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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended December 31, 2004

For the transition period from              to             .

Commission File No. 000 – 26505

COMMUNITY BANCORP INC.

(Name of issuer in its charter)

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

Securities registered under Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Act:

Common Stock, $0.625 par value per share

(Title of class)

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 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 if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of the Company’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

As of June 30, 2004, the aggregate market value of the common stock held by non-affiliates of the Company was: $88,011,000

Number of shares of common stock outstanding as of February 28, 2005: 5,254,347

Portions of the definitive proxy statement for the 2005 Annual Meeting of the Company’s shareholders are incorporated into Part III of this Report by reference.

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FORWARD-LOOKING INFORMATION

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

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

PART I

ITEM 1. BUSINESS

WHERE YOU CAN FIND MORE INFORMATION

Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the SEC. We electronically file the following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), Form 11-K (Annual Report for Employees Stock Purchase and Savings Plans), Form 8-K (Report of Unscheduled Material Events), and Form DEF 14A (Proxy Statement). We may file additional forms. The SEC maintains an Internet site, www.sec.gov, in which all forms filed electronically may be accessed. Additionally, all forms filed with the SEC and additional shareholder information (including director and executive officer ownership reports) are available free of charge on our website: www.comnb.com. We post these reports to our website as soon as reasonably practicable after filing them with the SEC. None of the information on or hyperlinked from our website is incorporated into this Report.

Community Bancorp

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

We acquired Cuyamaca Bank, N.A., a commercial bank with assets of approximately $115 million, by merging it into Community National Bank as of the close of business on October 1, 2004. As a result, we consolidated the results of the combined entity beginning in the fourth quarter 2004.

At December 31, 2004, we had total assets of $641.6 million, total deposits of $549.8 million and stockholders’ equity of $63.1 million. We have ten full service branches serving the communities of Bonsall, El Cajon, Encinitas, Escondido, Fallbrook, La Mesa, Murrieta, Santee, Temecula and Vista, and additional SBA loan production offices in California, Arizona and Nevada. According to June 30, 2004 FDIC data, our nine branches (including Cuyamaca and prior to the opening of our Murrieta branch) have a 5.43% combined deposit market share within the nine cities we serve, which would rank us first amongst community banks and sixth among all banks and thrifts.

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Community National Bank

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

The Bank is focused on more “traditional” aspects of commercial banking, including building long term relationships and servicing the entire banking relationship and on the production and servicing of SBA loans that we may retain in the Bank’s loan portfolio or sell to third party investors.

Management

Our highly experienced management team consists of the following individuals:

Our Strategy

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

Our operating goals are to:

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Enhance profitability and expand our banking franchise. We have improved earnings by expanding net interest income, growing non-interest income and controlling expenses. This has resulted in record earnings for 2004 of $8.4 million. Our return on average tangible equity (“ROTE”) and return on average assets (“ROA”) for 2004 were 20.11% and 1.55%, respectively. Our efficiency ratio has also improved to 60.08% for 2004.

Total assets have increased an average of 23% over the past five years. This growth rate has been driven by several factors including loan generation of commercial real estate and other loans, combined with significant increases in core deposits to support the loan growth. Loan production totaled $420.6 million in 2004, contributing to the 35% growth in total assets in 2004.

Maintain strong credit quality. Oversight of our lending portfolio has been performed by individuals with extensive experience in commercial lending, and who have been with us for a significant period of time. Donald W. Murray, Executive Vice President and Chief Credit Officer has 22 years experience in commercial and SBA lending and has been with us since 1994. Gary M. Youmans, Executive Vice President, was hired in 1991 to develop our SBA lending operation. Mr. Youmans has over 35 years of experience in banking and SBA lending. In addition, our other commercial lending officers have an average tenure with us of 6 years, and have experience in excess of 17 years on average in commercial lending. Our consistent lending quality and underwriting expertise is the result of experienced lenders and sound underwriting practices.

Over the last five years the percentage of our net loan charge-offs to average loans outstanding, net of deferred fees and costs, was 0.10% with the percentage being 0.01% for 2004. Non-accrual loans, net of government guarantees, to total loans have averaged 0.21% of total gross loans for the last five years and were 0.39% at December 31, 2004.

Increase core deposits and lower our cost of funds. In 2004, Richard M. Sanborn, Executive Vice President, Chief Administrative Officer, was hired to manage the Bank’s branch network, operations administration, merger/acquisition integration and as well as other administrative oversight. Mr. Sanborn, with 20 years experience in banking and financial services, brought new focus to both core deposit growth and deposit fee generation on the deposit side. In addition, Mr. Sanborn expanded the branch operation by adding one new branch in 2004 and successfully leading the Cuyamaca Bank acquisition which included the integration of 4 additional branches. As a result, average transaction accounts (interest bearing checking accounts, demand deposits, savings and money market accounts) increased 36.0% for the year to $226.1 million in 2004. Non-interest bearing deposits increased 61.3% to $110.8 million as of December 31, 2004 when compared to 2003.

With the continued expansion of the retail banking operations, wholesale deposits as a percentage of total deposits have been declining. Wholesale deposits decreased from $63.7 million as of December 31, 2002 to $59.6 million as of December 31, 2003 and to $58.8 million as of December 31, 2004. As a percentage of total deposits, wholesale deposits declined from 17.5% as of December 31, 2002 to 15.2% as of December 31, 2003 and to 10.7% as of December 31, 2004. We reduced the cost of deposits by 36 basis points to 0.99% for 2004 when compared to 2003. This has contributed to our improved net interest margin.

