 17    |  
|                                                      |  |                                         |       |   |                                        |   |       |      |  |   |       |   |  |   |       |  
|                                                      |  | $                                       | 2,278 |   |                                        | $ | 1,256 |      |  | $ | 5,820 |   |  | $ | 3,573 |  
|                                                      |  |                                         |       |   |                                        |   |       |      |  |   |       |   |  |   |       |  



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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities as of September 30, 2005 and December 31, 2004 are as follows:



|                                                                      |  |                        |        |   |                     |   |       |  
|--------------------------------------------------------------------- |  | ---------------------- | ------ | - | ------------------- | - | ----- | -
|                                                                      |  | At September 30,2005   |        |   | At December 31,2004 |  
|                                                                      |  | (dollars in thousands) |       
|Deferred tax assets:                                                  |  |                        |        |   |                     |   |       |  
|Loan loss allowance, due to differences in computation of bad debts   |  | $                      | 3,443  |   |                     | $ | 2,825 |  
|Unrealized gains on loans held for sale                               |  |                        | 1,816  |   |                     |   | 1,666 |  
|State income taxes                                                    |  |                        | 789    |   |                     |   | 562   |  
|Fair value adjustments on acquired assets and liabilities             |  |                        | 816    |   |                     |   | 312   |  
|Deferred loan costs                                                   |  |                        | 327    |   |                     |   | 424   |  
|Unrealized loss on available for sale securities                      |  |                        | 270    |   |                     |   | 66    |  
|Non-accrual interest recognized as income for taxes but not for books |  |                        | 93     |   |                     |   | 120   |  
|Accrued compensation expenses                                         |  |                        | 222    |   |                     |   | 287   |  
|Deferred rent                                                         |  |                        | 143    |   |                     |   | 104   |  
|Depreciable assets - state                                            |  |                        | 15     |   |                     |   |      |  
|Writedown of OREO and REO                                             |  |                        | 10     |   |                     |   |      |  
|                                                                      |  |                        |        |   |                     |   |       |  
|                                                                      |  |                        | 7,944  |   |                     |   | 6,366 |  
|                                                                      |  |                        |        |   |                     |   |       |  
|Deferred tax liabilities:                                             |  |                        |        |   |                     |   |       |  
|Depreciable assets - federal                                          |  |                        | (146   | ) |                     |   | (291  | )
|Depreciable assets - state                                            |  |                        |       |   |                     |   | (16   | )
|Core deposit intangibles                                              |  |                        | (1,917 | ) |                     |   |      |  
|Other liabilities                                                     |  |                        | (271   | ) |                     |   | (131  | )
|                                                                      |  |                        |        |   |                     |   |       |  
|                                                                      |  |                        | (2,334 | ) |                     |   | (438  | )
|                                                                      |  |                        |        |   |                     |   |       |  
|Deferred tax asset, net                                               |  | $                      | 5,610  |   |                     | $ | 5,928 |  
|                                                                      |  |                        |        |   |                     |   |       |  



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 it is more likely than not that the Company will realize the benefits of these deductible
differences.



As of September 30, 2005 income taxes
receivable totaled approximately $674,000. As of December 31, 2004 income taxes payable totaled approximately $319,000 and is included in accrued expenses and other liabilities.



Note 8 Commitments and Contingencies:



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



Commitments to extend credit amounting to $19.2 million and $13.9 million
were outstanding at September 30, 2005 and December 31, 2004, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements.



The Company has undisbursed portions of
construction loans totaling $174.6 million and $147.0 million as of September 30, 2005 and December 31, 2004, respectively. These commitments are agreements to lend to a



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customer, subject to meeting certain construction progress requirements. The underlying construction loans have fixed expiration dates.



Standby letters of credit and financial guarantees amounting to $3.2 million
and $2.1 million were outstanding at September 30, 2005 and December 31, 2004, 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.



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.



As of September 30, 2005 and December 31, 2004, the Company had non-mandatory commitments to sell loans of $6.4 million and $2.1 million,
respectively.



In December 2002, the Company entered into an
interest rate swap agreement with a third party. The terms of the agreement include, amongst other things, a collateral requirement which would offset any credit risk between the Company and the third party. The collateral requirement is the greater
of the mark-to-market value of the interest rate swap agreement or $945,000. As of September 30, 2005, the collateral requirement was $1.0 million. As of September 30, 2005 and December 31, 2004, the Company pledged one agency
mortgage backed security classified as available for sale as collateral with a market value of $1.1 million and $1.4 million, respectively. The unrealized gain on the interest rate swap was $135,000 and $150,000 as of September 30, 2005 and
December 31, 2004, respectively. The unrealized gains or losses on the interest rate swap are recorded as other assets or liabilities with the corresponding change in the amount of liability for the trust preferred securities. The change in
unrealized gains or losses on the interest rate swap is offset by the corresponding changes in the unrealized gains or losses on the long term debt (from the trust preferred securities) in the accompanying consolidated income statements.



Because of the nature of its activities, the Company is from time to time
subject to pending and threatened legal actions which arise out of the normal course of its business. In the opinion of management, the ultimate disposition of these matters is not expected to 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 liabilities arising out of their relationships. The duration of these indemnities and guarantees varies, and in certain cases, is indefinite.
The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments for
these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated balance sheets.



In connection with the $35.0 million in outstanding long-term debt securities reflecting the issuance of trust preferred securities, the Company issued
guarantees providing for the limited guarantee of certain payments.



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Note 9 Earnings per share



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



|                                            |  |                                                          |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  
|------------------------------------------- |  | -------------------------------------------------------- | ----- | ------------------- | ----- | ---------------- | - | ----- | ----------------- |  | ------------------- | ----- | ---------------- | ----- |  | - | ----- | -
|                                            |  | For the three months ended September 30,                 |      
|                                            |  | 2005                                                     |       |                     | 2004  |                 
|                                            |  | Income(numerator)                                        |       | Shares(denominator) |       | Per ShareAmounts |   |       | Income(numerator) |  | Shares(denominator) |       | Per ShareAmounts |      
|                                            |  | (dollars and shares in thousands, except per share data) |      
|Basic EPS                                   |  |                                                          |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  
|Net income available to common shareholders |  | $                                                        | 3,384 |                     | 5,576 |                  | $ | 0.61  |                   |  | $                   | 2,030 |                  | 4,403 |  | $ | 0.46  |  
|Effect of dilutive stock options            |  |                                                          |      |                     | 305   |                  |   | (0.03 | )                 |  |                     |      |                  | 303   |  |   | (0.03 | )
|                                            |  |                                                          |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  
|Diluted EPS                                 |  | $                                                        | 3,384 |                     | 5,881 |                  | $ | 0.58  |                   |  | $                   | 2,030 |                  | 4,706 |  | $ | 0.43  |  
|                                            |  |                                                          |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  
|                                            | 
|                                            |  | For the nine months ended September 30,                  |      
|                                            |  | 2005                                                     |       |                     | 2004  |                 
|                                            |  | Income(numerator)                                        |       | Shares(denominator) |       | Per ShareAmounts |   |       | Income(numerator) |  | Shares(denominator) |       | Per ShareAmounts |      
|                                            |  | (dollars and shares in thousands, except per share data) |      
|Basic EPS                                   |  |                                                          |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  
|Net income available to common shareholders |  | $                                                        | 8,754 |                     | 5,359 |                  | $ | 1.63  |                   |  | $                   | 5,877 |                  | 4,386 |  | $ | 1.34  |  
|Effect of dilutive stock options            |  |                                                          |      |                     | 310   |                  |   | (0.09 | )                 |  |                     |      |                  | 300   |  |   | (0.09 | )
|                                            |  |                                                          |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  
|Diluted EPS                                 |  | $                                                        | 8,754 |                     | 5,669 |                  | $ | 1.54  |                   |  | $                   | 5,877 |                  | 4,685 |  | $ | 1.25  |  
|                                            |  |                                                          |       |                     |       |                  |   |       |                   |  |                     |       |                  |       |  |   |       |  



Note 10 Segment Information



The following disclosure about segments of the Company is
made in accordance with the requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company segregates its operations into two primary segments: Banking Division and Small Business
Administration 7a (SBA 7a) Division. The Company determines operating results of each segment based on an internal management system that allocates certain expenses to each. In the current year, the company refined its cost of funds
allocation to the SBA 7a division. The prior year was restated for the change in methodology.



|                                                    |  |                                          |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|--------------------------------------------------- |  | ---------------------------------------- | ------- | ---------------------- | - | ------ | ----- |  | --------------- | ------- | -------------- | - | ------- |  | - | ------ |  | - | -------
|                                                    |  | For the three months ended September 30,
|                                                    |  | 2005                                     |         | 2004                  
|                                                    |  | BankingDivision                          |         | SBA 7aDivision         |   |        | Total |  | BankingDivision |         | SBA 7aDivision |   | Total  
|                                                    |  | (dollars in thousands)                   |         | (dollars in thousands)
|Interest income                                     |  | $                                        | 12,623  |                        | $ | 2,240  |       |  | $               | 14,863  |                | $ | 6,459   |  | $ | 1,348  |  | $ | 7,807  
|Interest expense                                    |  |                                          | 2,510   |                        |   | 1,292  |       |  |                 | 3,802   |                |   | 630     |  |   | 763    |  |   | 1,393  
|                                                    |  |                                          |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Net interest income                                 |  |                                          | 10,113  |                        |   | 948    |       |  |                 | 11,061  |                |   | 5,829   |  |   | 585    |  |   | 6,414  
|Provision (recovery) for loan losses                |  |                                          | 433     |                        |   | (3     | )     |  |                 | 430     |                |   | 297     |  |   | 28     |  |   | 325    
|                                                    |  |                                          |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Net interest income after provision for loan losses |  |                                          | 9,680   |                        |   | 951    |       |  |                 | 10,631  |                |   | 5,532   |  |   | 557    |  |   | 6,089  
|                                                    |  |                                          |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Other operating income                              |  |                                          | 1,193   |                        |   | 1,274  |       |  |                 | 2,467   |                |   | 364     |  |   | 2,169  |  |   | 2,533  
|Other operating expenses                            |  |                                          | 6,774   |                        |   | 662    |       |  |                 | 7,436   |                |   | 4,410   |  |   | 926    |  |   | 5,336  
|                                                    |  |                                          |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Income before income tax provision                  |  |                                          | 4,099   |                        |   | 1,563  |       |  |                 | 5,662   |                |   | 1,486   |  |   | 1,800  |  |   | 3,286  
|Income tax provision                                |  |                                          | 1,625   |                        |   | 653    |       |  |                 | 2,278   |                |   | 527     |  |   | 729    |  |   | 1,256  
|                                                    |  |                                          |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Net income                                          |  | $                                        | 2,474   |                        | $ | 910    |       |  | $               | 3,384   |                | $ | 959     |  | $ | 1,071  |  | $ | 2,030  
|                                                    |  |                                          |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Assets employed at quarter end                      |  | $                                        | 791,075 |                        | $ | 91,220 |       |  | $               | 882,295 |                | $ | 456,130 |  | $ | 84,480 |  | $ | 540,610
|                                                    |  |                                          |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        



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|                                                    |  |                                         |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|--------------------------------------------------- |  | --------------------------------------- | ------- | ---------------------- | - | ------ | ----- |  | --------------- | ------- | -------------- | - | ------- |  | - | ------ |  | - | -------
|                                                    |  | For the nine months ended September 30,
|                                                    |  | 2005                                    |         | 2004                  
|                                                    |  | BankingDivision                         |         | SBA 7aDivision         |   |        | Total |  | BankingDivision |         | SBA 7aDivision |   | Total  
|                                                    |  | (dollars in thousands)                  |         | (dollars in thousands)
|Interest income                                     |  | $                                       | 31,644  |                        | $ | 5,982  |       |  | $               | 37,626  |                | $ | 18,806  |  | $ | 3,632  |  | $ | 22,438 
|Interest expense                                    |  |                                         | 4,926   |                        |   | 3,738  |       |  |                 | 8,664   |                |   | 1,984   |  |   | 1,976  |  |   | 3,960  
|                                                    |  |                                         |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Net interest income                                 |  |                                         | 26,718  |                        |   | 2,244  |       |  |                 | 28,962  |                |   | 16,822  |  |   | 1,656  |  |   | 18,478 
|Provision (recovery) for loan losses                |  |                                         | 1,351   |                        |   | (190   | )     |  |                 | 1,161   |                |   | 747     |  |   | 91     |  |   | 838    
|                                                    |  |                                         |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Net interest income after provision for loan losses |  |                                         | 25,367  |                        |   | 2,434  |       |  |                 | 27,801  |                |   | 16,075  |  |   | 1,565  |  |   | 17,640 
|                                                    |  |                                         |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Other operating income                              |  |                                         | 2,575   |                        |   | 5,196  |       |  |                 | 7,771   |                |   | 1,938   |  |   | 4,979  |  |   | 6,917  
|Other operating expenses                            |  |                                         | 17,708  |                        |   | 3,290  |       |  |                 | 20,998  |                |   | 12,372  |  |   | 2,735  |  |   | 15,107 
|                                                    |  |                                         |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Income before income tax provision                  |  |                                         | 10,234  |                        |   | 4,340  |       |  |                 | 14,574  |                |   | 5,641   |  |   | 3,809  |  |   | 9,450  
|Income tax provision                                |  |                                         | 4,006   |                        |   | 1,814  |       |  |                 | 5,820   |                |   | 1,982   |  |   | 1,591  |  |   | 3,573  
|                                                    |  |                                         |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Net income                                          |  | $                                       | 6,228   |                        | $ | 2,526  |       |  | $               | 8,754   |                | $ | 3,659   |  | $ | 2,218  |  | $ | 5,877  
|                                                    |  |                                         |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        
|Assets employed at quarter end                      |  | $                                       | 791,075 |                        | $ | 91,220 |       |  | $               | 882,295 |                | $ | 456,130 |  | $ | 84,480 |  | $ | 540,610
|                                                    |  |                                         |         |                        |   |        |       |  |                 |         |                |   |         |  |   |        |  |   |        



Note 11 Recent Accounting
Developments:



In December 2003, the AICPA issued SOP
03-3, which requires that loans purchased at a discount due to poor credit quality be recorded at fair value and prohibits the recognition of a loss accrual or valuation allowance at the time of purchase. SOP 03-3 also limits the yield that may be
accreted to the excess of the undiscounted expected cash flows over the initial investment of the loan. Subsequent increases in expected cash flows are recognized prospectively through an adjustment of yield over its remaining life and decreases in
expected cash flows are recognized as an impairment. The Company adopted SOP 03-3 and was effective on loans or debt securities acquired after December 31, 2004.



