**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**




**Washington,
      D.C. 20549**




**FORM
      10-K**




(Mark
      one)


x
            Annual
                report under Section 13 or 15(d) of the Securities Exchange Act of
                1934





**For
      the Fiscal Year December 31, 2006**





o
            Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934




Commission
      file number: **000-51949**




**Valley
      Commerce Bancorp**


(Name
      of
      Small Business Issuer in its charter)





**California**
            **46-1981399**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S. 
                Employer Identification No.)**200
                South Court Street, Visalia, California 93291**(Address
                of principal executive offices and Zip Code)**(559)
                622-9000**(Issuer’s
                telephone number, including area
                code)




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




Securities
      registered under Section 12(g) of the Exchange Act: **Common
      stock, no par value**




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.





Yes o  No x




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the Exchange Act o




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 issuer was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past
      90 days.  Yes x No o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of registrant’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. x




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.





Large
                Accelerated Filero
            Accelerated
                Filero
            Non-accelerated
                filerx




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




Yes o No x




State
      issuer’s revenues for its most recent fiscal year: $17,745,731







1




State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      last sold, or the average bid and asked price of such common equity, as of
      the
      last business day of the registrant’s most recently completed second quarter.
      (See definition of affiliate in Rule 12b-2 of the Exchange Act.): $33,772,008,
      based upon the closing price of the issuer’s Common Stock reported March 21,
      2007, on the OTC Bulletin Board. For purposes of this disclosure, shares of
      Common Stock held by persons who the issuer believes beneficially own more
      than
      5% of the outstanding shares of Common Stock and shares held by officers and
      directors of the issuer have been excluded because such persons may be deemed
      to
      be affiliates of the issuer.  This determination is not necessarily
      conclusive.






**(APPLICABLE
      ONLY TO CORPORATE REGISTRANTS)**





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date.




As
      of
      March 13, 2007, 2,217,588 shares of the issuer’s Common Stock were
      outstanding.






**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the definitive proxy statement to be used in conjunction with the 2007 Annual
      Meeting of Shareholders are incorporated by reference into Part III of the
      Form
      10-K.




2




**TABLE
      OF CONTENTS**




**Part
      I**




PageItem
                1.
            Business
            5Item
                1A.
            Risk
                Factors
            14Item
                1B.
            Unresolved
                Staff Comments
            15Item
                2.
            Properties
            16Item
                3.
            Legal
                Proceedings
            17Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            17**Part
                II**Item
                5.
            Market
                For Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            18Item
                6.
            Selected
                Financial Data
            21Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and
                Results of Operations
            23Item
                7A.
            Quantitative
                and Qualitative Disclosure About Market
                Risk
            38Item
                8.
            Financial
                Statements and Supplementary Data
            40Item
                9.
            Changes
                in and Disagreements With Accountants on Accounting and
                Financial Disclosure
            84Item
                9A.
            Controls
                and Procedures
            84Item
                9B.
            Other
                Information
            84**Part
                III**Item
                10.
            Directors,
                Executive Officers, and Corporate Governance.
            85Item
                11.
            Executive
                Compensation
            85Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            85Item
                13.
            Certain
                Relationships and Related Transactions and Director
                Independence
            85Item
                14.
            Principal
                Accountant Fees and Services
            85**Part
                IV**Item
                15.
            Exhibits,
                Financial Statement Schedules
            85Signatures




3
 *Table
          of Contents*


**PART
      I**




**Forward-Looking
      Information**




*Certain
      matters discussed in this Annual Report on Form 10-K including, but not
      limited to, those described in Item 7 - Management’s Discussion and Analysis of
      Financial Condition and Results of Operations, are forward-looking statements
      that are subject to risks and uncertainties that could cause actual results
      to
      differ materially from those projected in the forward-looking statements. Such
      risks and uncertainties include, among others: (1) significant increases in
      competitive pressure in the banking and financial services industries; (2)
      changes in the interest rate environment, which could reduce anticipated or
      actual margins; (3) changes in the regulatory environment; (4) general economic
      conditions, either nationally or regionally and especially in the Company’s
      primary service area, becoming less favorable than expected and resulting in,
      among other things, a deterioration in credit quality; (5) operational risks,
      including data processing systems failures or fraud; (6) changes in business
      conditions and inflation; (7)changes in technology; (8) changes in monetary
      and
      tax policies; and (9)changes in the securities markets; (10) civil disturbances
      or terrorist threats or acts, or apprehension about the possible future
      occurrences or acts of this type; (11) outbreak or escalation of hostilities
      in
      which the United States is involved, any declaration of war by the U.S. Congress
      or any other national or international calamity, crisis or emergency; changes
      in
      laws and regulations; recently issued accounting pronouncements; government
      policies, regulations, and their enforcement (including (12) Bank Secrecy
      Act-related matters, taxing statutes and regulations; (13) restrictions on
      dividends that our subsidiaries are allowed to pay to us; (14) the ability
      to
      satisfy requirements related to the Sarbanes-Oxley Act and other regulation
      on
      internal control; and management’s ability to manage these and other risks.
      Therefore, the information set forth in such forward-looking statements should
      be carefully considered when evaluating the business prospects of the
      Company.*