Continue strong loan production. One of our core strengths is our ability to generate loans, and, in particular, SBA loans. We originated SBA loans of $47.2 million for 2000, $54.5 million for 2001, $85.1 million for 2002, $106.5 million for 2003 and $168.4 million for 2004. SBA loans have provided a recurring revenue stream from three sources:

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We strive to provide greater stability to our earnings through the sale of SBA loans on a quarter-by-quarter basis. Such sales allowed us to normalize earnings during the third and fourth quarter of 2004 despite the extraordinary expenses resulting from compliance with Section 404 of the Sarbanes-Oxley Act. We can not provide assurance as to what the levels of earnings from such sales will be in the future. SBA loans not sold in the secondary market will be retained to enhance interest income. See “Factors That May Affect Future Results of Operations - Legislative and regulatory developments related to SBA lending may adversely affect our revenue.”

Expansion through de novo branches, organic growth and acquisitions. We believe that the consolidation in banking, particularly in the San Diego County market, has created an opportunity at the community banking level in the communities that we serve. Many bank customers feel displaced by large out-of-market acquirers and are attracted to local institutions that have local decision making capability, more responsive customer service, and more familiarity with the needs in their markets. Utilizing our size and experience, we intend to continue expanding our franchise along the high growth areas of the I-15 corridor of San Diego and into the southwest Riverside County. Furthermore, as opportunities arise, we will consider expansion into markets contiguous to our own through potential acquisitions.

We continue to develop and introduce new services for our customers that keep us competitive with larger bank competitors, while maintaining the feel of a community-based bank focused on customer needs. Attracting and maintaining business relationships is a major focus of the Bank.

We acquired Cuyamaca Bank, N.A., a commercial bank with assets of approximately $115 million, by merging it into Community National Bank as of the close of business on October 1, 2004. As a result, we consolidated the results of the combined entity beginning in the fourth quarter 2004.

Efficiently manage capital. We have efficiently managed capital at the holding company while maintaining a “well-capitalized” status on all regulatory capital ratios at the Bank level. We maintain our capital at appropriate levels to fund foreseeable growth. Our capital base at the holding company is made up of long term debt (Trust Preferred securities) and Common Stock. Our goal is to continue to maximize ROE and minimize our overall cost of capital by maintaining an efficient capital structure.

We initiated a $0.05 per share quarterly cash dividend during the first quarter of 2004 which totaled $0.20 for the year. In January 2005, we declared a cash dividend of $0.10 per share, payable on March 31, 2005 to stockholders of record on March 15, 2005.

Market Area

Our primary market area is San Diego County consisting of the communities of Bonsall, El Cajon, Encinitas, Escondido, Fallbrook, La Mesa, Santee and Vista, and southwest Riverside County in the communities of Temecula and Murrieta.

Lending

The following is a discussion of our various lending functions.

Underwriting Process

Our lending activities are guided by the basic lending policies established by our Board of Directors. Each loan must meet minimum underwriting criteria established in our lending policies and must fit within our strategies for yield and portfolio enhancement.

For all newly originated loans, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered and, if necessary, additional financial information is requested. An independent appraisal is required on every property securing a loan in excess of $250,000. In addition, a loan officer conducts a review of these appraisals for accuracy, reasonableness and conformance to our lending policy on all applications. All revisions to our approved appraiser list must be approved by the President.

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Credit approval authority is segregated into three distinct levels, namely the Directors’ Loan Committee, Officers’ Loan Committee and the individual lending limits of loan officers. The limits for the various levels are determined by the Board of Directors and/or the President and reviewed periodically. Our Directors’ Loan Committee consists of our President, who is the Chairman, and at least three of our outside directors. The committee meets at least once a month or more frequently as needed. Our Officers’ Loan Committee consists of our President, our Executive Vice President/Chief Credit Officer, our Executive Vice President/SBA, our Senior Vice President/Credit Administration, our Senior Vice President/Senior Commercial Lending Manager, our Vice President/SBA Manager and our First Vice President/Corporate lending. Our committee is chaired by our Chief Credit Officer and meets twice a week or more frequently as needed.

Our Board has established loan authority guidelines, which in general state that all loans to borrowing relationships where the aggregate amount of credit is over $2,000,000 or more must be submitted to our Officers’ Loan Committee for approval. Our Officers’ Loan Committee has authority to approve loans up to $5.0 million. Our Directors’ Loan Committee approves all loans over $5.0 million, and reviews all secured loans originated of $500,000 or more and all other loans of $100,000 or more, as well as classification of assets, delinquencies and the current status of the loan portfolio. See “Concentrations of Credit”

If the loan is approved, our loan commitment specifies the terms and conditions of the proposed loan including the amount, interest rate, amortization term, a brief description of the required collateral, and the required insurance coverage. Generally, the borrower must provide proof of fire, flood (if applicable) and casualty insurance on the property serving as collateral, which insurance must be maintained during the full term of the loan. Also, generally, title insurance is required on all real estate secured loans.

Outside of our ten branches, we maintain loan production offices in California, Arizona, and Nevada. Our loan production offices are typically staffed with a loan officer who prepares the loan applications and compiles the necessary information regarding the applicant. The completed loan file is then sent to our main office where the credit decision is made. Our loan production offices not associated with the retail branches predominantly originate loans guaranteed by the SBA. Our retail branches may include both SBA loan officers as well as non-SBA commercial loan officers.