In March 2004, the Emerging Issues Task Force (EITF) reached consensus on the guidance provided in EITF Issue
No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (EITF 03-1) as applicable to debt and equity securities that are within the scope of SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities and equity securities that are accounted for using the cost method specified in Accounting Policy Board Opinion No. 18 The Equity Method of Accounting for Investments in Common
Stock. An investment is impaired if the fair value of the investment is less than its cost. EITF 03-1 outlines that an impairment would be considered other-than-temporary unless: a) the investor has the ability and intent to hold an
investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment, and b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time
outweighs evidence to the contrary. Although not presumptive, a pattern of selling investments prior to the forecasted recovery of fair value may call into question the investors intent. The severity and duration of the impairment should
also be considered in determining whether the impairment is other-than-temporary. The Company adopted EITF 03-1 on July 1, 2004. The adoption of EITF 03-1 did not have a material impact on the operations or the financial condition of the
Company.



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 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. The Company will adopt SFAS No. 123(R) on January 1, 2006. The adoption of SFAS No. 123(R) is not expect to have a material impact on the operations or the financial condition of the Company.



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



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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. The Company will adopt SFAS No. 154 on January 1, 2006.



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



The following is managements discussion and analysis of the major factors that influenced our financial performance for the three months and nine
months ended September 30, 2005. This analysis should be read in conjunction with our 2004 Annual Report as filed on Form 10-K and with the unaudited financial statements and notes as set forth in this report. Unless the context requires
otherwise, the terms Company, us, we, and our refers to Community Bancorp Inc. on a consolidated basis.



Certain statements contained in this Quarterly Report on Form 10-Q (Report), including, without limitation, statements containing the words
believes, anticipates, intends, expects, and words of similar import, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which we operate, demographic
changes, competition, fluctuations in interest rates, changes in business strategy or development plans, changes in governmental regulation, the ability to integrate operations of merged companies successfully or to achieve expected cost savings,
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 2004 Annual
Report as filed on form 10-K, including in Item 1. BusinessFactors That May Affect Future Results of Operations. When relying on forward-looking statements to make decisions with respect to our Company, investors and others are
cautioned to consider these and other risks and uncertainties. We disclaim any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future
events or developments.



Executive Overview: Key Factors in Evaluating
Financial Condition and Operating Performance



We are a
Southern California-based bank holding company for Community National Bank. We provide traditional commercial banking services to small and medium-sized businesses and individuals in the communities along the I-15 corridor in northern San Diego
County and western Riverside County. San Diego and Riverside Counties, according to U.S. census data, were among the top ten fastest growing counties in the United States measured by numerical population growth from April 1, 2000 to
July 1, 2004.



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 other operating income
| | - |  | ---------------------------------------------------------------------------------------------



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



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



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



The comparability of our financial information is affected by our two acquisitions. Operating results include the operations of acquired entities from the
dates of acquisition. We acquired Cuyamaca Bank on October 1, 2004 and Rancho Bernardo Community Bank on August 19, 2005. For a further discussion of these acquisitions, see Item 1 Financial Statements Note 2 Merger-related Activity.



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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), which is total equity less goodwill, and the potential valuation of the stock price relative to our returns and earnings per share (EPS). Our ROTE was 22.07% for the nine months ended
September 30, 2005 compared to 19.64% for the nine months ended September 30, 2004. The increase in ROTE is due to the increase in net income combined with the decrease in average tangible equity outstanding as a result of the mergers with
Cuyamaca Bank in the fourth quarter of 2004 and Rancho Bernardo Community Bank in the third quarter of 2005. Our net income for the nine months ended September 30, 2005 increased 49.0% to $8.8 million compared to $5.9 million for the nine
months ended September 30, 2004. Net income increased due to an increase in net interest income and other operating income, partially offset by an increase in operating expenses. Basic EPS increased to $1.63 for the nine months ended
September 30, 2005 compared to $1.34 for the nine months ended September 30, 2004. Diluted EPS increased to $1.54 for the nine months ended September 30, 2005 compared to $1.25 for the nine months ended September 30, 2004. 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 two mergers.



We also initiated a $0.05 per share quarterly cash dividend during the first quarter of 2004. In January 2005, we declared a $0.10 per share cash
dividend, which was paid on March 31, 2005 to stockholders of record on March 15, 2005. In May 2005, we declared a $0.10 per share cash dividend, which was paid on June 30, 2005 to stockholders of record on June 15, 2005. In
August 2005, we declared a $0.10 per share cash dividend, which was paid on September 30, 2005 to stockholders of record on September 15, 2005.



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 was 1.56% for both the nine months ended September 30, 2005 and 2004.



Development of Core Revenue Streams. Over the past several years, we have focused on not only improving net income, but improving the
consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income. Specifically, we have focused on net interest income through a variety of
processes, including increases in average interest earning assets as a result of loan generation and retention and improved net interest margin by focusing on core deposit growth. As a result, our net interest income before provision for loan losses
increased 56.7% to $29.0 million for the nine months ended September 30, 2005 compared to $18.5 million for the nine months ended September 30, 2004. Our net interest margin has also improved to 5.71% for the nine months ended
September 30, 2005 compared to 5.29% for the nine months ended September 30, 2004.



We have also improved our other operating income. Other operating income for the nine months ended September 30, 2005 was $7.8 million compared to $6.9 million for the nine months ended September 30, 2004.
Gain on sale of loans increased to $5.2 million for the nine months ended September 30, 2005 compared to $4.9 million for the nine months ended September 30, 2004.



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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 banks and bank holding companies, asset quality has a significant impact on the overall financial condition and
results of operations. Asset quality is measured in terms of percentage of total loans and total assets, and is a key element in estimating the future performance of a company. Non-performing loans totaled $2.7 million as of September 30, 2005
compared to $4.0 million as of December 31, 2004. Non-performing loans as a percentage of gross loans decreased to 0.37% as of September 30, 2005 compared to 0.74% as of December 31, 2004. Net of government guarantees, non-performing
loans totaled $1.2 million, or 0.17% of total loans as of September 30, 2005 compared to $2.1 million, or 0.39%, as of December 31, 2004. Non-performing assets were $2.8 million as of September 30, 2005 compared to $4.0 million as of
December 31, 2004. Net of government guarantees, non-performing assets as a percent of total assets were 0.15% as of September 30, 2005 compared to 0.33% as of December 31, 2004. The decrease in non-performing loans and assets is
primarily due to three loans totaling $1.8 million which were paid off or sold during the third quarter of 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 as management has determined that the loans are likely to remain current in future periods.



Asset Growth. As revenues from both net interest income and other operating income are a function of asset size, the continued 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 increased 37.5% during the first nine months of 2005 from $641.6 million as of December 31, 2004 to $882.3 million as of September 30, 2005. Total gross loans increased 35.8% to $737.9 million as of
September 30, 2005 compared to $543.5 million as of December 31, 2004. Total deposits increased 33.9% to $736.0 million as of September 30, 2005 compared to $549.8 million as of December 31, 2004. Total retail banking deposits
increased 15.0% to $562.6 million as of September 30, 2005 compared to $489.2 million as of December 31, 2004. If we exclude the effect of the acquisitions, assets grew internally 21.8% since December 31, 2004. Excluding acquisitions and
wholesale deposits, retail deposits increased 18.2% since December 31, 2004 and gross loans increased 25.2% over the same period.



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 before provision for loan losses plus other operating income, excluding gains or losses on repossessed assets) was 57.41% for the first nine months of 2005 compared to 59.12%
for the first nine months of 2004. The decrease (improvement) in the efficiency ratio is due to the increase in revenues exceeding the increase in operating expenses. Net interest income before provision plus other operating income increased 44.6%
to $36.7 million for the nine months ended September 30, 2005, while operating expenses increased 39.0% to $21.0 million for the same period as the result of the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank and normal
increases in operating expenses.



Critical Accounting Policies and Estimates



The Managements Discussion and Analysis of
Financial Condition and Results of Operations, as well as disclosures found elsewhere in this Form 10-Q, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of the servicing assets and interest-only strips, the valuation of repossessed assets and the valuation of goodwill and
other intangible assets. Actual results could differ from those estimates.



| |  |  | Allowance for loan losses. An allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and
inherent risks in the loan portfolio and other extensions of credit, including off-balance sheet credit extensions. The allowance is based upon a continuing review of the portfolio, past loan loss experience and current economic conditions, which
may affect the borrowers ability to pay, guarantees by government agencies and the underlying collateral value of the loans. Loans
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | which are deemed to be uncollectible are charged off and deducted from the allowance. Changes in these factors and conditions may cause managements
estimate of the allowance to increase or decrease and result in adjustments to our provision for loan losses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In determining the appropriate level of the allowance for loan losses, our management and Directors Loan Committee initially identify all
classified, restructured or non-performing loans and assesses each loan for impairment, as well as any government guarantees on these loans, which in general do not require an allowance for loan loss. Loans are considered impaired when it is
probable that a creditor will be unable to collect all amounts due according to the original contractual terms of the loan agreement. If the measure of the impaired loan is less than the recorded investment in the loan, a valuation allowance is
established with a corresponding charge to the provision for loan losses. We measure an impaired loan by using the fair value of the collateral if the loan is collateral-dependent and the present value of the expected future cash flows discounted at
the loans effective interest rate if the loan is not collateral-dependent.



After the specific allowances for loans are allocated, the remaining loans are pooled based on collateral type. A range of potential losses is determined using an eight quarter historical analysis by pool based on the
relative carrying value at the time of charge off. In addition, our management and Directors Loan Committee establish reserve levels for each pool based upon loan type as well as market condition for the underlying collateral, considering such
factors as trends in the real estate market, economic uncertainties and other risks that exist as of each reporting period. In general there are no reserves established for the government guaranteed portion of loans outstanding. All non-specific
reserves are allocated to each of these pools.



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



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



We
periodically evaluate servicing assets for impairment. For purposes of measuring impairment, the rights are stratified based on original term to maturity. The amount of impairment recognized is the amount by which the servicing asset for a stratum
exceeds its fair value. Unrealized losses on servicing assets were not material during the three months and nine months ended September 30, 2005 and 2004. In estimating fair values at September 30, 2005, we utilized a weighted average
prepayment assumption of approximately 8.85% and a discount rate of 10.75%. In estimating fair values at December 31, 2004, we utilized a weighted average prepayment assumption of approximately 8.53% and a discount rate of 10.00%.



Rights to future servicing income from serviced loans that exceed
contractually specified servicing fees are classified as interest-only strips. The interest-only strips are recorded at fair value with any unrealized gains or losses recorded in earnings in the period of change of fair value. Unrealized gains or
losses on interest-only strips were not material during the three months and nine months ended September 30, 2005 and 2004. At September 30, 2005, the fair value of interest-only strips was estimated using a weighted average prepayment
assumption of approximately 8.85% and a discount rate of 10.75%. At December 31, 2004, the fair value of interest-only strips was estimated using a weighted average prepayment assumption of approximately 8.53% and a discount rate of 10.00%.



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



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| |  |  | Real Estate Owned and Repossessed Assets. Real estate or other assets acquired through foreclosure, deed-in-lieu of foreclosure or repossession are initially recorded at the
lower of cost or fair value less estimated costs to sell through a charge to the allowance for estimated loan losses. Subsequent declines in value are charged to operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Goodwill and Other Intangibles.Net assets of companies acquired in purchase transactions are recorded at 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 is reviewed for potential impairment
on an annual basis, or if events or circumstances indicate a potential impairment. The impairment test is performed in two phases. The first step of the Goodwill impairment test compares the fair value of the reporting unit with its carrying amount,
including Goodwill. If the fair value of the reporting unit exceeds its carrying amount, Goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure
must be performed. That additional procedure compares the implied fair value of the reporting units Goodwill (as defined in SFAS No. 142, Goodwill and Other Intangible Assets) with the carrying amount of that Goodwill. An
impairment loss is recorded to the extent that the carrying amount of Goodwill exceeds its implied fair value.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other 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 will be recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible is considered not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use of the asset. At September 30, 2005 and December 31, 2004, goodwill included on the Consolidated Balance Sheet consists of core deposit intangibles for Cuyamaca National Bank
and Rancho Bernardo Community Bank that are amortized using an estimated life of 8.5 years and 7.8 years, respectively.



RESULTS OF OPERATIONS



Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004



Net Income



Net income increased to $8.8 million for the nine months ended September 30, 2005 compared to $5.9 million for the nine months ended
September 30, 2004. Basic earnings per share were $1.63 and $1.34 for the nine months ended September 30, 2005 and 2004, respectively. Diluted earnings per share were $1.54 and $1.25 for the nine months ended September 30, 2005 and
2004, respectively. ROTE was 22.07% for the nine months ended September 30, 2005 compared to 19.64% for the nine months ended September 30, 2004. The ROA for the nine months ended September 30, 2005 and 2004 was 1.56%.



The increase in net income and profitability for the nine months ended
September 30, 2005 was mainly due to the increases in net interest income and other operating income, partially offset by an increase in other operating expense, as a result of the acquisitions of Cuyamaca Bank and Rancho Bernardo Community
Bank and increased compensation for loan production. Net interest income increased due to an increase in average interest earning assets and an expanding net interest margin. Other operating income increased primarily due to an increase in gain on
sale of loans. Operating expenses increased primarily as a result of the Companys expansion, including the two mergers. For a further discussion of the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank, see Item 1
Financial Statements Note 2 Merger-related Activity.



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 rate earned on interest earning assets and the volume of and interest rate paid on interest bearing liabilities. Our loan portfolio experienced



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a 99 basis point increase in average yield primarily due to the impact of the prime rate increasing to 6.75% at September 30, 2005 from 4.75% at
September 30, 2004.