*When
      the Company uses in this Annual Report on Form 10-K the words “anticipate,”
“estimate,” “expect,” “project,” “intend,” “commit,” “believe” and similar
      expressions, the Company intends to identify forward-looking statements. 
Such statements are not guarantees of performance and are subject to certain
      risks, uncertainties and assumptions, including those described in this Annual
      Report on Form 10-K.  Should one or more of these risks or uncertainties
      materialize, or should underlying assumptions prove incorrect, actual results
      may vary materially from those anticipated, estimated, expected, projected,
      intended, committed or believed.  The future results and shareholder values
      of the Company may differ materially from those expressed in these
      forward-looking statements.  Many of the factors that will determine these
      results and values are beyond the Company’s ability to control or predict. The
      Company undertakes no obligation to revise or publicly release the results
      of
      any revision to these forward-looking statements. For those statements, the
      Company claims the protection of the safe harbor for forward-looking statements
      contained in the Private Securities Litigation Reform Act of
      1995.*


4
 *Table
          of Contents*




**ITEM
      1 -BUSINESS**




**General**




**The
      Company.** Valley
      Commerce Bancorp (the “Company”) was incorporated on February 2, 2002 as a
      California corporation, for the purpose of becoming the holding company for
      Valley Business Bank (the “Bank,” formerly Bank of Visalia), a California state
      chartered bank, through a corporate reorganization.  In the reorganization,
      the Bank became the wholly-owned subsidiary of the Company, and the shareholders
      of the Bank became the shareholders of the Company.  The Company is
      registered as a bank holding company under the Bank Holding Company Act of
      1956,
      as amended (the “BHC Act”), and is subject to supervision and regulation by the
      Board of Governors of the Federal Reserve System (the “Board of
      Governors”).




At
      December 31, 2006, the Company had one banking subsidiary, the Bank. The
      Company’s principal source of income is dividends from the Bank. The cash
      outlays of the Company, including operating expenses and debt service costs,
      as
      well as any future cash dividends paid to Company shareholders, will generally
      be paid from dividends paid to the Company by the Bank.




The
      Company’s principal business is to provide, through its banking subsidiary,
      financial services in its primary market area in California. The Company serves
      Tulare and Fresno Counties and the surrounding area through the Bank. The
      Company does not currently conduct any operations other than through the Bank.
      Unless the context otherwise requires, references to the Company refer to the
      Company and the Bank on a consolidated basis.





At
      December 31, 2006, the Company’s assets totaled $263.8 million. As of
      January 31, 2007, the Company had a total of 77 employees and 75.0 full time
      equivalent employees, including the employees of the Bank.





This
      Annual Report on Form 10-K and other reports filed under the Securities
      Exchange Act of 1934 with the Securities and Exchange Commission (SEC) will
      be
      accessible on the Company’s website, www.valleybusinessbank.net ,
      as soon
      as practicable after the Company files the document with the SEC. These reports
      are also available through the SEC’s website at www.sec.gov .




**The
      Bank.** The Bank
      was organized in 1995 and commenced business as a California state chartered
      bank in 1996.  The deposits of the Bank are insured by the Federal Deposit
      Insurance Corporation (the “FDIC”) up to applicable limits.  The Bank is
      not a member of the Federal Reserve System.




The
      Bank’s target customers are local businesses, professionals and commercial
      property owners. The Bank’s income is derived primarily from interest earned on
      loans, and, to a lesser extent, interest on investment securities, fees for
      services provided to deposit customers, and fees from the brokerage of loans.
      The Bank’s major operating expenses are the interest paid on deposits and
      borrowings, and general operating expenses. In general, the business of the
      Bank
      is not seasonal.




The
      Bank
      conducts its business through its branch offices located in Visalia, Fresno,
      Woodlake and Tipton, and a loan production office in Tulare, all in California’s
      South San Joaquin Valley. The Visalia office opened in 1996 and the
      Visalia/Tulare county area is the current principal market of the Bank. The
      Woodlake and Tipton branch offices were acquired from Bank of America in 1998,
      primarily to obtain core deposits. The Fresno Branch was acquired in 2003 to
      allow the Bank to commence commercial banking operations in the Fresno
      metropolitan area. Management anticipates that over time the Fresno area will
      develop into a principal market of the Bank.





In
      July
      2005, the Bank changed its name from Bank of Visalia to Valley Business Bank
      to
      facilitate its further expansion within the South San Joaquin
      Valley.