SBA Lending Programs

Our SBA lending programs are designed by the federal government to assist the small business community in obtaining financing from financial institutions that are given government guarantees as an incentive to make the loan. We are a “Preferred Lender” with the SBA. As a “Preferred Lender,” we can approve a loan within the authority given us by the SBA without prior approval from the SBA. “Preferred Lenders” approve, package, fund and service SBA loans within a range of authority that is not available to other SBA lenders without the “Preferred Lender” designation. We have been a “Preferred Lender” since 1992 and have this authority throughout the states of California, Arizona, Oregon and Nevada.

Our SBA loans fall into two categories, loans originated under the SBA’s 7a Program (“7a Loans”) and loans originated under the SBA’s 504 Program (“504 Loans”). Historically, 7a Loans have represented approximately 80% of the SBA Loans we originate while 504 Loans have represented the balance. In late 2002, the Company opened a separate lending unit for SBA 504 loan production. During the year ended December 31, 2004, 504 Loans constituted approximately 61% of all SBA loans originated. Of all SBA loans originated, approximately 98.9% are collateralized by commercial real estate, while the balance are commercial business loans generally for the purpose of funding working capital, equipment purchases and accounts receivable. See “Commercial Real Estate Lending” and “General Business Lending.”

Under the SBA’s 7a Program, loans are guaranteed up to 85% by the SBA. SBA 7a loans in excess of $150,000 are guaranteed 75% by the SBA. Generally, this guarantee may become invalid only if the loan does not meet the SBA documentation guidelines.

In general our policy permits SBA 7a Loans in amounts currently authorized by the SBA. Loans collateralized by real estate have terms of up to 25 years, while loans collateralized by equipment and working capital have terms of up to 10 years and 7 years, respectively. We require a 10% down payment on most 7a Loans, with a 15% to 20% down payment on loans collateralized by special use properties.

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Under the SBA’s 504 Program, we require a 10% down payment. We then enter into a 50% first trust deed secured loan to the borrower and an interim 40% second trust deed secured loan. The first trust deed secured loan has a term of 25 years. The second trust deed secured loans is for a term of 120 days. Within the 120 day period of entering into the loan, the second trust deed loans are refinanced by SBA certified development companies and used as collateral for SBA guaranteed debentures. For 504 construction loans, the 120 day period does not commence until the notice of completion is filed. The first trust deed secured loans may be pre-sold by the Bank with no recourse, prior to releasing the funds to the purchaser. We retain no servicing on 504 Loans after they are sold.

We periodically sell the guaranteed and unguaranteed portions of SBA 7a loans we originate. We retain the servicing on such loans. This strategy allows us to manage our liquidity levels and to ensure that funding is always available to meet the local community loan demand. Upon sale in the secondary market, the purchaser of the guaranteed portion of 7a Loans pays a premium to us which, generally, is between 6% and 10% of the guaranteed amount. We also receive a servicing fee equal to 1% to 2% of the amount sold in the secondary market. In the event that a 7a Loan goes into default within 270 days of its sale, or prepays within 90 days, we are required to repurchase the loan and refund the premium to the purchaser. During the three year period ended December 31, 2004, we have not repurchased any loans that defaulted within the first 270 days, and have had only 2 loans prepay within the first 90 days. A reserve has not been deemed necessary as the likelihood of a refund is considered remote.

SBA lending is a federal government created and administered program. As such, legislative and regulatory developments can affect the availability and funding of the program. This dependence on legislative funding and regulatory restrictions from time to time causes limitations and uncertainties with regard to the continued funding of such loans, with a resulting potential adverse financial impact on our business. Since our SBA Division constitutes a significant portion of our lending business, this dependence on this government program and its periodic uncertainty with availability and amounts of funding creates greater risk for the our business than does other parts of our business. See “Factors That May Affect Future Results of Operations - Legislative and regulatory developments related to SBA lending may adversely affect our revenue.”

Total Loan Portfolio Composition

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

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Loan Maturity

The following table sets forth the contractual maturities of our gross loans at December 31, 2004:

The following table sets forth, as of December 31, 2004, the dollar amounts of gross loans outstanding that are contractually due after December 31, 2005 and whether such loans have fixed or adjustable rates.

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Loan Production and Sale

The following table sets forth our loan production by category and purchases, sales and principal repayments of loans for the periods indicated:

Commercial Lending

We offer commercial business loans to businesses operating in our primary market area. Our commercial business loans consist of lines of credit which require annual renewals, adjustable-rate loans with terms of five to seven years, and short term fixed-rate loans with terms of up to three years. Such loans are made up to our loans-to-one-borrower limit. We will also enter into commercial loans in excess of $9.9 million, our current legal lending limit, but will participate out that portion in excess of our legal lending limit.

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Small Aircraft Lending

Our commercial loan portfolio also includes loans secured by new and used aircraft. The original loan amounts range in size from $12,000 to $1.0 million, however, our average loan size is $116,000. These loans have 15 or 20 year terms and are offered at variable or fixed interest rates. At December 31, 2004, we had $28.8 million of aircraft loans in our portfolio.