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.



|                                              |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|--------------------------------------------- |  | ---------------------------------- | ------- | ------------------- | ---- | ----------------- |  | ---- | -------------- |  | ------------------- | ------- | ----------------- | - | ------ |  | ---- | -
|                                              |  | 2005                               |         |                     | 2004 |                  
|                                              |  | AverageBalance                     |         | InterestEarned/Paid |      | AverageRate/Yield |  |      | AverageBalance |  | InterestEarned/Paid |         | AverageRate/Yield |  
|For the nine months ended September 30,       |  | (unaudited) (dollars in thousands) |        
|Average assets:                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Securities and time deposits at other banks   |  | $                                  | 46,027  |                     | $    | 1,378             |  | 4.00 | %              |  | $                   | 24,635  |                   | $ | 729    |  | 3.95 | %
|Fed funds sold                                |  |                                    | 9,655   |                     |      | 208               |  | 2.88 | %              |  |                     | 14,831  |                   |   | 124    |  | 1.12 | %
|Loans:                                        |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Commercial                                    |  |                                    | 45,323  |                     |      | 2,374             |  | 7.00 | %              |  |                     | 21,473  |                   |   | 871    |  | 5.42 | %
|Real Estate                                   |  |                                    | 529,232 |                     |      | 31,046            |  | 7.84 | %              |  |                     | 372,276 |                   |   | 18,951 |  | 6.80 | %
|Aircraft                                      |  |                                    | 30,381  |                     |      | 1,537             |  | 6.76 | %              |  |                     | 29,893  |                   |   | 1,569  |  | 7.01 | %
|Consumer                                      |  |                                    | 17,851  |                     |      | 1,083             |  | 8.11 | %              |  |                     | 3,415   |                   |   | 194    |  | 7.59 | %
|                                              |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total loans                                   |  |                                    | 622,787 |                     |      | 36,040            |  | 7.74 | %              |  |                     | 427,057 |                   |   | 21,585 |  | 6.75 | %
|                                              |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total earning assets                          |  |                                    | 678,469 |                     |      | 37,626            |  | 7.41 | %              |  |                     | 466,523 |                   |   | 22,438 |  | 6.42 | %
|Non earning assets                            |  |                                    | 70,090  |                     |      |                   |  |      |                |  |                     | 34,950  |                   |   |        |  |      |  
|                                              |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total average assets                          |  | $                                  | 748,559 |                     |      |                   |  |      |                |  | $                   | 501,473 |                   |   |        |  |      |  
|                                              |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Average liabilities and stockholders equity:  |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Interest bearing deposits:                    |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Savings and interest bearing accounts         |  | $                                  | 194,933 |                     |      | 1,055             |  | 0.72 | %              |  | $                   | 124,103 |                   |   | 438    |  | 0.47 | %
|Time deposits                                 |  |                                    | 297,267 |                     |      | 5,956             |  | 2.68 | %              |  |                     | 225,467 |                   |   | 2,728  |  | 1.62 | %
|                                              |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total interest bearing deposits               |  |                                    | 492,200 |                     |      | 7,011             |  | 1.90 | %              |  |                     | 349,570 |                   |   | 3,166  |  | 1.21 | %
|Short term borrowing                          |  |                                    | 25,290  |                     |      | 576               |  | 3.05 | %              |  |                     | 11,866  |                   |   | 107    |  | 1.20 | %
|Long term debt (1)                            |  |                                    | 21,235  |                     |      | 1,077             |  | 6.78 | %              |  |                     | 14,683  |                   |   | 687    |  | 6.25 | %
|                                              |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total interest bearing liabilities            |  |                                    | 538,725 |                     |      | 8,664             |  | 2.15 | %              |  |                     | 376,119 |                   |   | 3,960  |  | 1.41 | %
|Demand deposits                               |  |                                    | 129,072 |                     |      |                   |  |      |                |  |                     | 78,627  |                   |   |        |  |      |  
|Accrued expenses and other liabilities        |  |                                    | 9,917   |                     |      |                   |  |      |                |  |                     | 6,834   |                   |   |        |  |      |  
|Net shareholders equity                       |  |                                    | 70,845  |                     |      |                   |  |      |                |  |                     | 39,893  |                   |   |        |  |      |  
|                                              |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Total average liabilities stockholders equity |  | $                                  | 748,559 |                     | $    | 28,962            |  |      |                |  | $                   | 501,473 |                   | $ | 18,478 |  |      |  
|                                              |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Net interest spread                           |  |                                    |         |                     |      |                   |  | 5.26 | %              |  |                     |         |                   |   |        |  | 5.01 | %
|                                              |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  
|Net interest margin                           |  |                                    |         |                     |      |                   |  | 5.71 | %              |  |                     |         |                   |   |        |  | 5.29 | %
|                                              |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |        |  |      |  



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



Interest income for the nine months ended September 30, 2005 increased to $37.6 million compared to $22.4 million for the nine months ended
September 30, 2004. The increase was due to the 45.4% increase in the average balance of interest earning assets, combined with the increase in the yield on those assets. Due to the internal growth and the acquisition of Cuyamaca Bank and
Rancho Bernardo Community Bank, average interest earning assets increased to $678.5 million for the nine months ended September 30, 2005 compared to $466.5 million for the nine months ended September 30, 2004. The yield on interest earning
assets increased to 7.41% for the nine months ended September 30, 2005 compared to 6.42% for the nine months ended September 30, 2004. The largest single component of interest earning assets was real estate loans receivable, which had an
average balance of $529.2 million with a yield of 7.84% for the nine months ended September 30, 2005 compared to $372.3 million with a yield of 6.80% for the nine months ended September 30, 2004.



Interest expense for the nine months ended September 30, 2005 increased
to $8.7 million compared to $4.0 million for the nine months ended September 30, 2004. This increase was due to the increase in average interest bearing liabilities, combined with the increase in the cost of those liabilities. Due to internal
growth and the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank, average interest-bearing liabilities increased to $538.7 million for the nine months ended September 30, 2005 compared to $376.1 million for the nine months ended
September 30, 2004.



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Average time deposits, the largest component of interest bearing liabilities, increased to $297.3 million with a cost of 2.68% for the nine months ended
September 30, 2005 compared to $225.5 million with a cost of 1.62% for the nine months ended September 30, 2004.



Other average borrowings increased to $46.5 million with a cost of 4.75% for the nine months ended September 30, 2005 compared to $26.5 million with
a cost of 3.99% for the nine months ended September 30, 2004.



Average demand deposits increased 64.2% to $129.1 million for the nine months ended September 30, 2005 from $78.6 million for the nine months ended September 30, 2004. The cost of deposits, including demand deposits and interest
bearing deposits, increased to 1.51% for the nine months ended September 30, 2005 compared to 0.99% for the nine months ended September 30, 2004. Average transaction accounts (including interest bearing checking, demand deposits, money
market accounts and savings accounts), increased 59.8% to $324.0 million for the nine months ended September 30, 2005 compared to $202.7 million for the nine months ended September 30, 2004. The cost of funds, including interest bearing
liabilities and demand deposits, increased 57 basis points to 1.73% for the nine months ended September 30, 2005 compared to 1.16% for the nine months ended September 30, 2004.



Net Interest Income before Provision for Estimated Loan Losses



Net interest income before provision for estimated loan losses for the nine months ended September 30, 2005 was $29.0
million compared to $18.5 million for the nine months ended September 30, 2004. This increase was primarily due to the increase in the net interest margin, combined with an increase in average interest earning assets. Due to internal growth and
the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank, average interest earning assets increased to $678.5 million for the nine months ended September 30, 2005 with a net interest margin of 5.71% compared to $466.5 million with a
net interest margin of 5.29% for the nine months ended September 30, 2004.



For the nine months ended September 30, 2005, 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.



Provision for Estimated Loan Losses



The
provision for estimated loan losses was $1.2 million for the nine months ended September 30, 2005 compared to $838,000 for the nine months ended September 30, 2004. For further information, please see the Loans discussion in
the Financial Condition portion of this section.



Other
Operating Income



Other operating income represents
non-interest types of revenue and is comprised of net gain on sale of loans, loan servicing fees, customer service charges and other fee income. Other operating income was $7.8 million for the nine months ended September 30, 2005 compared to
$6.9 million for the nine months ended September 30, 2004. The increase in other operating income for the nine months ended September 30, 2005 was primarily due to an increase 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.



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##### Table of Contents

Other 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 $21.0 million for the nine months ended September 30, 2005 compared
to $15.1 million for the nine months ended September 30, 2004. The increase in operating expense was due to significant growth and expansion, including the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank, with a combined five
banking offices, and the addition of a new banking office in Murrieta, CA, and increases in incentive compensation as a result of higher loan production.



The efficiency ratio, measured as the percentage of operating expenses to net interest income before provision for loan losses plus other operating
income, excluding gains or losses on repossessed assets, improved to 57.41% for the nine months ended September 30, 2005 compared to 59.12% for the nine months ended September 30, 2004.



Salaries and employee benefits increased to $12.0 million for the nine months
ended September 30, 2005 compared to $8.1 million for the nine months ended September 30, 2004. The increase in salaries and employee benefits for the nine month period ended September 30, 2005 can be attributed to the addition of six
branches, including five acquired in the Cuyamaca Bank and Rancho Bernardo Community Bank mergers, normal cost increases for salaries and benefits plus increased incentive based compensation due to increased loan and deposit production and
profitability. As of September 30, 2005, we had 245 full time equivalent employees, compared to 149 as of September 30, 2004. Incentive based compensation (based on loan production, deposit generation and profitability), not including tax
related expense, totaled $3.7 million for the nine months ended September 30, 2005 compared to $2.7 million for the nine months ended September 30, 2004.



Occupancy expense increased to $1.7 million for the nine months ended September 30, 2005 compared to $1.0 million for
the nine months ended September 30, 2004. The increase in occupancy expense for the nine months ended September 30, 2005 was due to the two acquisitions, the addition of a de novo branch in Murrietta, CA, as well as normal consumer product
index (CPI) increases in rent.



Professional services,
including legal, accounting, regulatory and consulting, decreased 20.9% to $1.5 million for the nine months ended September 30, 2005 compared to $1.9 million for the nine months ended September 30, 2004. The decrease in professional
services for the nine months ended September 30, 2005 was due to the prior year start up costs for complying with Section 404 of the Sarbanes-Oxley Act.



Depreciation and amortization expense increased to $957,000 for the nine months ended September 30, 2005 compared to
$566,000 for the nine months ended September 30, 2004. The increase in depreciation and amortization expense for the nine months ended September 30, 2005 was due to the increase in the amount of premises and equipment, which increased from
an average $3.7 million during the nine months of 2004 to $6.8 million for the first nine months of 2005 as a result of the two acquisitions and the increase in depreciation of premises and equipment from normal additions.



Data processing expense increased to $672,000 for the nine months ended
September 30, 2005 compared to $611,000 for the nine months ended September 30, 2004. Data processing expense for the nine months ended September 30, 2005 increased due to the increase in both deposits and loans as a result of the two
acquisitions, as well as normal cost increases.



Office
expenses were $644,000 for the nine months ended September 30, 2005 compared to $483,000 for the nine months ended September 30, 2004. The increase in office expense for the nine months ended September 30, 2005 was primarily due to
the two acquisitions.



Increases in other operating expenses
are due to the expansion of our operations, including the two acquisitions and the addition of a de novo branch in Murrieta, CA. Other expenses increased to $3.5 million for the nine months ended September 30, 2005 compared to $2.4 million for
the nine months ended September 30, 2004. Other operating expenses include the increase for the amortization



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##### Table of Contents

of the core deposit intangibles of $199,000 during the nine months ended September 30, 2005 and none during the nine months ended September 30,
2004.



Provision for Income Taxes



The effective income tax rate was 39.9% for the nine months ended
September 30, 2005 compared to 37.8% for the nine months ended September 30, 2004. The effective tax rate increase in the nine months ended September 30, 2005 was relative to the increase in pretax income, which moved the Company into
a higher tax bracket, combined with a decrease in income tax credits. Provisions for income taxes totaled $5.8 million and $3.6 million for the nine months ended September 30, 2005 and 2004, respectively.



Divisions of the Company



In order to better present and monitor our performance, we have separated
the Bank into two distinct divisions, Banking and SBA 7a. The separation of income and expenses, as well as assets and liabilities allows 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 nine months ended September 30, 2005, the Banking Division had a pre-tax profit of $10.2 million, with net interest income of $26.7 million, other operating
income of $2.6 million, and other operating expenses of $17.7 million. Total assets of the Banking Division increased to $791.1 million at September 30, 2005 due to the strong loan growth.



Customer service charges increased to $793,000 for the nine months ended
September 30, 2005 compared to $569,000 for the nine months ended September 30, 2004 due to an increase in transaction accounts.



Other fee income decreased to $881,000 for the nine months ended September 30, 2005 compared to $956,000 for the nine months ended September 30,
2004. The decrease in other fee income for the nine ended September 30, 2005 is a result of a decrease in fees from brokering of loans to other financial institutions which the Company does not directly fund.



Other operating expenses were $21.0 million for the nine months ended
September 30, 2005 compared to $15.1 million for the nine months ended September 30, 2004. The increase in other operating expense is due to the expansion of our operations, including the acquisitions of Cuyamaca Bank and Rancho Bernardo
Community Bank with five combined banking offices, and the addition of a de novo branch in Murrieta, CA, and increases in incentive compensation as a result of higher loan production.



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##### Table of Contents

The following table shows the total assets and results of operations for the Banking Division as of and
for the nine months ended September 30, 2005 and 2004.



|                                                     |  |                                |         |      |   |        
|---------------------------------------------------- |  | ------------------------------ | ------- | ---- | - | -------
|                                                     |  | Nine months endedSeptember 30,
|                                                     |  | 2005                           |         | 2004
|Interest income                                      |  | $                              | 31,644  |      | $ | 18,806 
|Interest expense                                     |  |                                | 4,926   |      |   | 1,984  
|                                                     |  |                                |         |      |   |        
|Net interest income before provision for loan losses |  |                                | 26,718  |      |   | 16,822 
|Provision for loan losses                            |  |                                | 1,351   |      |   | 747    
|Other operating income                               |  |                                | 2,575   |      |   | 1,938  
|Other operating expense                              |  |                                | 17,708  |      |   | 12,372 
|                                                     |  |                                |         |      |   |        
|Income before income tax provision                   |  |                                | 10,234  |      |   | 5,641  
|Income tax provision                                 |  |                                | 4,006   |      |   | 1,982  
|                                                     |  |                                |         |      |   |        
|Net income                                           |  | $                              | 6,228   |      | $ | 3,659  
|                                                     |  |                                |         |      |   |        
|Assets employed at quarter end                       |  | $                              | 791,075 |      | $ | 456,130
|                                                     |  |                                |         |      |   |        



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 nine months ended September 30, 2005, the SBA 7a Division had a pre-tax profit of $4.3 million, with net interest income of $2.2 million, other operating income of $5.2 million, and other operating expenses of $3.3
million. Net income improved due to an increase in the amount of 7a loans sold combined with improved net interest income due to the retention of loans, partially offset by a higher cost of operations. The SBA 7a Division experienced a recovery of
provision for loan losses of $190,000 due to a 16.8% decrease in gross loans, net of government guarantees, from $65.2 million at December 31, 2004 to $54.2 million at September 30, 2005. Total assets of the SBA 7a Division were $91.2
million at September 30, 2005 as a result of the retention of SBA 7a loans.