On
      August
      16, 2006, the Company closed escrow on the purchase of land in the city of
      Tulare in the amount of $401,000. A full service branch will be constructed
      on
      the site and is expected to be completed in 2008. The new branch office will
      replace the Tulare loan production office that has been operating in leased
      quarters since January 2005.


5
 *Table
          of Contents*




The
      Bank
      intends to continue expanding within the South San Joaquin Valley by opening
      de
      novo branches and loan production offices, and by acquiring branches from other
      institutions. New branches and loan production offices provide the Bank with
      greater opportunity to expand its core deposit base and increase its lending
      activities. All future branches are subject to regulatory approval.




**Bank
      Lending Activities** .
      The
      Bank originates primarily commercial mortgage loans, secured and unsecured
      commercial loans and construction loans. It also originates a small number
      of
      consumer and agricultural loans and broker single-family residential loans
      to
      other mortgage lenders. The Bank targets small businesses, professionals and
      commercial property owners in its market area for loans. It attracts and retains
      borrowers primarily on the basis of personalized service, responsive handling
      of
      their needs, local promotional activity, and personal contacts by officers,
      directors and staff. The majority of loans bear interest at adjustable rates
      tied to the Valley Business Bank prime rate, which is administered by management
      and will not necessarily change at the same time or by the same amount as the
      prevailing national prime rate. At March 26, 2007, Valley Business Bank’s prime
      rate was equivalent to the prevailing national prime rate as published in the *Wall
      Street Journal* .
      The
      remaining loans in the Bank’s portfolio either bear interest at adjustable rates
      tied to the national prime rate or are priced with fixed rates or under custom
      pricing programs. For customers whose loan demands exceed the Bank’s lending
      limits, the Bank seeks to make those loans and concurrently sell participation
      interests in them to other lenders.




No
      individual or single group of related accounts is considered material in
      relation to the Bank’s assets or in relation to the overall business of the
      Bank. At December 31, 2006 approximately 74% of the Bank’s loan portfolio
      consisted of real estate-related loans, including construction loans, real
      estate mortgage loans and commercial loans secured by real estate, while 22%
      of
      the loan portfolio was comprised of commercial loans.   Currently, the
      business activities of the Bank are mainly concentrated in Tulare County,
      California. Consequently, the results of operations and financial condition
      of
      the Bank are dependent upon the general trends in this part of the California
      economy and, in particular, the residential and commercial real estate markets.
      In addition, the concentration of the Bank’s operations in this area of
      California exposes it to greater risk than other banking companies with a wider
      geographic base.




**Bank
      Deposit Activities.** The Bank
      offers a full range of deposit products including non-interest bearing demand
      deposit accounts and interest-bearing money market, savings, and time deposit
      accounts. The Bank also has access to time deposits through deposit
      brokers.




The
      Bank’s deposits are a combination of business and consumer accounts.  No
      individual deposit account or group of related deposit accounts is considered
      material in relation to the Bank’s total deposits. The loss of any one account
      or group of related accounts is not expected to have a material adverse effect
      on the Bank.




**Other
      Bank Services.** The Bank
      has offered Internet banking services since July 2002. As new technology becomes
      available, the Bank intends to continue expanding its Internet based banking
      services for the benefit of its customers. The Bank also offers courier
      services, travelers’ checks, safe deposit boxes, banking-by-mail, and other
      customary bank services. The Bank provides certain services such as
      international banking transactions to its customers through correspondent
      banks.




During
      the Bank’s past two fiscal years, there have been no significant changes in the
      kinds of services rendered, or the methods of distribution of such services.
      Bank management is continually engaged in the evaluation of products and
      services to enable the Bank to retain and improve its competitive position.
      The
      Bank holds no patents or licenses (other than licenses required by appropriate
      bank regulatory agencies), franchises, or concessions.




**Competition
      and Growth.** The
      Company’s primary market area has been Tulare County. In California generally
      and in the Company’s market area specifically, major banks and large regional
      banks dominate the commercial banking industry. Many of the Company’s
      competitors have substantially greater lending limits than the Bank, as well
      as
      more locations, more products and services, greater economies of scale and
      greater ability to make investments in technology for the delivery of financial
      services.




The
      Company’s principal competitors for deposits and loans are major banks, other
      local banks, savings and loan associations, credit unions, and brokerages.
      In
      addition, management anticipates that improved technology and effective
      marketing strategies will enable nontraditional competitors such as internet
      based financial services companies to effectively compete for loan and deposit
      business.




6
 *Table
          of Contents*


Despite
      a
      very competitive banking environment, the Company has grown significantly in
      the
      last three years. Total assets grew from $139.6 million at December 31, 2003,
      to
      $263.8 million at December 31, 2006, an increase of 89%. Growth in the regional
      economy and the Company’s success in marketing to its target customers are
      primarily responsible for this growth.