Our aircraft loan customers are generally professionals, business owners and other high net worth individuals. We primarily focus on the credit worthiness of the borrower and also review the wholesale value of the aircraft. A title search is conducted on all aircraft loans. In addition, appropriate ground and air coverage insurance and title insurance must be obtained by the borrower.

Commercial Real Estate Lending

We focus on originating loans secured by commercial real estate, such as retail centers, small office, light industrial buildings and other mixed use commercial properties. We will also make loans secured by special purpose properties such as motels, and, from time-to-time, restaurants and service stations. Pursuant to our underwriting policies, commercial real estate loans, which are not SBA loans, may be made in amounts up to 75% of the appraised value of the property. These loans may be made with terms up to 10 years and are either adjustable rate loans or fixed for a maximum term of up to 5 years. We generally require a minimum debt service ratio (the ratio of net earnings on a property to service the debt) of 1.25 to 1 or more. In addition to commercial real estate lending, and to a much lesser extent, we originate loans secured by multi-family residential properties.

Loans secured by commercial real estate and multi-family residential properties are generally larger and involve a greater degree of risk than one- to four-family residential loans. The liquidation value of commercial and multi-family properties may be adversely affected by risks generally incidental to interests in real property, including changes or continued weakness in general or local economic conditions and/or specific industry segments; declines in real estate values; declines in occupancy rates; increases in interest rates, real estate and personal property tax rates and other operating expenses (including energy costs); the availability of refinancing; changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation, taxation and other factors beyond the control of the borrower or the lender. Because of this, an important consideration is the borrower’s experience in owning and managing similar properties and our lending experience with the borrower.

Construction Lending

We originate construction loans on both one- to four- family residences and on commercial real estate properties. We originate two types of residential construction loans, consumer and builder. We originate consumer construction loans to build single family residences. We will originate builder construction loans to companies engaged in the business of constructing homes for resale. These loans may be for homes currently under contract for sale or homes built for speculative purposes to be marketed for sale during construction. For owner occupied single family residences, the borrower and the property must qualify for permanent financing. Prequalification for owner occupied single family residences is required. For commercial property, the borrower must qualify for permanent financing and the debt service coverage generally must be 1.25 to 1 or more. Qualification for commercial properties can be determined by the loan officer as part of the credit presentation. Absent such prequalification, a construction loan will not be approved. We originate land acquisition and development loans with the source of repayment being either the sale of finished lots or the sale of homes to be constructed on the finished lots. Construction loans are generally offered with terms up to eighteen months.

Construction loans are generally made in amounts up to 75% of the value of the security property for non-owner occupied single family residences and commercial properties and up to 80% for owner-occupied single family residences. During construction, loan proceeds are disbursed in draws as construction progresses based upon inspections of work in place by independent construction inspectors. At December 31, 2004, we had construction loans, including land acquisition and development loans, totaling $75.2 million.

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Construction loans are generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the secured property’s value upon completion of construction as compared to the estimated costs of construction, including interest. Also, we assume certain risks associated with the borrower’s ability to complete construction in a timely and workmanlike manner. If the estimate of value proves to be inaccurate, or if construction is not performed timely or accurately, we may be confronted with a project which, when completed, has a value which is insufficient to assure full repayment.

Consumer Lending

Our portfolio of consumer loans primarily consists of adjustable-rate home equity lines of credit and installment loans secured by new or used automobiles and loans secured by deposit accounts. Unsecured consumer loans are made with a maximum term of three years and a maximum loan amount of $5,000. At December 31, 2004, installment and unsecured consumer loans totaled $9.5 million.

As of December 31, 2004, home equity loans totaled $8.0 million. Our home equity loans are adjustable-rate and reprice with changes in the prime rate as reported in the Wall Street Journal. Adjustable-rate home equity lines of credit are offered in amounts up to 75% of the appraised value. Home equity lines of credit are offered with terms up to ten years.

Our one- to four- family residential loan portfolio at December 31, 2004, was $8.7 million. As of December 31, 2004, the average loan size for one- to four- family residential loans was $285,000, the average remaining maturity was 5 years, the average current interest rate was 6.78%.

Loan Servicing

Loans are serviced by our Note department except for long term permanent loans secured by single family residences, which are serviced by a third party which specializes in residential mortgage servicing. The loan officer is responsible for the day to day relationship with the customer, unless the loan becomes delinquent, at which time the responsibilities are reassigned to credit administration. Loan servicing is centralized at our corporate headquarters. As of December 31, 2004, our servicing portfolio was $706.1 million of which $172.0 million were loans serviced for others. Of the $172.0 million serviced for others, $162.6 million were SBA 7a loans.

Our loan servicing operations performed by the Note department are intended to provide prompt customer service and accurate and timely information for account follow-up, financial reporting and management review. Following the funding of an approved loan, all pertinent loan data is entered into our data processing system, which provides monthly billing statements, tracks payment performance, and effects agreed upon interest rate adjustments on loans. Regular loan service functions include payment processing and collection notices, as well as tracking the performance of additional borrower obligations with respect to the maintenance of casualty insurance coverage, payment of property taxes and senior liens. When payments are not received by their contractual due date, collection efforts begin on the fifteenth day of delinquency with a telephone contact. If the borrower is non-responsive or the loan officer feels more stringent action may be required, the Credit Administrator and/or the Chief Credit Officer are consulted. Notices of default are generally filed when the loan has become 30-90 days past due.