Loan servicing income increased to $700,000 for the nine months ended September 30, 2005 compared to $614,000 for the nine months ended September 30, 2004 due to an increase in the amount of loans serviced
for others as a result of the increase in loans sold.



Other
operating expense increased due to an increase in incentive compensation related to the increase in SBA 7a loan originations.



The following chart illustrates the earnings, asset and loan production growth of the SBA 7a Division for the nine months ended September 30, 2005
and 2004.



|                                                     |  |                                |        |   |      |   |       
|---------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------
|                                                     |  | Nine months endedSeptember 30,
|                                                     |  | 2005                           |        |   | 2004
|Interest income                                      |  | $                              | 5,982  |   |      | $ | 3,632 
|Interest expense                                     |  |                                | 3,738  |   |      |   | 1,976 
|                                                     |  |                                |        |   |      |   |       
|Net interest income before provision for loan losses |  |                                | 2,244  |   |      |   | 1,656 
|Provision (recovery) for loan losses                 |  |                                | (190   | ) |      |   | 91    
|Other operating income                               |  |                                | 5,196  |   |      |   | 4,979 
|Other operating expense                              |  |                                | 3,290  |   |      |   | 2,735 
|                                                     |  |                                |        |   |      |   |       
|Income before income tax provision                   |  |                                | 4,340  |   |      |   | 3,809 
|Income tax provision                                 |  |                                | 1,814  |   |      |   | 1,591 
|                                                     |  |                                |        |   |      |   |       
|Net income                                           |  | $                              | 2,526  |   |      | $ | 2,218 
|                                                     |  |                                |        |   |      |   |       
|Assets employed at quarter end                       |  | $                              | 91,220 |   |      | $ | 84,480
|                                                     |  |                                |        |   |      |   |       



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##### Table of Contents

Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004



Net Income



Net income increased to $3.4 million for the three months ended September 30, 2005 compared to $2.0 million for the
three months ended September 30, 2004. Basic earnings per share were $0.61 and $0.46 for the three months ended September 30, 2005 and 2004, respectively. Diluted earnings per share were $0.58 and $0.43 for the three months ended
September 30, 2005 and 2004, respectively. ROTE was 22.12% for the three months ended September 30, 2005 compared to 19.76% for the three months ended September 30, 2004. The ROA for the three months ended September 30, 2005 was
1.63% compared to 1.57% for the three months ended September 30, 2004.



The increase in net income and profitability for the three months ended September 30, 2005 was mainly due to the increases in net interest income, partially offset by a decrease in other operating income and an
increase in other operating expense, as a result of the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank and increased incentive compensation for loan production. Net interest income increased due to an increase in average interest
earning assets and an expanding net interest margin. Other operating income decreased primarily due to a decrease in gain on sale of loans. 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 the loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume of and interest rate earned on interest earning assets and the volume
of and interest rate paid on interest bearing liabilities. Our loan portfolio experienced an 149 basis point increase in average yield primarily due to the impact of the prime rate increasing to 6.75% as of September 30, 2005 from 4.75% as of
September 30, 2004.



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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.



|                                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|---------------------------------------------- |  | ---------------------------------- | ------- | ------------------- | ---- | ----------------- |  | ---- | -------------- |  | ------------------- | ------- | ----------------- | - | ----- |  | ---- | -
|                                               |  | 2005                               |         |                     | 2004 |                  
|                                               |  | AverageBalance                     |         | InterestEarned/Paid |      | AverageRate/Yield |  |      | AverageBalance |  | InterestEarned/Paid |         | AverageRate/Yield |  
|For the three months ended September 30,       |  | (unaudited) (dollars in thousands) |        
|Average assets:                                |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Securities and time deposits at other banks    |  | $                                  | 57,055  |                     | $    | 573               |  | 3.98 | %              |  | $                   | 22,157  |                   | $ | 233   |  | 4.18 | %
|Fed funds sold                                 |  |                                    | 6,735   |                     |      | 59                |  | 3.48 | %              |  |                     | 14,477  |                   |   | 52    |  | 1.43 | %
|Loans:                                         |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Commercial                                     |  |                                    | 53,867  |                     |      | 990               |  | 7.29 | %              |  |                     | 21,990  |                   |   | 291   |  | 5.26 | %
|Real Estate                                    |  |                                    | 585,905 |                     |      | 12,297            |  | 8.33 | %              |  |                     | 393,693 |                   |   | 6,663 |  | 6.73 | %
|Aircraft                                       |  |                                    | 31,843  |                     |      | 546               |  | 6.80 | %              |  |                     | 29,108  |                   |   | 508   |  | 6.94 | %
|Consumer                                       |  |                                    | 19,318  |                     |      | 398               |  | 8.17 | %              |  |                     | 3,040   |                   |   | 60    |  | 7.85 | %
|                                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total loans                                    |  |                                    | 690,933 |                     |      | 14,231            |  | 8.17 | %              |  |                     | 447,831 |                   |   | 7,522 |  | 6.68 | %
|                                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total earning assets                           |  |                                    | 754,723 |                     |      | 14,863            |  | 7.81 | %              |  |                     | 484,465 |                   |   | 7,807 |  | 6.41 | %
|Non earning assets                             |  |                                    | 77,068  |                     |      |                   |  |      |                |  |                     | 33,899  |                   |   |       |  |      |  
|                                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total average assets                           |  | $                                  | 831,791 |                     |      |                   |  |      |                |  | $                   | 518,364 |                   |   |       |  |      |  
|                                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Average liabilities and shareholders equity:  |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Interest bearing deposits:                     |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Savings and interest bearing accounts          |  | $                                  | 212,181 |                     |      | 482               |  | 0.90 | %              |  | $                   | 134,908 |                   |   | 155   |  | 0.46 | %
|Time deposits                                  |  |                                    | 333,481 |                     |      | 2,659             |  | 3.16 | %              |  |                     | 233,611 |                   |   | 971   |  | 1.65 | %
|                                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total interest bearing deposits                |  |                                    | 545,662 |                     |      | 3,141             |  | 2.28 | %              |  |                     | 368,519 |                   |   | 1,126 |  | 1.22 | %
|Short term borrowing                           |  |                                    | 21,610  |                     |      | 189               |  | 3.47 | %              |  |                     | 8,470   |                   |   | 32    |  | 1.51 | %
|Long term debt (1)                             |  |                                    | 28,182  |                     |      | 472               |  | 6.64 | %              |  |                     | 14,676  |                   |   | 235   |  | 6.37 | %
|                                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total interest bearing liabilities             |  |                                    | 595,454 |                     |      | 3,802             |  | 2.53 | %              |  |                     | 391,665 |                   |   | 1,393 |  | 1.42 | %
|Demand deposits                                |  |                                    | 146,080 |                     |      |                   |  |      |                |  |                     | 78,491  |                   |   |       |  |      |  
|Accrued expenses and other liabilities         |  |                                    | 10,885  |                     |      |                   |  |      |                |  |                     | 7,105   |                   |   |       |  |      |  
|Net shareholders equity                       |  |                                    | 79,372  |                     |      |                   |  |      |                |  |                     | 41,103  |                   |   |       |  |      |  
|                                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Total average liabilities shareholders equity |  | $                                  | 831,791 |                     | $    | 11,061            |  |      |                |  | $                   | 518,364 |                   | $ | 6,414 |  |      |  
|                                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Net interest spread                            |  |                                    |         |                     |      |                   |  | 5.28 | %              |  |                     |         |                   |   |       |  | 4.99 | %
|                                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  
|Net interest margin                            |  |                                    |         |                     |      |                   |  | 5.81 | %              |  |                     |         |                   |   |       |  | 5.27 | %
|                                               |  |                                    |         |                     |      |                   |  |      |                |  |                     |         |                   |   |       |  |      |  



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



Interest income for the three months ended September 30, 2005 increased to $14.9 million compared to $7.8 million for the three months ended
September 30, 2004. The increase was due to the 55.8% increase in the average balance of interest earning assets, combined with the increase in the yield on those assets and the recovery of $362,000 of deferred interest on non-accrual loans.
Due to internal growth and the two acquisitions, average interest earning assets increased to $754.7 million for the three months ended September 30, 2005 compared to $484.5 million for the three months ended September 30, 2004. The yield
on interest earning assets increased to 7.81% for the three months ended September 30, 2005 compared to 6.41% for the three months ended September 30, 2004. The largest single component of interest earning assets was real estate loans
receivable, which had an average balance of $585.9 million with a yield of 8.33% for the three months ended September 30, 2005 compared to $393.7 million with a yield of 6.73% for the three months ended September 30, 2004.



Interest expense for the three months ended September 30, 2005 increased
to $3.8 million compared to $1.4 million for the three months ended September 30, 2004. This increase was due to the increase in average interest bearing liabilities, combined with the increase in the cost of those liabilities. Due to internal
growth and the two acquisitions, average interest-bearing liabilities



29



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##### Table of Contents

increased to $595.5 million for the three months ended September 30, 2005 compared to $391.7 million for the three months ended September 30, 2004.
Average time deposits, the largest component of interest bearing liabilities, increased to $333.5 million with a cost of 3.16% for the three months ended September 30, 2005 compared to $233.6 million with a cost of 1.65% for the three months
ended September 30, 2004.



Other average borrowings
increased to $49.8 million with a cost of 5.27% for the three months ended September 30, 2005 compared to $23.1 million with a cost of 4.59% for the three months ended September 30, 2004.



Average demand deposits increased 86.1% to an average $146.1 million for the
three months ended September 30, 2005 from $78.5 million for the three months ended September 30, 2004. The cost of deposits, including demand deposits and interest bearing deposits, increased to 1.80% for the three months ended
September 30, 2005 compared to 1.00% for the three months ended September 30, 2004. Average transaction accounts (including interest bearing checking, demand deposits, money market accounts and savings accounts), increased 67.9% to $358.3
million for the three months ended September 30, 2005 compared to $213.4 million for the three months ended September 30, 2004. The cost of funds, including interest bearing liabilities and demand deposits, increased 85 basis points to
2.03% for the three months ended September 30, 2005 compared to 1.18% for the three months ended September 30, 2004.



Net Interest Income before Provision for Estimated Loan Losses



Net interest income before provision for estimated loan losses for the three months ended September 30, 2005 was $11.1 million compared to $6.4
million for the three months ended September 30, 2004. This increase was primarily due to the increase in the net interest margin, combined with an increase in average interest earning assets. Due to internal growth and the acquisitions of
Cuyamaca Bank and Rancho Bernardo Community Bank, average interest earning assets increased to $754.7 million for the three months ended September 30, 2005 with a net interest margin of 5.81% compared to $484.5 million with a net interest
margin of 5.27% for the three months ended September 30, 2004.



For the three months ended September 30, 2005, 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.



Provision for Estimated
Loan Losses



The provision for estimated loan losses was
$430,000 for the three months ended September 30, 2005 compared to $325,000 for the three months ended September 30, 2004. For further information, please see the Loans discussion in the Financial Condition portion
of this section.



Other Operating Income



Other operating income represents non-interest types of revenue and is
comprised of net gain on sale of loans, loan servicing fees, customer service charges and other fee income. Excluding the loss on REO in 2004, other operating income decreased 8.4% to $2.5 million for the three months ended September 30, 2005
compared to $2.7 million during the same period last year due to a decrease in the gain on sale of loans. SBA 504 loan sales totaled $18.2 million and SBA 7a loan sales totaled $9.6 million for the third quarter of 2005 compared to $2.6 million in
SBA 504 loans and $16.1 million in SBA 7a for the same period in 2004. The change in mix of loans sold resulted in a decrease in gain on sale revenue during the third quarter of 2005 to $1.5 million compared to $2.0 million for the same period in
2004. The decrease in gain on sale was partially offset by increases in customer service charges and other fee income. 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.



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 $7.4 million for the three months ended September 30, 2005 compared
to $5.3 million for the three months ended September 30, 2004. The increase in operating expense was due to significant growth and expansion, including the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank, with five combined
banking offices, and



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the addition of a new banking office in Murrieta, CA, and increases in incentives as a result of higher loan production.



The efficiency ratio, measured as the percentage of operating expenses to net
interest income before provision for loan losses plus other operating income, excluding gains or losses on repossessed assets, improved to 54.97% for the three months ended September 30, 2005 compared to 58.59% for the three months ended
September 30, 2004.



Salaries and employee benefits
increased to $4.4 million for the three months ended September 30, 2005 compared to $2.9 million for the three months ended September 30, 2004. The increase in salaries and employee benefits for the three month period ended
September 30, 2005 can be attributed to the addition of six branches, including five acquired in the Cuyamaca Bank and Rancho Bernardo Community Bank mergers, normal cost increases for salaries and benefits plus increased incentive based
compensation due to increased loan and deposit production and profitability. As of September 30, 2005, the Company had 245 full time equivalent employees, compared to 149 as of September 30, 2004. Incentive based compensation (based on
loan production, deposit generation and profitability), not including tax related expense, totaled $1.4 million for the three months ended September 30, 2005 compared to $1.0 million for the three months ended September 30, 2004.



Occupancy expense increased to $574,000 for the three months
ended September 30, 2005 compared to $340,000 for the three months ended September 30, 2004. The increase in occupancy expense for the three months ended September 30, 2005 was due to the acquisitions of Cuyamaca Bank, N.A. and Rancho
Bernardo Community Bank, the addition of a de novo branch in Murrietta, CA, as well as normal CPI increases in rent.