Credit Risk and Loan Review

Credit risk represents the possibility that a customer or counter-party may not perform in accordance with contractual terms. We incur credit risk whenever we extend credit to, or enter into other transactions with, our customers. Loan review and other loan monitoring practices provide a means for our management to ascertain whether proper credit, underwriting and loan documentation policies, procedures and practices are being followed by our loan officers and are being applied uniformly. Implementation and daily administration of loan review rests with our Chief Credit Officer and our President who approve loan officer requests for changes in risk ratings. Loan officers are responsible for continually grading their loans so that individual credits properly reflect the risk inherent therein. On a quarterly basis, our Board of Directors provide for a third-party outside loan review of all loans that meet certain criteria originated since the previous review. While we continue to review these and other related functional areas, there can be no assurance that the steps we have taken to date will be sufficient to enable us to identify, measure, monitor and control all credit risk.

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Concentrations of Credit

Our primary investment is in loans, 86.5% of which were secured by real estate at December 31, 2004. Therefore, although we monitor the real estate loan portfolio on a regular basis to avoid undue concentrations to a single borrower or type of real estate collateral, real estate in general is considered a concentration of investment. We seek to mitigate this risk by requiring each borrower to have a certain amount of equity in the real estate at the time of production, depending on the type of real estate and the credit quality of the borrower. Trends in the market are monitored closely by management on a regular basis.

Under federal law, our ability to make aggregate loans-to-one-borrower is limited to 15% of unimpaired capital and surplus (as of December 31, 2004, this amount was $9.9 million) plus an additional 10% of unimpaired capital and surplus if a loan is secured by readily-marketable collateral (defined to include only certain financial instruments and gold bullion).

Investment Activities

Our investment policy, as established by the Board of Directors, attempts to provide for and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement our lending activities. Specifically, our policies generally limit investments to government and federal agency-backed securities and other non-government guaranteed securities, including corporate debt obligations, which are investment grade. Our policies provide the authority to invest in mortgage-backed securities guaranteed by the U.S. government and agencies thereof. Our policies provide that all investment purchases which individually exceed $5.0 million, or that are outside the policy guidelines, be approved by our Board of Directors or committee thereof. Purchases and sales under this limitation and within the guidelines of the policies may be done at the discretion of our President, our Chief Financial Officer or our Controller. At December 31, 2004, we had $26.6 million in U.S. Treasury and agency securities available for sale, $4.2 million in U.S. Treasury and agency securities held for investment and federal funds sold of $9.6 million.

We have subscribed to a 6.4% interest in a limited partnership that was formed to develop and operate six properties with a total of 433 affordable housing units for lower income tenants throughout the state of California. The facilities have been awarded federal and state affordable housing tax credits which pass-through to the limited partnership investors. We are committed to a total investment in the limited partnership of $1.0 million. As of December 31, 2004, $854,000 of the investment had been funded, with $96,000, $24,000 and $26,000 to be disbursed in 2005, 2006 and 2007, respectively. The balance of the investment as of December 31, 2004 was $724,000, net of amortization.

In the second quarter of 2003, we subscribed to a 23.5% interest in a second limited partnership operating a 112 unit senior assisted living facility in Escondido, California. The facility has been awarded federal and state affordable housing tax credits which pass-through to the limited partnership investors. We are committed to a total investment in the limited partnership of $2.0 million. As of December 31, 2004, $2.0 million of the investment had been funded. The balance of the investment as of December 31, 2004 was $1.8 million, net of amortization.

In the fourth quarter of 2004, we subscribed to a 2.4% interest in a third limited partnership that was formed to develop and operate 23 properties for lower income tenants. The facilities have been awarded federal and state affordable housing tax credits which pass-through to the limited partnership investors. We are committed to a total investment in the limited partnership of $3.0 million. As of December 31, 2004, $30,000 of the investment had been funded, with $2.5 million and $480,000 to be disbursed in 2006 and 2007, respectively. The balance of the investment as of December 31, 2004 was $30,000, net of amortization.

The remaining federal tax credits to be utilized over a multiple-year period are $5.4 million as of December 31, 2004. Our usage of tax credits approximated $430,000 during 2004. Investment amortization amounted to $215,000 for the year ended December 31, 2004. The cost of these investments is being amortized on a level-yield method over the life of the related tax credits. The partnerships must meet the regulatory requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits, otherwise, the credits may be denied and/or a portion of the credits previously taken may be subject to recapture with interest.

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The following table sets forth the carrying values and estimated fair values of our held to maturity and available for sale investment portfolios at the dates indicated.

The contractual maturities of securities held to maturity at December 31, 2004 were as follows:

Sources of Funds

General

Deposits, loan repayments and prepayments, proceeds from the sales of loans, cash flows generated from operations and Federal Home Loan Bank (“FHLB”) borrowings are the primary sources of our funds for use in lending, investing and for other general purposes.

Deposits

We offer a variety of deposit accounts with a range of interest rates and terms. Our deposits consist of checking accounts, money market accounts, savings accounts and certificates of deposit. As of December 31, 2004, core deposits, defined as transaction accounts plus retail certificates of deposit under $100,000, constituted 68% of total deposits. As of December 31, 2004, the average core deposit account was $28,000. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. Our deposits are attracted primarily from individuals and small and medium-sized businesses.

We rely primarily on customer service, aggressive marketing and cross-selling to customers and prospects to attract and retain deposits. However, market interest rates and products, and rates offered by competing financial institutions significantly affect our ability to grow and retain deposits.

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The following table sets forth the distribution of our average deposit accounts for the periods indicated and the weighted average yields for each category of deposits presented:

At December 31, 2004, we had $178.6 million in time deposits in amounts of $100,000 or more, consisting of 615 accounts, maturing as follows:

Employees

As of December 31, 2004, we had a total of 186 full-time employees and 24 part-time employees reflecting a full time equivalent 203 employees. We believe that our employee relations are satisfactory.

Competition

The banking and financial services business in California generally, and in our primary market area specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers.

We compete for loans, deposits and customers for financial services with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other non-bank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than we do. In order to compete with the other financial services providers, we principally rely upon local promotional activities, personal relationships established by officers, directors and employees with our customers, and specialized services tailored to meet our customers’ needs.

Effect of Governmental Policies and Recent Legislation

Banking is a business that depends on rate differentials. In general, the difference between the interest rate we pay on our deposits and our other borrowings and the interest rate we receive on loans extended to our customers and securities held in our portfolio comprise the major portion of our earnings. These rates are highly sensitive to many factors that are beyond our control. Accordingly, our earnings and growth are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment.

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The commercial banking business is not only affected by general economic conditions but is also influenced by monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted.

From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the California legislature and before various bank regulatory and other professional agencies.

Supervision and Regulation

Community Bancorp and the Bank are extensively regulated under both federal and state law. Set forth below is a summary description of certain laws, which relate to the regulation of Community Bancorp and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

Community Bancorp

Community Bancorp is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), and is registered as such with, and subject to the supervision of, the Federal Reserve Board. Community Bancorp is required to file with the Federal Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may conduct examinations of bank holding companies and their subsidiaries.

Community Bancorp is required to obtain the approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, Community Bancorp would own or control more than 5% of the voting shares of such bank. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of Community Bancorp and another bank holding company.

Community Bancorp is prohibited by the Bank Holding Company Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging, directly or indirectly, in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, Community Bancorp may, subject to the prior approval of the Federal Reserve Board, engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Federal Reserve Board may require that Community Bancorp terminate an activity or terminate control of or liquidate or divest subsidiaries or affiliates when the Federal Reserve Board determines that the activity or the control or the subsidiary or affiliates constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, Community Bancorp must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities.

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Under the Federal Reserve Board’s regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe and unsound manner. In addition, it is the Federal Reserve Board’s policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board’s regulations or both.

We and the Bank are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither Community Bancorp nor the Bank may condition an extension of credit to a customer on either (1) a requirement that the customer obtain additional services provided by us or (2) an agreement by the customer to refrain from obtaining other services from a competitor

Our common stock is registered with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended. As such, we are subject to the information, proxy solicitation, insider trading, corporate governance, and other requirements and restrictions of such Act.

The Bank

The Bank, as a national banking association, is subject to primary supervision, examination and regulation by the Comptroller. If, as a result of an examination of a bank, the Comptroller should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the Comptroller. Such remedies include the power to enjoin “unsafe or unsound practices,” to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, and to remove officers and directors. The FDIC has similar enforcement authority, in addition to its authority to terminate a bank’s deposit insurance in the absence of action by the Comptroller and upon a finding that a bank is in an unsafe or unsound condition, is engaging in unsafe or unsound activities, or that its conduct poses a risk to the deposit insurance fund or make prejudice the interest of its depositors. The Bank has never been subject to any such actions by the Comptroller or the FDIC.

The deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank pays a semiannual statutory assessment. The Bank is also subject to certain regulations of the Federal Reserve Board and applicable provisions of California law, insofar as they do not conflict with or are not preempted by federal banking law. Various other requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes and regulations relate to many aspects of the Bank’s operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, capital requirements and disclosure obligations to depositors and borrowers. Further, the Bank is required to maintain certain levels of capital.

Capital Standards

The Federal Reserve Board and the Comptroller have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which includes off balance sheet items, against both

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total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock, retained earnings, non-cumulative perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, cumulative preferred stock, long term preferred stock, eligible term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.

In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of Community Bancorp to grow and could restrict the amount of profits, if any, available for the payment of dividends.

For information concerning the capital ratios of Community Bancorp and the Bank, see, “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Under applicable regulatory guidelines, the Bank was considered “Well Capitalized” as of December 31, 2004.

Under applicable regulatory guidelines, Community Bancorp Inc.’s trust preferred securities issued by our subsidiary capital trusts qualify as Tier 1 capital up to a maximum limit of 25% of Tier 1 capital. Any additional portion of the trust preferred securities would qualify as Tier II capital. As of December 31, 2004, those subsidiary trusts have $15 million in trust preferred securities outstanding, of which $14.9 million qualify as Tier 1 capital. See “Factors That May Affect Future Results of Operations – Recent accounting changes may give rise to a future regulatory capital event that may reduce our consolidated capital ratios or permit us to redeem the trust preferred securities.”

Prompt Corrective Action

Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios described above. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment.

In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include;

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Additionally, a holding company’s inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against the holding company.

Premiums for Deposit Insurance

The Bank’s deposits are currently insured to a maximum of $100,000 per depositor through the Bank Insurance Fund administered by the FDIC. The Bank is required to pay deposit insurance premiums, which are assessed semiannually and paid quarterly. The premium amount is based upon a risk classification system established by the FDIC. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern.