Professional services, including legal, accounting, regulatory and consulting, decreased to $512,000 for the three months ended September 30, 2005
compared to $818,000 for the three months ended September 30, 2004. The decrease in professional services for the three months ended September 30, 2005 was due to the prior year start up costs for complying with Section 404 of the
Sarbanes-Oxley Act.



Depreciation and amortization expense
increased to $326,000 for the three months ended September 30, 2005 compared to $190,000 for the three months ended September 30, 2004. The increase in depreciation and amortization expense for the three months ended September 30,
2005 was due to the increase in the amount of premises and equipment, which increased from an average $3.8 million during the three months ended September 30, 2004 to $6.8 million for the three months ended September 30, 2005 as a result
of the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank and the increase in depreciation of premises and equipment from normal additions.



Data processing expense increased to $226,000 for the three months ended September 30, 2005 compared to $194,000 for the three months ended
September 30, 2004. Office expenses increased to $217,000 for the three months ended September 30, 2005 compared to $155,000 for the three months ended September 30, 2004. Increases in both data processing and office expenses were due
to internal growth and the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank.



Increases in other operating expenses are due to the expansion of our operations, including the acquisitions of Cuyamaca Bank and Rancho Bernardo Community Bank and the addition of a de novo branch in Murrieta, Ca.
Other expenses increased to $1.2 million for the three months ended September 30, 2005 compared to $723,000 for the three months ended September 30, 2004.



Provision for Income Taxes



The effective income tax rate was 40.2% for the three months ended September 30, 2005 compared to 38.2% for the three months ended September 30,
2004. The effective tax rate increase in the three months ended September 30, 2005 was relative to the increase in pretax income, which moved the Company into a higher tax bracket, combined with a decrease in income tax credits. Provisions for
income taxes totaled $2.3 million and $1.3 million for the three months ended September 30, 2005 and 2004, respectively.



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##### Table of Contents

Divisions of the Company



Banking Division



For the quarter ended September 30, 2005, the Banking Division had a pre-tax profit of $4.1 million, with net interest income of $10.1 million, other
operating income of $1.2 million, and other operating expenses of $6.8 million. Total assets of the Banking Division increased to $791.1 million at September 30, 2005 due to the strong loan growth.



Customer service charges increased to $295,000 for the three months ended
September 30, 2005 compared to $185,000 for the three months ended September 30, 2004 due to an increase in transaction accounts.



Other fee income increased to $418,000 for the three months ended September 30, 2005 compared to $335,000 for the three months ended
September 30, 2004. The increase in other fee income for the three months ended September 30, 2005 is a result of an increase in fees from brokering of loans to other financial institutions which the Company does not directly fund.



Other operating expenses were $7.4 million for the three
months ended September 30, 2005 compared to $5.3 million for the three months ended September 30, 2004. The increase in other operating expense is due to the expansion of our operations, including the acquisitions of Cuyamaca Bank and
Rancho Bernardo Community Bank with a combined five banking offices, and the addition of a de novo branch in Murrieta, CA, and increases in incentives as a result of higher loan production.



The following table shows the total assets and results of operations for the
Banking Division as of and for the three months ended September 30, 2005 and 2004.



|                                                     |  |                                 |         |      |   |        
|---------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | -------
|                                                     |  | Three months endedSeptember 30,
|                                                     |  | 2005                            |         | 2004
|Interest income                                      |  | $                               | 12,623  |      | $ | 6,459  
|Interest expense                                     |  |                                 | 2,510   |      |   | 630    
|                                                     |  |                                 |         |      |   |        
|Net interest income before provision for loan losses |  |                                 | 10,113  |      |   | 5,829  
|Provision for loan losses                            |  |                                 | 433     |      |   | 297    
|Other operating income                               |  |                                 | 1,193   |      |   | 364    
|Other operating expense                              |  |                                 | 6,774   |      |   | 4,410  
|                                                     |  |                                 |         |      |   |        
|Income before income tax provision                   |  |                                 | 4,099   |      |   | 1,486  
|Income tax provision                                 |  |                                 | 1,625   |      |   | 527    
|                                                     |  |                                 |         |      |   |        
|Net income                                           |  | $                               | 2,474   |      | $ | 959    
|                                                     |  |                                 |         |      |   |        
|Assets employed at quarter end                       |  | $                               | 791,075 |      | $ | 456,130
|                                                     |  |                                 |         |      |   |        



SBA 7a Division



For the quarter ended September 30, 2005, the
SBA 7a Division had a pre-tax profit of $1.6 million, with net interest income of $948,000, other operating income of $1.3 million, and other operating expenses of $662,000. Net income decreased due to a decrease in the amount of 7a loans sold and
decrease in cost of operations, partially offset with improved net



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interest income due to the retention of loans. The SBA 7a Division experienced a recovery of provision for loan losses of $3,000 due to a 5.7% decrease in
gross loans, net of government guarantees, during the three months ended September 30, 2005. Total assets of the SBA 7a Division were $91.2 million at September 30, 2005 as a result of the retention of SBA 7a loans,.



Loan servicing income remained steady at $221,000 for the three months ended
September 30, 2005 and 2004.



The following chart
illustrates the earnings, asset and loan production growth of the SBA 7a Division for the three months ended September 30, 2005 and 2004.



|                                                     |  |                                  |        |   |      |   |       
|---------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------
|                                                     |  | Three months ended September 30,
|                                                     |  | 2005                             |        |   | 2004
|Interest income                                      |  | $                                | 2,240  |   |      | $ | 1,348 
|Interest expense                                     |  |                                  | 1,292  |   |      |   | 763   
|                                                     |  |                                  |        |   |      |   |       
|Net interest income before provision for loan losses |  |                                  | 948    |   |      |   | 585   
|Provision (recovery) for loan losses                 |  |                                  | (3     | ) |      |   | 28    
|Other operating income                               |  |                                  | 1,274  |   |      |   | 2,169 
|Other operating expense                              |  |                                  | 662    |   |      |   | 926   
|                                                     |  |                                  |        |   |      |   |       
|Income before income tax provision                   |  |                                  | 1,563  |   |      |   | 1,800 
|Income tax provision                                 |  |                                  | 653    |   |      |   | 729   
|                                                     |  |                                  |        |   |      |   |       
|Net income                                           |  | $                                | 910    |   |      | $ | 1,071 
|                                                     |  |                                  |        |   |      |   |       
|Assets employed at quarter end                       |  | $                                | 91,220 |   |      | $ | 84,480
|                                                     |  |                                  |        |   |      |   |       



FINANCIAL CONDITION



Summary of Changes in Consolidated Balance Sheets

September 30, 2005 compared to December 31, 2004



The demand for our banking products has led to continued increases in loans and deposits during the first nine months of 2005. As of September 30,
2005, total assets were $882.3 million, an increase of 37.5% compared to $641.6 million as of December 31, 2004. Total gross loans increased to $737.9 million as of September 30, 2005 compared to $543.5 million as of December 31,
2004. Total deposits increased to $736.0 million as of September 30, 2005 compared to $549.8 million as of December 31, 2004. Stockholders equity increased to $92.8 million as of September 30, 2005 compared to $63.1 million as
of December 31, 2004.



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 increased to $7.0 million as of September 30, 2005 compared to $4.2 million as of
December 31, 2004. The increase in held to maturity securities was due to the purchase of agency bonds partially offset by the maturing or prepayment of agency bonds and mortgage backed securities. As of September 30, 2005, $720,000 was
held as collateral for public funds, treasury, tax, and loan deposits and for other purposes.



Our available for sale portfolio increased to $42.6 million as of September 30, 2005 compared to $26.6 million as of December 31, 2004 to increase our liquidity position. 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 $42.6 million, a single security of $1.1 million was pledged as additional security for our interest rate swap. The
collateral requirement for the interest rate swap is the greater of the mark to market value of the swap or $945,000. Therefore, as interest rates increase, it is probable that the collateral required will increase. In addition to the security
pledged for the swap, a portion of the portfolio was held as collateral for public funds, treasury, tax and loan deposits and for other purposes at September 30, 2005.



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Average Federal Funds sold for the nine months ended September 30, 2005 were $9.7 million compared
to $14.8 million for the nine months ended September 30, 2004.



We held $1.9 million and $1.2 million in Federal Reserve Bank stock as of September 30, 2005 and December 31, 2004, respectively. We held $3.4 million and $2.2 million in Federal Home Loan Bank stock as of September 30, 2005
and December 31, 2004, respectively.



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



|                                  |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|--------------------------------- |  | ---------------------- | ------ | -------------------- | - | --------------------- |  | - | ------------------ | - |  | - | ------
|                                  |  | AmortizedCost          |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFairValue
|                                  |  | (dollars in thousands)
|At September 30, 2005             |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Held to Maturity                  |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities |  | $                      | 6,320  |                      | $ | 17                    |  | $ | (120               | ) |  | $ | 6,217 
|SBA loan pools                    |  |                        | 656    |                      |   | 5                     |  |   | (7                 | ) |  |   | 654   
|                                  |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Total held to maturity            |  | $                      | 6,976  |                      | $ | 22                    |  | $ | (127               | ) |  | $ | 6,871 
|                                  |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Available for sale                |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities |  | $                      | 43,201 |                      | $ | 7                     |  | $ | (596               | ) |  | $ | 42,613
|                                  |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|At December 31, 2004              |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Held to Maturity                  |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities |  | $                      | 3,281  |                      | $ | 53                    |  | $ | (6                 | ) |  | $ | 3,328 
|SBA loan pools                    |  |                        | 917    |                      |   | 6                     |  |   |                   |   |  |   | 923   
|                                  |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Total held to maturity            |  | $                      | 4,198  |                      | $ | 59                    |  | $ | (6                 | ) |  | $ | 4,251 
|                                  |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Available for sale                |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       
|Agency mortgage-backed securities |  | $                      | 26,701 |                      | $ | 39                    |  | $ | (178               | ) |  | $ | 26,562
|                                  |  |                        |        |                      |   |                       |  |   |                    |   |  |   |       



The contractual
maturities held to maturity at September 30, 2005 were as follows:



|                                                      |  |                        |        |                     |   |                               |  |      |  
|----------------------------------------------------- |  | ---------------------- | ------ | ------------------- | - | ----------------------------- |  | ---- | -
|Year maturing                                         |  | Amortized Cost         |        | Estimated FairValue |   | WeightedAverage InterestYield | 
|                                                      |  | (dollars in thousands) |       
|Mortgage-backed securities                            |  |                        |        |                     |   |                               |  |      |  
|Due greater than one year through five years          |  | $                      | 155    |                     | $ | 156                           |  | 4.93 | %
|Due greater than five years through ten years         |  |                        | 4,959  |                     |   | 4,859                         |  | 4.49 | %
|Mortgage-backed securities due greater than ten years |  |                        | 44,408 |                     |   | 43,814                        |  | 3.64 | %
|                                                      |  |                        |        |                     |   |                               |  |      |  
|Subtotal mortgage-backed securities                   |  |                        | 49,522 |                     |   | 48,829                        |  | 3.73 | %
|SBA pass through securities                           |  |                        |        |                     |   |                               |  |      |  
|Due greater than ten years                            |  |                        | 655    |                     |   | 654                           |  | 4.75 | %
|                                                      |  |                        |        |                     |   |                               |  |      |  
|Total                                                 |  | $                      | 50,177 |                     | $ | 49,483                        |  | 3.74 | %
|                                                      |  |                        |        |                     |   |                               |  |      |  



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As of September 30, 2005, the Company held investments with unrealized holding losses totaling
$723,000, consisting of the following (in thousands):



|                                                             |  |                        |        |                  |                   |      |            |       |                  |     |  |            |     |                  |  |   |        |  |   |      |  
|------------------------------------------------------------ |  | ---------------------- | ------ | ---------------- | ----------------- | ---- | ---------- | ----- | ---------------- | --- |  | ---------- | --- | ---------------- |  | - | ------ |  | - | ---- | -
|                                                             |  | Less than 12 Months    |        |                  | 12 Months or More |      |            | Total |                 
|Description of Securities                                    |  | Fair Value             |        | UnrealizedLosses |                   |      | Fair Value |       | UnrealizedLosses |     |  | Fair Value |     | UnrealizedLosses | 
|                                                             |  | (dollars in thousands) |       
|Mortgage-backed securities, classified as held to maturity   |  |                        |        |                  |                   |      |            |       |                  |     |  |            |     |                  |  |   |        |  |   |      |  
|FHLMC                                                        |  | $                      | 243    |                  | $                 | (1   | )          |       | $                |    |  | $          |    |                  |  | $ | 243    |  | $ | (1   | )
|FNMA                                                         |  |                        | 3,964  |                  |                   | (108 | )          |       |                  | 543 |  |            | (11 | )                |  |   | 4,507  |  |   | (119 | )
|SBA                                                          |  |                        | 414    |                  |                   | (7   | )          |       |                  |    |  |            |    |                  |  |   | 414    |  |   | (7   | )
|                                                             |  |                        |        |                  |                   |      |            |       |                  |     |  |            |     |                  |  |   |        |  |   |      |  
|                                                             |  | $                      | 4,621  |                  | $                 | (116 | )          |       | $                | 543 |  | $          | (11 | )                |  | $ | 5,164  |  | $ | (127 | )
|                                                             |  |                        |        |                  |                   |      |            |       |                  |     |  |            |     |                  |  |   |        |  |   |      |  
|Mortgage-backed securities, classified as available for sale |  |                        |        |                  |                   |      |            |       |                  |     |  |            |     |                  |  |   |        |  |   |      |  
|FHLMC                                                        |  | $                      | 20,199 |                  | $                 | (301 | )          |       | $                |    |  | $          |    |                  |  | $ | 20,199 |  | $ | (301 | )
|FNMA                                                         |  |                        | 18,313 |                  |                   | (295 | )          |       |                  |    |  |            |    |                  |  |   | 18,313 |  |   | (295 | )
|                                                             |  |                        |        |                  |                   |      |            |       |                  |     |  |            |     |                  |  |   |        |  |   |      |  
|                                                             |  | $                      | 38,512 |                  | $                 | (596 | )          |       | $                |    |  | $          |    |                  |  | $ | 38,512 |  | $ | (596 | )
|                                                             |  |                        |        |                  |                   |      |            |       |                  |     |  |            |     |                  |  |   |        |  |   |      |  



As of
September 30, 2005, 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 first nine months of 2005 and are not the result
of credit or principal risk. Based on the nature of the investments and other considerations discussed above, 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 September 30, 2005.



Loans



As a result of the acquisition of
Rancho Bernardo and increased loan origination, total gross loans have increased to $737.9 million as of September 30, 2005 compared to $543.5 million as of December 31, 2004. Our total servicing portfolio increased to $930.7 million as of
September 30, 2005 compared to $715.5 million as of December 31, 2004. Sold loans serviced for others, primarily consisting of SBA 7a loans, increased to $192.7 million as of September 30, 2005 compared to $172.0 million as of
December 31, 2004.



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##### Table of Contents

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



|                                    |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|----------------------------------- |  | --------------------------------------------- | ------- | ---------------------------------------------- | ---- | - | ------- |  | - | ------- | - |  | - | -------
|                                    |  | At and for the nine monthsended September 30, |         | At and for the three monthsended September 30,
|                                    |  | 2005                                          |         |                                                | 2004 |   | 2005    |  |   | 2004   
|Beginning balance                   |  | $                                             | 532,012 |                                                |      | $ | 394,212 |  | $ | 635,629 |   |  | $ | 441,330
|Loans originated:                   |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|Commercial loans                    |  |                                               | 32,512  |                                                |      |   | 16,218  |  |   | 10,955  |   |  |   | 2,734  
|Aircraft                            |  |                                               | 10,298  |                                                |      |   | 7,731   |  |   | 1,883   |   |  |   | 3,698  
|Real estate:                        |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|Construction loans                  |  |                                               | 83,443  |                                                |      |   | 96,774  |  |   | 13,477  |   |  |   | 41,612 
|One- to four-family                 |  |                                               | 476     |                                                |      |   | 576     |  |   |        |   |  |   | 201    
|Commercial                          |  |                                               | 244,508 |                                                |      |   | 189,125 |  |   | 56,860  |   |  |   | 58,393 
|Consumer                            |  |                                               | 8,406   |                                                |      |   | 2,595   |  |   | 3,189   |   |  |   | 1,765  
|                                    |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|Total loans originated              |  |                                               | 379,643 |                                                |      |   | 313,019 |  |   | 86,364  |   |  |   | 108,403
|Loans sold                          |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|Real estate:                        |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|One- to four-family                 |  |                                               | 535     |                                                |      |   |        |  |   |        |   |  |   |       
|Commercial                          |  |                                               | 73,041  |                                                |      |   | 53,692  |  |   | 27,814  |   |  |   | 18,686 
|                                    |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|Total loans sold                    |  |                                               | 73,576  |                                                |      |   | 53,692  |  |   | 27,814  |   |  |   | 18,686 
|Loans acquired in merger:           |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|Commercial loans                    |  |                                               | 13,053  |                                                |      |   |         |  |   | 13,053  |   |  |   |        
|Aircraft                            |  |                                               |        |                                                |      |   |         |  |   |        |   |  |   |        
|Real estate:                        |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|Construction loans                  |  |                                               | 39,415  |                                                |      |   |         |  |   | 39,415  |   |  |   |        
|One- to four-family                 |  |                                               | 3,741   |                                                |      |   |         |  |   | 3,741   |   |  |   |        
|Commercial                          |  |                                               | 18,659  |                                                |      |   |         |  |   | 18,659  |   |  |   |        
|Consumer                            |  |                                               | 5,728   |                                                |      |   |         |  |   | 5,728   |   |  |   |        
|                                    |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|Total gross loans acquired          |  |                                               | 80,596  |                                                |      |   |         |  |   | 80,596  |   |  |   |        
|Deferred loan origination fees      |  |                                               | (288    | )                                              |      |   |         |  |   | (288    | ) |  |   |        
|Discount on unguaranteed portion of |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|SBA loans retained                  |  |                                               | (58     | )                                              |      |   |         |  |   | (58     | ) |  |   |        
|Allowance for loan loss             |  |                                               | (1,269  | )                                              |      |   |         |  |   | (1,269  | ) |  |   |        
|                                    |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|Net loans acquired                  |  |                                               | 78,981  |                                                |      |   |         |  |   | 78,981  |   |  |   |        
|Less:                               |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|Principal repayments                |  |                                               | 191,345 |                                                |      |   | 203,502 |  |   | 49,539  |   |  |   | 81,716 
|Other net changes (1)               |  |                                               | 2,176   |                                                |      |   | 819     |  |   | 82      |   |  |   | 113    
|                                    |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        
|Total loans                         |  | $                                             | 723,539 |                                                |      | $ | 449,218 |  | $ | 723,539 |   |  | $ | 449,218
|                                    |  |                                               |         |                                                |      |   |         |  |   |         |   |  |   |        



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



Loans held for sale are accounted for at the lower of cost or market at any
given reporting date. Market is determined by obtaining estimated pricing from third party investors in similar types of product and considers loan type, maturity, interest rate, margin (if applicable) and other factors. As of September 30,
2005, loans held for sale totaled $143.8 million compared to $101.6 million as of December 31, 2004. For the three months and nine months ended September 30, 2005 and 2004, 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:



|                                         |  |                        |         |   |                      |        |   |        |   |         |         |  |        |  
|---------------------------------------- |  | ---------------------- | ------- | - | -------------------- | ------ | - | ------ | - | ------- | ------- |  | ------ | -
|                                         |  | At September 30, 2005  |         |   | At December 31, 2004 |       
|                                         |  | Amount                 |         |   | Percent              |        |   | Amount |   |         | Percent | 
|                                         |  | (dollars in thousands) |        
|Loan portfolio composition:              |  |                        |         |   |                      |        |   |        |   |         |         |  |        |  
|Commercial loans                         |  | $                      | 51,744  |   |                      | 7.01   | % |        | $ | 35,213  |         |  | 6.48   | %
|Aircraft loans                           |  |                        | 31,181  |   |                      | 4.23   | % |        |   | 28,819  |         |  | 5.30   | %
|Real estate:                             |  |                        |         |   |                      |        |   |        |   |         |         |  |        |  
|Construction loans                       |  |                        | 121,080 |   |                      | 16.41  | % |        |   | 75,200  |         |  | 13.84  | %
|One- to four-family HFI                  |  |                        | 16,961  |   |                      | 2.30   | % |        |   | 8,690   |         |  | 1.60   | %
|Commercial HFI                           |  |                        | 351,597 |   |                      | 47.65  | % |        |   | 276,724 |         |  | 50.91  | %
|Commercial HFS                           |  |                        | 143,689 |   |                      | 19.47  | % |        |   | 101,385 |         |  | 18.65  | %
|Consumer:                                |  |                        |         |   |                      |        |   |        |   |         |         |  |        |  
|Home equity lines of credit              |  |                        | 11,538  |   |                      | 1.56   | % |        |   | 8,027   |         |  | 1.48   | %
|Other                                    |  |                        | 10,151  |   |                      | 1.37   | % |        |   | 9,473   |         |  | 1.74   | %
|                                         |  |                        |         |   |                      |        |   |        |   |         |         |  |        |  
|Total gross loans outstanding            |  |                        | 737,941 |   |                      | 100.00 | % |        |   | 543,531 |         |  | 100.00 | %
|Deferred loan fees and unamortized gains |  |                        | (4,278  | ) |                      |        |   |        |   | (4,011  | )       |  |        |  
|Allowance for loan losses                |  |                        | (10,124 | ) |                      |        |   |        |   | (7,508  | )       |  |        |  
|                                         |  |                        |         |   |                      |        |   |        |   |         |         |  |        |  
|Net loans                                |  | $                      | 723,539 |   |                      |        |   |        | $ | 532,012 |         |  |        |  
|                                         |  |                        |         |   |                      |        |   |        |   |         |         |  |        |  



Loan Maturity



The following table sets forth the contractual maturities of our gross loans at
September 30, 2005:



|                                                        |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|------------------------------------------------------- |  | ---------------------- | ------- | ------------------------ | - | ------------------------- |  | ---------------- | ------ | ---------- | - | ------- |  | - | -------
|                                                        |  | One yearor less        |         | Morethan 1year to 3years |   | Morethan 3years to5 years |  | More than5 years |        | TotalLoans
|                                                        |  | (dollars in thousands)
|Loan portfolio composition:                             |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Commercial loans                                        |  | $                      | 35,607  |                          | $ | 9,357                     |  | $                | 4,765  |            | $ | 2,015   |  | $ | 51,744 
|Aircraft loans                                          |  |                        | 3,009   |                          |   | 3,252                     |  |                  | 3,597  |            |   | 21,323  |  |   | 31,181 
|Real estate:                                            |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Construction loans                                      |  |                        | 117,506 |                          |   | 666                       |  |                  | 715    |            |   | 2,193   |  |   | 121,080
|Secured by one- to four-family residential properties   |  |                        | 9,052   |                          |   | 5,399                     |  |                  | 435    |            |   | 2,075   |  |   | 16,961 
|Secured by commercial properties                        |  |                        | 130,616 |                          |   | 64,129                    |  |                  | 53,412 |            |   | 247,129 |  |   | 495,286
|Consumer:                                               |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Home equity lines of credit                             |  |                        | 16      |                          |   | 48                        |  |                  | 335    |            |   | 11,139  |  |   | 11,538 
|Other                                                   |  |                        | 2,607   |                          |   | 1,196                     |  |                  | 961    |            |   | 5,387   |  |   | 10,151 
|                                                        |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        
|Total gross loans held for investment and held for sale |  | $                      | 298,413 |                          | $ | 84,047                    |  | $                | 64,220 |            | $ | 291,261 |  | $ | 737,941
|                                                        |  |                        |         |                          |   |                           |  |                  |        |            |   |         |  |   |        



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



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



|                                                                                                                      |  |                        |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                      |  | September 30,2005      |         |   | December 31,2004 |  
|                                                                                                                      |  | (dollars in thousands) |        
|Non-accrual loans                                                                                                     |  | $                      | 2,721   |   |                  | $ | 4,027   |  
|Troubled debt restructurings                                                                                          |  |                        |        |   |                  |   |        |  
|Loans contractually past due 90 days or more with respect to either principal or interest and still accruing interest |  |                        |        |   |                  |   |        |  
|                                                                                                                      |  |                        |         |   |                  |   |         |  
|Total non-performing loans                                                                                            |  |                        | 2,721   |   |                  |   | 4,027   |  
|Repossessed assets                                                                                                    |  |                        | 68      |   |                  |   |        |  
|                                                                                                                      |  |                        |         |   |                  |   |         |  
|Total non-performing assets                                                                                           |  | $                      | 2,789   |   |                  | $ | 4,027   |  
|                                                                                                                      |  |                        |         |   |                  |   |         |  
|SUPPLEMENTAL DATA                                                                                                     |  |                        |         |   |                  |   |         |  
|Undisbursed portion of construction and other loans                                                                   |  | $                      | 177,783 |   |                  | $ | 149,075 |  
|Government guaranteed portion of total loans                                                                          |  | $                      | 33,372  |   |                  | $ | 37,018  |  
|Non-performing loans, net of government guarantees                                                                    |  | $                      | 1,219   |   |                  | $ | 2,133   |  
|Total non-performing loans/gross loans                                                                                |  |                        | 0.37    | % |                  |   | 0.74    | %
|Total non-performing assets/total assets                                                                              |  |                        | 0.32    | % |                  |   | 0.63    | %
|Total non-performing loans, net of guarantees/gross loans                                                             |  |                        | 0.17    | % |                  |   | 0.39    | %
|Total non-performing assets, net of guarantees/total assets                                                           |  |                        | 0.15    | % |                  |   | 0.33    | %
|Allowance for loan losses                                                                                             |  | $                      | 10,124  |   |                  | $ | 7,508   |  
|Net charge offs to average loans outstanding                                                                          |  |                        | -0.04   | % |                  |   | 0.01    | %
|Loan loss allowance/loans, gross                                                                                      |  |                        | 1.37    | % |                  |   | 1.38    | %
|Loan loss allowance/loans held for investment                                                                         |  |                        | 1.72    | % |                  |   | 1.71    | %
|Loan loss allowance/non-performing loans                                                                              |  |                        | 372.07  | % |                  |   | 186.44  | %
|Loan loss allowance/non-performing assets                                                                             |  |                        | 363.00  | % |                  |   | 186.44  | %
|Loan loss allowance/non-performing loans, net of guarantees                                                           |  |                        | 830.52  | % |                  |   | 351.99  | %
|Loan loss allowance/non-performing assets, net of guarantees                                                          |  |                        | 786.64  | % |                  |   | 351.99  | %



Non-accrual Loans.Non-accrual loans are impaired loans where the original contractual amount may not be fully collectible. We measure our impaired loans by using the fair value of the collateral if the loan is collateral-dependent and the present value of the
expected future cash flows discounted at the loans effective interest rate if the loan is not collateral-dependent. As of September 30, 2005 and December 31, 2004 all impaired or non-accrual loans were collateral-dependent. We place
loans on non-accrual status that are delinquent 90 days or more or when a reasonable doubt exists as to the collectibility of interest and principal. As of September 30, 2005 we had ten loans on non-accrual status totaling $2.7 million with
$1.5 million, or 55.2%, guaranteed by the government. As of December 31, 2004, loans on non-accrual status totaled $4.0 million. Of this total, $1.9 million, or 47.0%, was guaranteed by the government. The decrease in non-accrual loans is
primarily due to three loans totaling $1.8 million which were paid off or sold during the third quarter of 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 as management has determined that the loans are likely to remain current in future periods.



Classified Assets.From time to time, management has reason to believe that certain borrowers may not be able to repay their loans within the
parameters of the present repayment terms, even though, in some cases, the loans are current at the time. These loans are graded in the classified loan grades of substandard, doubtful, or loss and include
non-performing loans. Each classified loan is monitored monthly. Classified assets, consisting of non-



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accrual loans, loans graded as substandard or lower, other real estate owned and repossessed assets, (all net of government guarantees), totaled $11.7
million as of September 30, 2005 compared to $6.1 million as of December 31, 2004. The increase was due to the addition of six classified loans valued at $7.0 million during the nine months ended September 30, 2005, all of which are
current at this time. Four loans are collateralized by residential property and the other two are collateralized by commercial property.