The FDIC is also empowered to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary.

The FDIC is authorized to terminate a depository institution’s deposit insurance upon a finding by the FDIC that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency.

Sarbanes-Oxley Act of 2002

On July 30, 2002, the Sarbanes-Oxley Act of 2002 (“SOX”), was signed into law to address corporate and accounting fraud. SOX establishes a new accounting oversight board that will enforce auditing standards and restricts the scope of services that accounting firms may provide to their public company audit clients. Among other things, SOX also (i) requires chief executive officers and chief financial officers to certify to the accuracy of periodic reports filed with the SEC; (ii) imposes new requirements regarding internal controls, off-balance-sheet transactions, and pro forma (non-GAAP) disclosures; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; and (iv) requires companies to disclose whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert.”

Under SOX, the SEC is required to regularly and systematically review corporate filings, based on certain enumerated factors. To deter wrongdoing, SOX: (i) subjects bonuses issued to top executives to disgorgement if a restatement of a company’s financial statements was due to corporate misconduct; (ii) prohibits an officer or director from misleading or coercing an auditor; (iii) prohibits insider trades during pension fund “blackout periods”; (iv) imposes new criminal penalties for fraud and other wrongful acts; and (v) extends the period during which certain securities fraud lawsuits can be brought against a company or its officers.

As a public reporting company, Community Bancorp is subject to the requirements of SOX and related rules and regulations issued by the SEC and Nasdaq. We incurred substantial, additional expense as a result of the Act, but we do not expect that such compliance will have a material impact on our business.

Financial Services Modernization Legislation

On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”) was signed into law. The Financial Services Modernization Act is intended to modernize the banking industry by removing barriers to affiliation among banks, insurance companies, the securities industry and other financial service providers. It provides financial organizations with the flexibility of structuring such affiliations through a holding company structure or through a financial subsidiary of a bank, subject to certain limitations. The Financial Services Modernization Act establishes a new type of bank holding company, known as a financial holding company, which may engage in an expanded list of activities that are “financial in nature,” which include securities and insurance brokerage, securities underwriting, insurance underwriting and merchant banking. Community Bancorp has not chosen to seek “financial holding company” status.

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The Financial Services Modernization Act also sets forth a system of functional regulation that makes the Federal Reserve Board the “umbrella supervisor” for holding companies, while providing for the supervision of the holding company’s subsidiaries by other federal and state agencies.

In addition, the Bank is subject to other provisions of the Financial Services Modernization Act, including those relating to CRA, privacy and safe-guarding confidential customer information, regardless of whether the Company elects to become a financial holding company or to conduct activities through a financial subsidiary of the Bank. The Company does not, however, currently intend to file notice with the Federal Reserve Board to become a financial holding company or to engage in expanded financial activities through a financial subsidiary of the Bank.

Community Bancorp and the Bank do not believe that the Financial Services Modernization Act will have a material adverse effect on their operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that Community Bancorp and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than Community Bancorp and the Bank.

USA Patriot Act of 2001

On October 26, 2001, President Bush signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism, or the Patriot Act, of 2001. Among other things, the Patriot Act (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals (iii) requires financial institutions to establish an anti-money-laundering compliance program, and (iv) eliminates civil liability for persons who file suspicious activity reports. The Patriot Act also increases governmental powers to investigate terrorism, including expanded government access to account records. The Department of the Treasury is empowered to administer and make rules to implement the Patriot Act. While we believe the Patriot Act may, to some degree, affect our recordkeeping and reporting expenses, we do not believe that it will have a material adverse effect on our business and operations.

Transactions with Affiliates

Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under the Federal Reserve Act. The Federal Reserve Board issued Regulation W on October 31, 2002, which comprehensively implements Sections 23A and 23B of the Federal Reserve Act. Sections 23A and 23B and Regulation W restrict loans by a depository institution to its affiliates, asset purchases by a depository institution from its affiliates, and other transactions between a depository institution and its affiliates. Regulation W unifies in one public document the Federal Reserve Board’s interpretations of Section 23A and 23B. Regulation W had an effective date of April 1, 2003.

Community Reinvestment Act

The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and CRA activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities.

When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. A bank’s compliance with its CRA obligations is based on a performance-based evaluation system which bases CRA ratings on an institution’s lending service and investment

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performance, resulting in a rating by the appropriate bank regulatory agency of “outstanding”, “satisfactory”, “needs to improve” or “substantial noncompliance.” At its last examination by the Comptroller, the Bank received a CRA rating of “Satisfactory.”

Safety and Soundness Standards

The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) imposes certain specific restrictions on transactions and requires federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. The federal banking agencies may require an institution to submit to an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution’s noncompliance with one or more standards.

Privacy

Federal banking rules limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. Pursuant to these rules, financial institutions must provide:

These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. We have implemented our privacy policies in accordance with the law.

In recent years, a number of states have implemented their own versions of privacy laws. For example, in 2003, California adopted standards that are more restrictive than federal law, allowing bank customers the opportunity to bar financial companies from sharing information with their affiliates.