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



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



The allowance for loan losses is maintained to cover
losses inherent in the loan portfolio. The responsibility for the review of our assets and the determination of the adequacy of the general valuation allowance lies with management and our Directors Loan Committee. They assign the loss reserve
ratio for each type of asset and review 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: Construction, Real estate  residential, Real estate  other, Aircraft, Commercial secured, Consumer secured, Commercial/consumer unsecured, and Government (unguaranteed). All non-specific reserves
are allocated to one of these categories. Estimates of identifiable losses are reviewed continually and, generally, a provision for losses is charged against operations on a monthly basis as necessary to maintain the allowance at an appropriate
level. Management presents an analysis of the allowance for loan losses to our Board of Directors on a quarterly basis.



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



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



|                                              |  |                                              |        |   |                                                |   |       |      |  |   |        |   |  |   |       |  
|--------------------------------------------- |  | -------------------------------------------- | ------ | - | ---------------------------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                              |  | At or for the nine monthsended September 30, |        |   | At and for the three monthsended September 30, |  
|                                              |  | 2005                                         |        |   | 2004                                           |   |       | 2005 |  |   | 2004   |  
|                                              |  | (dollars in thousands)                       |        |   |                                                |   |       |      | 
|Balance at beginning of year                  |  | $                                            | 7,508  |   |                                                | $ | 5,210 |      |  | $ | 8,392  |   |  | $ | 5,715 |  
|Reserve acquired in merger                    |  |                                              | 1,269  |   |                                                |   |      |      |  |   | 1,269  |   |  |   |      |  
|Chargeoffs:                                   |  |                                              |        |   |                                                |   |       |      |  |   |        |   |  |   |       |  
|One- to four- family                          |  |                                              |       |   |                                                |   | 15    |      |  |   |        |   |  |   | 15    |  
|Commercial                                    |  |                                              | 6      |   |                                                |   | 11    |      |  |   | 6      |   |  |   |      |  
|Aircraft                                      |  |                                              |       |   |                                                |   |      |      |  |   |       |   |  |   |      |  
|Consumer                                      |  |                                              | 10     |   |                                                |   | 10    |      |  |   | 1      |   |  |   |      |  
|                                              |  |                                              |        |   |                                                |   |       |      |  |   |        |   |  |   |       |  
|Total chargeoffs                              |  |                                              | 16     |   |                                                |   | 36    |      |  |   | 7      |   |  |   | 15    |  
|Recoveries:                                   |  |                                              |        |   |                                                |   |       |      |  |   |        |   |  |   |       |  
|Real estate loans:                            |  |                                              |        |   |                                                |   |       |      |  |   |        |   |  |   |       |  
|Commercial                                    |  |                                              | 5      |   |                                                |   |      |      |  |   | 5      |   |  |   |      |  
|Commercial                                    |  |                                              |       |   |                                                |   | 7     |      |  |   |       |   |  |   | 3     |  
|Aircraft                                      |  |                                              | 195    |   |                                                |   |      |      |  |   | 34     |   |  |   |      |  
|Consumer                                      |  |                                              | 2      |   |                                                |   | 10    |      |  |   | 1      |   |  |   | 1     |  
|                                              |  |                                              |        |   |                                                |   |       |      |  |   |        |   |  |   |       |  
|Total recoveries                              |  |                                              | 202    |   |                                                |   | 17    |      |  |   | 40     |   |  |   | 4     |  
|                                              |  |                                              |        |   |                                                |   |       |      |  |   |        |   |  |   |       |  
|Net chargeoffs (recoveries)                   |  |                                              | (186   | ) |                                                |   | 19    |      |  |   | (33    | ) |  |   | 11    |  
|Provision for loan losses                     |  |                                              | 1,161  |   |                                                |   | 838   |      |  |   | 430    |   |  |   | 325   |  
|                                              |  |                                              |        |   |                                                |   |       |      |  |   |        |   |  |   |       |  
|Balance at end of period                      |  | $                                            | 10,124 |   |                                                | $ | 6,029 |      |  | $ | 10,124 |   |  | $ | 6,029 |  
|                                              |  |                                              |        |   |                                                |   |       |      |  |   |        |   |  |   |       |  
|Net charge offs (recoveries) to average loans |  |                                              | -0.04  | % |                                                |   | 0.01  | %    |  |   | -0.02  | % |  |   | 0.01  | %



As of
September 30, 2005 the balance in the allowance for loans losses was $10.1 million compared to $7.5 million as of December 31, 2004.



As of September 30, 2005 the allowance was 1.37% of total gross loans compared to 1.38% as of December 31, 2004. As a percent of loans held for
investment, the allowance was 1.72% as of September 30, 2005 compared to 1.71% as of December 31, 2004. During the three and nine months ended September 30, 2005, there were no major changes in loan concentrations that affected the
allowance for loan losses. There have been no significant changes in estimation methods during the periods presented. Assumptions regarding the collateral value of various underperforming loans may affect the level and allocation of the allowance
for loan losses in future periods. The allowance may also be affected by trends in the amount of charge offs experienced, or expected trends within different loan portfolios. The allowance for loan losses as a percentage of non-performing loans was
372.07% as of September 30, 2005 compared to 186.44% as of December 31, 2004, reflecting the decrease in non-performing loans. Management believes the allowance at September 30, 2005 is adequate based upon its ongoing analysis of the
loan portfolio, historical loss trends and other factors.



We
perform a migration analysis on a quarterly basis using an eight quarter history of charge offs to average loans by collateral type. Net recoveries for the three months ended September 30, 2005 totaled $33,000 compared to net charge offs of
$11,000 for the three months ended September 30, 2004. Net recoveries for the nine months ended September 30, 2005 totaled $186,000 compared to net charge offs of $19,000 for the nine months ended September 30, 2004. Our management
and Directors Loan Committee have also established reserve levels for each category based upon loan type, as certain loan types may not have incurred losses or have had minimal losses in the eight quarter migration analysis. Our management and
Directors Loan Committee will consider trends in delinquencies and potential charge offs by loan type, the market for the underlying real estate or other collateral, trends in industry types, economic changes and other risks. In general, there
are no reserves established for the government guaranteed portion of loans outstanding.



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Other real estate owned and repossessed assets.As of September 30, 2005 and
December 31, 2004, there were no OREOs. There was one $68,000 repossessed asset as of September 30, 2005 compared to no repossessed assets as of December 31, 2004. As of September 30, 2005, the repossessed asset was a single
mobile home property and was valued using the collateral method based on a recent appraisal of the underlying collateral.



Affordable housing investments. The Company has invested in limited partnerships formed to develop and operate affordable housing units for lower
income tenants throughout the state of California. The costs of the investments are being amortized on a level-yield method over the life of the related tax credits. If the partnerships cease to qualify during the compliance period, the credits may
be denied for any period in which the projects are not in compliance and a portion of the credits previously taken is subject to recapture with interest. The remaining federal tax credits to be utilized over a multiple-year period are $5.4 million
as of September 30, 2005. The Companys usage of tax credits approximated $90,000 and $107,000 during the quarters ended September 30, 2005 and 2004, respectively. The Companys usage of tax credits approximated $269,000 and
$214,000 during the nine months ended September 30, 2005 and 2004, respectively. Investment amortization amounted to $77,000 and $79,000 for the quarters ended September 30, 2005 and 2004, respectively. Investment amortization amounted to
$229,000 and $140,000 for the nine months ended September 30, 2005 and 2004, respectively. As of September 30, 2005 and December 31, 2004, the investment in these partnerships totaled $2.5 million and $2.6 million, respectively. The
Company had a commitment to fund an additional $3.0 million to these partnerships as of September 30, 2005.



Deposits and Borrowings



Total deposits increased to $736.0 million as of September 30, 2005 compared to $549.8 million as of December 31, 2004. Interest bearing
deposits increased to $576.1 million as of September 30, 2005 compared to $439.0 million as of December 31, 2004. Non-interest bearing deposits increased to $159.9 million as of September 30, 2005 compared to $110.8 million as of
December 31, 2004. Total wholesale deposits were $60.2 million as of September 30, 2005 compared to $58.8 million as of December 31, 2004. Total retail banking deposits increased to $562.6 million as of September 30, 2005
compared to $489.2 million as of December 31, 2004.



Short
term borrowings totaled $3.0 million as of September 30, 2005 compared to $1.0 million as of December 31, 2004. We established a line of credit with the FHLB collateralized by commercial loans and government securities. Funds from the
credit line are used from time to time to manage our liquidity.



Long term debt, consisting primarily of trust preferred securities, totaled $38.7 million as of September 30, 2005 compared to $17.6 million as of December 31, 2004. The net change in long term debt is a result of the issuance of
$20.0 million in trust preferred securities in August 2005 and the change in the market value of the interest rate swap hedging the $10.0 million fixed rate trust preferred securities portfolio. See Item 3. Quantitative and Qualitative
Disclosures about Market Risk for further information.



The Company had the following borrowing facilities as of September 30, 2005 and December 31, 2004 (dollars in thousands):



|                           |  |                  |         |                 |              |                          |       |                         |                    |   |                        |  |       |                    |  |   |       
|-------------------------- |  | ---------------- | ------- | --------------- | ------------ | ------------------------ | ----- | ----------------------- | ------------------ | - | ---------------------- |  | ----- | ------------------ |  | - | ------
|                           |  |                  |         |                 |              | As of September 30, 2005 |       | As of December 31, 2004
|                           |  | Maximumborrowing |         | Expiration date |              | 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 |                          | 5.98  | %                       |                    |   | 5,000                  |  | 5.45  | %                  |  |   | 5,000 
|Trust Preferred III        |  |                  | 20,000  |                 | Aug 31, 2035 |                          | 5.85  | %                       |                    |   | 20,000                 |  | N/A   |                    |  |   | N/A   
|Federal Home Loan Bank     |  |                  | 118,433 |                 | Open ended   |                          | 3.85  | %                       |                    |   | 6,790                  |  | 2.21  | %                  |  |   | 3,790 
|Pacific Coast Bankers Bank |  |                  | 20,000  |                 | Jun 30, 2006 |                          | 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   |                    |  |   |       
|                           |  |                  |         |                 |              |                          |       |                         |                    |   |                        |  |       |                    |  |   |       
|                           |  | $                | 208,433 |                 |              |                          |       |                         |                    | $ | 41,790                 |  |       |                    |  | $ | 18,790
|                           |  |                  |         |                 |              |                          |       |                         |                    |   |                        |  |       |                    |  |   |       



|* | The interest rate swap agreement effectively converts the 11.00% fixed rate interest payments to variable payments. The effective rate as of September 30, 2005 was 8.57%.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Capital



Our stockholders equity increased to $92.8 million as of September 30, 2005 compared to $63.1 million as of December 31, 2004. The
increase in stockholders equity is a result of $21.6 million in goodwill as the result of the acquisition of Rancho Bernardo Community Bank, net income of $8.8 million for the nine months ended September 30, 2005 combined with proceeds
from the exercise of stock options, less the cash dividends paid during the nine months.



On August 15, 2005, the Companys wholly owned subsidiary, Community (CA) Statutory Capital Trust III (Trust III), a Delaware business trust, issued $20 million of Fixed/Floating Rate Capital
Trust Pass-through Securities, with a liquidation value of $1,000 per share. The securities, which mature in 2035, pay interest at a fixed rate of interest of 5.85% for the first five years, and a floating rate of interest thereafter at LIBOR plus
1.69%. The Trust used the proceeds from the sale of the trust preferred securities to fund the Rancho Bernardo Community Bank acquisition. The Company received $20.0 million from the Trust upon issuance of the junior subordinated debentures, of
which $14.5 million was paid for the Rancho Bernardo Community acquisition as of September 30, 2005, $4.4 million was contributed to the Bank to increase its capital and the remainder was used for other corporate purposes. The $20.0 million is
included in Long term debt on the books of the Company.



On
February 26, 2004, the Company announced the payment of a cash dividend of $0.05 per common share (payable on March 31, 2004) and the initiation of a policy of paying quarterly cash dividends. The Company paid $0.05 per share for each
quarter on March 31, 2004, June 30, 2004 and September 30, 2004. The Company paid $0.10 per share for each quarter on March 31, 2005, June 30, 2005 and September 30, 2005. From 1998 until the first quarter of
2004, the Company had paid no cash dividends. Whether or not any cash dividends will be paid in the future will be determined by our Board of Directors after consideration of various factors.Community Bancorps and the Banks
profitability and regulatory capital ratios, in addition to other financial conditions, will be key factors considered by our Board of Directors in making such determinations regarding the payment of dividends. In connection with the $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 deferral right, we are restricted during such deferral period from paying any dividends on our common
stock.



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



At September 30, 2005 and December 31, 2004, all capital ratios were above all current Federal capital guidelines for a well
capitalized bank.



|                                         |  |                   |   |  |                  |  
|---------------------------------------- |  | ----------------- | - |  | ---------------- | -
|CAPITAL RATIOS                           |  | September 30,2005 |   |  | December 31,2004 |  
|Holding Company Ratios                   |  |                   |   |  |                  |  
|Total capital (to risk-weighted assets)  |  | 11.71             | % |  | 11.47            | %
|Tier 1 capital (to risk-weighted assets) |  | 9.98              | % |  | 10.22            | %
|Tier 1 capital (to average assets)       |  | 10.00             | % |  | 9.48             | %
|Tangible equity to tangible assets       |  | 5.69              | % |  | 7.33             | %
|Bank only Ratios                         |  |                   |   |  |                  |  
|Total capital (to risk-weighted assets)  |  | 11.17             | % |  | 11.19            | %
|Tier 1 capital (to risk-weighted assets) |  | 9.92              | % |  | 9.94             | %
|Tier 1 capital (to average assets)       |  | 10.07             | % |  | 9.30             | %



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Financial Borrowings and Commitments



As of September 30, 2005 the financial borrowings and commitments having an initial or remaining term of more than one
year are as follows:



|           |  |                        |       |                           |   |                 |  |                  |       |  |   |       
|---------- |  | ---------------------- | ----- | ------------------------- | - | --------------- |  | ---------------- | ----- |  | - | ------
|           |  | Net RentalCommitments  |       | Trust PreferredSecurities |   | OtherBorrowings |  | TotalCommitments
|           |  | (dollars in thousands)
|2005       |  | $                      | 383   |                           | $ |                |  | $                | 3,000 |  | $ | 3,383 
|2006       |  |                        | 1,474 |                           |   |                |  | $                | 1,290 |  |   | 2,764 
|2007       |  |                        | 1,325 |                           |   |                |  | $                | 1,250 |  |   | 2,575 
|2008       |  |                        | 1,249 |                           |   |                |  | $                |      |  |   | 1,249 
|2009       |  |                        | 1,161 |                           |   |                |  | $                | 750   |  |   | 1,911 
|Thereafter |  |                        | 3,942 |                           |   | 34,865          |  | $                | 500   |  |   | 39,307
|           |  |                        |       |                           |   |                 |  |                  |       |  |   |       
|Total      |  | $                      | 9,534 |                           | $ | 34,865          |  | $                | 6,790 |  | $ | 51,189
|           |  |                        |       |                           |   |                 |  |                  |       |  |   |       



In addition to the
above, we have commitments to extend credit on undisbursed construction and other loans totaling $177.8 million as of September 30, 2005.



The Company has a credit line with the FHLB with a limit of $118.4 million as of September 30, 2005, with a balance outstanding of $6.8 million. In
addition, we have credit lines with other correspondent banks of $55.0 million. There were no advances against these lines as of September 30, 2005. Of the total advances from the FHLB, $3.0 million have a remaining term of less than one year.



Liquidity



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



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



We
experienced net cash outflows from operating activities of $33.1 million during the nine months ended September 30, 2005 compared to net cash outflows of $36.2 million during the nine months ended September 30, 2004. Net cash outflows from
operating activities during the first nine months of 2005 and 2004 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. Net cash outflows from investing
activities totaled $56.2 million and $20.7 million during the nine months ended September 30, 2005 and 2004, respectively. Net cash outflows from investing activities for the nine months ended September 30, 2005 can be attributed to the
growth in the Banks loan portfolio and the purchase of additional investments offset by proceeds from principal repayments on loans held for investment and cash obtained from the acquisition of Rancho Bernardo Community Bank. Net cash outflows
from investing activities for the nine months ended September 30, 2004 can be attributed primarily to the growth in the Banks loan portfolio in excess of proceeds from principal repayments on loans held for investment, combined with the
increase in federal funds sold. We experienced net cash inflows from financing activities of $93.3 million and $57.1 million during the nine months ended September 30, 2005 and 2004, respectively. During the nine months ended September 30,
2005, interest bearing and non-interest bearing deposits increased $44.9 million and $27.2 million, respectively, as a result of the acquisition of Rancho Bernardo Community Bank. This increase was enhanced by the issuance of trust preferred



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securities of $20.0 million. During the nine months ended September 30, 2004, interest bearing and non-interest bearing deposits increased $39.3 million
and $21.7 million, respectively.



As a means of augmenting our
liquidity, we have established federal funds lines with correspondent banks. At September 30, 2005 our available borrowing capacity includes approximately $55.0 million in federal funds line facilities and $111.6 million in unused FHLB
advances. We believe our liquidity sources to be stable and adequate. At September 30, 2005, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.



The liquidity of the parent company, Community Bancorp Inc. is primarily
dependent on the payment of cash dividends by its subsidiary, Community National Bank, subject to limitations imposed by the National Bank Act. During the nine months ended September 30, 2005 there were $500,000 in dividends by the Bank to
Community Bancorp Inc used primarily to fund the second quarter dividend. During the nine months ended September 30, 2004 there were $8.3 million in dividends paid by the Bank to Community Bancorp Inc. As of September 30, 2005,
approximately $16.3 million of undivided profits of the Bank were available for dividends to the Company.



Off-Balance Sheet Arrangements



Off-balance sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in
assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation
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 a fuller discussion of these financial instruments, refer to Note 16 of the Companys consolidated financial statements contained in the Companys December 31, 2004 10-K.



In the ordinary course of business, the Company is party to various operating
leases. For a fuller discussion of these financial instruments, refer to Note 15 of the Companys consolidated financial statements contained in the Companys December 31, 2004 10-K.



In connection with the $35.0 million in trust preferred securities discussed
in Capital, the Company issued a guarantee providing for the limited guarantee of certain payments.



In the ordinary course of business, the Company entered into an interest rate swap to effectively convert the 11% fixed rate interest payments on $10.0
million of its trust preferred securities to variable payments. For a fuller discussion of this financial instrument, refer to Note 10 of the Companys consolidated financial statements contained in the Companys December 31, 2004
10-K.



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



Interest rate risk (IRR) and credit risk constitute the two greatest sources of financial exposure for insured financial institutions. Please
refer to Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial Condition - Loans, for a discussion of our lending activities. IRR represents the impact that changes in absolute
and relative levels of market interest rates may have upon our net interest income (NII). Changes in the NII are the result of changes in the net interest spread between interest-earning assets and interest-bearing liabilities (timing
risk), the relationship between various rates (basis risk), and changes in the shape of the yield curve.



We realize income principally from the differential or spread between the interest earned on loans, investments, other interest-earning assets and the
interest incurred on deposits and borrowings. The volumes and yields on loans,



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deposits and borrowings are affected by market interest rates. As of September 30, 2005, 86.7% of our loan portfolio was tied to adjustable rate
indices. Of our total loan portfolio, 55.4% are adjustable rate loans that are tied to prime and reprice within 90 days. As of September 30, 2005, 44.9% of our deposits were time deposits with a stated maturity (generally one year or less) and
a fixed rate of interest. As of September 30, 2005, 85.6% of our long term debt was fixed rate with an average remaining term of 27.0 years. We entered into an interest rate swap in December 2002 which effectively changes the fixed rate debt to
variable rate with a six month adjustment period. The Gap table below reflects the affects of this interest rate swap.



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



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



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



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



GAP ANALYSIS



A traditional, although analytically limited, measure of a financial institutions IRR is the static gap 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 September 30, 2005, 44.9% 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 six months at September 30, 2005. 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 $245.1 million in interest bearing transaction accounts (savings, money markets and interest bearing checking) as of September 30,
2005, with rates being paid between 0.15% and 2.96%. While the maturities of interest bearing deposits in the following gap table imply that declines in interest rates will result in further declines in interest rates paid on deposits, interest
rates cannot drop below 0%, and there is a behavioral limit somewhere above 0% as to how low the rates can be reduced before our customers will no longer maintain the deposit with the bank.



The following table sets forth information concerning repricing opportunities
for our interest-earning assets and interest bearing liabilities as of September 30, 2005. 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



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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.



|                                                         |  |                        |         |   |                                 |   |        |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|-------------------------------------------------------- |  | ---------------------- | ------- | - | ------------------------------- | - | ------ | -------------------------------- |  | - | ------------------------------- | - |  | ---------- | ------- | - | ------------- | - | -------- | - |  | - | ------- | -
|                                                         |  | 0 - 3 months           |         |   | Greater than3 monthsto 6 months |   |        | Greater than6 monthsto 12 months |  |   | Greater than12 monthsto 5 years |   |  | Thereafter |         |   | Total balance |  
|Contractual Static GAP Position as of September 30, 2005 |  | (dollars in thousands) |        
|Interest sensitive assets:                               |  |                        |         |   |                                 |   |        |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Loans receivable:                                        |  |                        |         |   |                                 |   |        |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Adjustable rate loans, gross                             |  | $                      | 389,301 |   |                                 | $ | 47,013 |                                  |  | $ | 78,477                          |   |  | $          | 121,912 |   |               | $ | 1,667    |   |  | $ | 638,370 |  
|Fixed rate loans, gross (1)(2)                           |  |                        | 21,092  |   |                                 |   | 10,138 |                                  |  |   | 3,812                           |   |  |            | 27,810  |   |               |   | 36,717   |   |  |   | 99,569  |  
|Investments:                                             |  |                        |         |   |                                 |   |        |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Investment securities held-to-maturity                   |  |                        | 364     |   |                                 |   | 935    |                                  |  |   | 502                             |   |  |            | 1,207   |   |               |   | 3,968    |   |  |   | 6,976   |  
|Investment securities available-for-sale                 |  |                        | 4,240   |   |                                 |   | 5,291  |                                  |  |   | 10,171                          |   |  |            | 22,911  |   |               |   |         |   |  |   | 42,613  |  
|Federal funds sold                                       |  |                        | 3,090   |   |                                 |   |       |                                  |  |   | 9,565                           |   |  |            |        |   |               |   |         |   |  |   | 12,655  |  
|Other investments                                        |  |                        | 2,688   |   |                                 |   |       |                                  |  |   |                                |   |  |            | 225     |   |               |   | 5,284    |   |  |   | 8,197   |  
|                                                         |  |                        |         |   |                                 |   |        |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Total interest sensitive assets                          |  |                        | 420,775 |   |                                 |   | 63,377 |                                  |  |   | 102,527                         |   |  |            | 174,065 |   |               |   | 47,636   |   |  |   | 808,380 |  
|                                                         |  |                        |         |   |                                 |   |        |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Interest sensitive liabilities:                          |  |                        |         |   |                                 |   |        |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Deposits:                                                |  |                        |         |   |                                 |   |        |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Non-interest bearing                                     |  |                        |        |   |                                 |   |       |                                  |  |   |                                |   |  |            |        |   |               |   | 159,892  |   |  |   | 159,892 |  
|Interest bearing (1)                                     |  |                        | 341,507 |   |                                 |   | 48,881 |                                  |  |   | 158,438                         |   |  |            | 27,283  |   |               |   |         |   |  |   | 576,109 |  
|Other borrowings (3)                                     |  |                        | 7,865   |   |                                 |   | 10,000 |                                  |  |   |                                |   |  |            | 23,290  |   |               |   | 500      |   |  |   | 41,655  |  
|                                                         |  |                        |         |   |                                 |   |        |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Total interest sensitive liabilities                     |  | $                      | 349,372 |   |                                 | $ | 58,881 |                                  |  | $ | 158,438                         |   |  | $          | 50,573  |   |               | $ | 160,392  |   |  | $ | 777,656 |  
|                                                         |  |                        |         |   |                                 |   |        |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|GAP Analysis                                             |  |                        |         |   |                                 |   |        |                                  |  |   |                                 |   |  |            |         |   |               |   |          |   |  |   |         |  
|Interest rate sensitivity gap                            |  | $                      | 71,403  |   |                                 | $ | 4,496  |                                  |  | $ | (55,911                         | ) |  | $          | 123,492 |   |               | $ | (112,756 | ) |  | $ | 30,726  |  
|GAP as % of total interest sensitive assets              |  |                        | 8.83    | % |                                 |   | 0.56   | %                                |  |   | -6.92                           | % |  |            | 15.28   | % |               |   | -13.95   | % |  |   | 3.80    | %
|Cumulative interest rate sensitivity gap                 |  | $                      | 71,403  |   |                                 | $ | 75,899 |                                  |  | $ | 19,988                          |   |  | $          | 143,480 |   |               | $ | 30,726   |   |  | $ | 30,726  |  
|Cumulative gap as % of total interest sensitive assets   |  |                        | 8.83    | % |                                 |   | 9.39   | %                                |  |   | 2.47                            | % |  |            | 17.75   | % |               |   | 3.80     | % |  |   | 3.80    | %

---

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



|(2) | Non-accrual loans are included as fixed rate loans with a maturity of one year or less for purposes of this table.
|--- | ------------------------------------------------------------------------------------------------------------------



|(3) | Other borrowings reflect the effects of the interest rate swap.
|--- | ---------------------------------------------------------------



Static Gap analysis has certain limitations. Measuring the volume of repricing or maturing assets and liabilities does not always measure the full impact
on net interest income. Static Gap analysis does not account for rate caps on products; dynamic changes such as increasing prepay speeds as interest rates decrease, basis risk, or the benefit of non-rate funding sources. The relationship between
product rate repricing and market rate changes (basis risk) is not the same for all products. The majority of our loan portfolio reprices quickly and completely following changes in market rates, while non-term deposit rates in general move more
slowly and usually incorporate only a fraction of the change in rates. Products categorized as non-rate sensitive, such as non-interest-bearing demand deposits, in the static Gap analysis behave like long term fixed rate funding sources. Both of
these factors tend to make our Company more asset sensitive than is indicated in the static Gap analysis.



INTEREST RATE SIMULATIONS



Interest rate simulations provide us with an estimate of both the dollar amount and percentage change in NII under various rate scenarios. All assets and liabilities are subjected to up to 300 basis point increases and decreases in interest
rates in 100 basis point increments. 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 September 30, 2006 under the interest rate shock scenarios stated. The table was prepared as of September 30, 2005, at which time prime was 6.75%.



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|                |  |                            |        |                    |   |         |                     |  |        |  
|--------------- |  | -------------------------- | ------ | ------------------ | - | ------- | ------------------- |  | ------ | -
|Changesin Rates |  | ProjectedNetinterestIncome |        | ChangefromBaseCase |   |         | %ChangefromBaseCase | 
|                |  | (dollars in thousands)     |       
|+ 300 bp        |  | $                          | 66,569 |                    | $ | 14,004  |                     |  | 26.64  | %
|+ 200 bp        |  | $                          | 61,997 |                    | $ | 9,432   |                     |  | 17.94  | %
|+ 100 bp        |  | $                          | 57,335 |                    | $ | 4,770   |                     |  | 9.07   | %
|0 bp            |  | $                          | 52,565 |                    | $ |        |                     |  | 0.00   | %
|- 100 bp        |  | $                          | 47,746 |                    | $ | (4,819  | )                   |  | -9.17  | %
|- 200 bp        |  | $                          | 43,491 |                    | $ | (9,074  | )                   |  | -17.26 | %
|- 300 bp        |  | $                          | 41,936 |                    | $ | (10,629 | )                   |  | -20.22 | %



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



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



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



There was no significant change in the Companys
internal controls over financial reporting during the quarter ended September 30, 2005 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
|------ | -----------------



None to report.



|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
|------ | ---------------------------------------------------



None to report.



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



None to report.



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



Exhibits



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



(
SIGNATURES)



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



|                      |  |  |  |                                            
|--------------------- |  |  |  | -------------------------------------------
|                      |  |  |  | Community Bancorp Inc.                     
|                      |  |  |  | (Registrant)                               
|                      |  | 
|Date November 2, 2005 |  |  |  | /s/ Michael J. Perdue                      
|                      |  |  |  | Michael J. Perdue                          
|                      |  |  |  | President and Chief Executive Officer      
|                      |  | 
|Date November 2, 2005 |  |  |  | /s/ L. Bruce Mills, Jr.                    
|                      |  |  |  | L. Bruce Mills, Jr.                        
|                      |  |  |  | Sr. Vice President, Chief Financial Officer



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EXHIBIT INDEX



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



49