Predatory Lending

The term “predatory lending,” much like the terms “safety and soundness” and “unfair and deceptive practices,” is far-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to a concise or a comprehensive definition. But typically predatory lending involves at least one, and perhaps all three, of the following elements:

Federal Reserve Board regulations aimed at curbing such lending significantly widened the pool of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994, a federal law that requires extra disclosures and consumer protections to borrowers. The following triggers coverage under the Home Ownership and Equity Protection Act of 1994:

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In addition, the regulation bars loan flipping by the same lender or loan servicer within a year. Lenders also will be presumed to have violated the law—which says loans shouldn’t be made to people unable to repay them—unless they document that the borrower has the ability to repay. Lenders that violate the rules face cancellation of loans and penalties equal to the finance charges paid. Community Bancorp does not expect these rules and potential state action in this area to have a material impact on our financial condition or results of operation.

Factors that May Affect Future Results of Operations

In addition to the other information contained in this Report, the following risks may affect us. If any of these risks occur, our business, financial condition or operating results could be adversely affected.

We are highly dependent on real estate and a downturn in the real estate market could hurt our business.

A significant portion of our loan portfolio is dependent on real estate. At December 31, 2004, real estate served as the principal source of collateral with respect to approximately 86.5% of the Bank’s loan portfolio. A decline in current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of real estate owned by us, as well as our financial condition and results of operations in general and the market value of our common stock. Acts of nature, including earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.

Failure to successfully execute our strategy could adversely affect our performance.

Our financial performance and profitability depends on our ability to execute our corporate growth strategy. Continued growth, however, may present operating and other problems that could adversely affect our business, financial condition and results of operations. Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain the level of profitability that we have recently experienced.

Our business is subject to interest rate risk and changes in interest rates may adversely affect our performance and financial condition.

Our earnings are impacted by changing interest rates. Changes in interest rates impact the demand for new loans, the credit profile of our borrowers, the rates received on loans and securities and rates paid on deposits and borrowings. The difference between the rates received on loans and securities and the rates paid on deposits and borrowings is known as interest rate spread. Given our current volume and mix of interest-bearing liabilities and interest-earning assets, we would expect our interest rate spread to increase if interest rates rise and, conversely, to decline if interest rates fall. Although we believe our current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations. Additionally, changes in interest rates will impact the gains we realize on the sale of SBA loans.

Our earnings are highly dependent on our continued ability to originate, sell and service SBA loans.

Our earnings are highly dependent on our ability to generate new SBA loans. Increases in interest rates and other economic conditions could result in decreased SBA loan demand as well as lower gain on sale.

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Legislative and regulatory developments related to SBA lending may adversely affect our revenue.

SBA lending is a federal government created and administered program. As such, legislative and regulatory developments can affect the availability and funding of the program. This dependence on legislative funding and regulatory restrictions from time to time causes limitations and uncertainties with regard to the continued funding of SBA loans, with a resulting potential adverse financial impact on our business.

For example, the SBA 7a program was halted briefly in January 2004, and when the program returned to operation, the maximum loan size had been decreased from $1.3 million to $750,000 per loan. Furthermore, the loans can no longer be secured by a second trust deed as previously allowed under the rules. Currently, the maximum SBA 7a loan is $2.0 million.

In late 2002, we began to concentrate on the efficient production of our SBA 504 lending. In 2004, the SBA 504 product accounted for 60.8% of the Company’s SBA loan production, or $102.5 million, which is a significant increase over prior years. We believe we can now shift a significant portion of the demand for the larger real estate secured loans from the 7a program to the SBA 504 loan product, which has been unaffected by the Government’s limitations on 7a loans. As a result, if we generate fewer 7a loans and have less gain on sale revenue in future periods due to governmental restrictions on 7a lending, we expect the increased income from our expanded SBA 504 portfolio will help lessen the impact of the restricted 7a program.

Economic conditions in the Southern California area could adversely affect our operations.

Our retail and commercial banking operations are concentrated primarily in San Diego and southwest Riverside Counties. As a result of this geographic concentration, our results of operations depend largely upon economic conditions in this area. Deterioration in economic conditions in our market area could have a material adverse impact on the quality of our loan portfolio and the demand for our retail and commercial banking products and services, which in turn may have a material adverse effect on our results of operations.

We are subject to government regulation that could limit or restrict our activities, which in turn could adversely impact our operations.

The financial services industry is regulated extensively. Federal and State regulation is designed primarily to protect the deposit insurance funds and consumers, and not to benefit our shareholders. These regulations can sometimes impose significant limitations on our operations. In addition, these regulations are constantly evolving and may change significantly over time.

New laws and regulations or changes in existing laws and regulations or repeal of existing laws and regulations may adversely impact our business. For example, operating expenses were impacted by the $1.5 million cost of complying with the new Sarbanes-Oxley Section 404 provisions in the year ended December 31, 2004.

Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects economic conditions for us.

We face strong competition from financial service companies and other companies that offer banking services that could hurt our business.

The financial services business in our market areas is highly competitive. It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers. We face competition both in attracting deposits and in making loans. We compete for loans principally through the interest rates and loan fees we charge and the efficiency and quality of services we provide. Increasing levels of competition in the banking and financial services businesses may reduce our market share or cause the prices we charge for our services to fall. Our results may differ in future periods depending upon the nature or level of competition.

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If a significant number of borrowers, guarantors and related parties fail to perform as required by the terms of their loans, we will sustain losses.

A significant source of risk arises from the possibility that losses will be sustained if a significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans. This risk increases when the economy is weak. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations.

We are exposed to risk of environmental liabilities with respect to properties to which we take title.

In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

Our internal operations are subject to a number of risks.