The
      Company’s growth over the last three years is detailed further in the following
      table:





**December
                31,***(dollars
                in 000’s)*
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006**Total
                assets
            
            $
            139,611
            
            $
            186,007
            
            $
            228,011
            
            $
            263,800Loans,
                net
            
            
            101,177
            
            
            114,834
            
            
            149,991
            
            
            184,077Deposits
            
            
            119,668
            
            
            156,424
            
            
            192,581
            
            
            207,576Shareholders’
                equity
            
            
            11,020
            
            
            16,333
            
            
            21,909
            
            
            25,448




As
      of
      June 30, 2006 (date of latest available statistics from FDIC), there were 10
      commercial banks and savings associations with a total of 62 offices in Tulare
      County. On this same date, the Company’s market share of FDIC-insured deposits
      in Tulare County was approximately 5.2% of the total $3.5 billion in deposits.
      The Company believes that it can gain additional market share in its principal
      market of Tulare County while it develops a core customer base in the
      metropolitan Fresno area.




**Regulation
      and Supervision**




The
      Company became subject to many of the requirements of the Sarbanes-Oxley Act
      discussed below at the commencement of the common stock offering described
      in
      Part II, Item 7 under “Capital Resources.” The Company anticipates that
      continued compliance with these requirements will require substantial additional
      costs in future years.




**Regulatory
      Environment.** The
      banking and financial services industry is extensively regulated. Statutes,
      regulations and policies affecting the industry are frequently under review
      by
      Congress and state legislatures, and by the federal and state agencies charged
      with supervisory and examination authority over banking institutions. Changes
      in
      the regulation of the banking and financial services industry may create
      opportunities for the Company to compete in financial markets with less
      regulation. However, these changes also may create new competitors. Changes
      in
      the statutes, regulations, or policies that impact the Company cannot
      necessarily be predicted and may have a material effect on its business and
      earnings. In addition, the operations of bank holding companies and their
      subsidiaries are affected by the credit and monetary policies of the Federal
      Reserve Board, which influence the over-all level of bank loans, investments
      and
      deposits, the interest rates charged on loans and paid for deposits, the price
      of the dollar in foreign exchange markets, and the level of inflation. The
      credit and monetary policies of the Federal Reserve Board have a significant
      effect on the Company.




Set
      forth
      below is a summary of some significant statutes, regulations and policies that
      apply to the operation of banking institutions. This summary is qualified in
      its
      entirety by reference to the full text of such statutes, regulations and
      policies.




**Holding
      Company Regulation.** Valley
      Commerce Bancorp is a bank holding company within the meaning of the Bank
      Holding Company Act and is registered as such with the Federal Reserve Board.
      A
      bank holding company is required to file with the Federal Reserve Board annual
      reports and other information regarding its business operations and those of
      its
      subsidiaries. It is also subject to examination by the Federal Reserve Board
      and
      is required to obtain Federal Reserve Board approval before acquiring ownership
      or control of more than 5% of the voting stock of any bank. According to Federal
      Reserve Board policy, bank holding companies are expected to act as a source
      of
      financial strength to each of their subsidiary banks and to commit resources
      to
      support each subsidiary. The Federal Reserve Board has issued regulations that
      describe the activities in which a bank holding company can and cannot engage.
      In general, bank holding companies can engage in the business of banking,
      managing or controlling banks, furnishing services to or performing services
      for
      their subsidiary banks, and activities closely related to banking.




A
      holding
      company for a bank and any subsidiary which it may acquire or organize are
      deemed to be affiliates of the bank and are therefore subject to the Federal
      Reserve Act. This means, for example, that there are limitations on loans by
      the




7
 *Table
          of Contents*




bank
      to
      affiliates, on investments by the bank in any affiliate’s stock and on the
      bank’s taking any affiliate’s stock as collateral for loans to any borrower.
      Also, transactions by the bank with an affiliate must be on substantially the
      same terms as would be available for non-affiliates.


Sections 23A
        and 23B of the Federal Reserve Act limit the risks to a bank from
        transactions between the bank and its affiliates and limit the ability of
        a bank
        to transfer to its affiliates the benefits arising from the bank’s access to
        insured deposits, the payment system and the discount window and other benefits
        of the Federal Reserve system. Federal Reserve Board Regulation W
        comprehensively implements sections 23A and 23B of the
        Federal Reserve Act. The statute and rule impose quantitative and
        qualitative limits on the ability of a bank to extend credit to, or engage
        in
        certain other transactions with, an affiliate (and a nonaffiliate if an
        affiliate benefits from the transaction).  However, certain transactions
        that generally do not expose a bank to undue risk or abuse the safety net
        are
        exempted from coverage under Regulation W.




The
      Company is also prohibited from engaging in certain tie-in arrangements in
      connection with the extension of credit. For example, generally a bank may
      not
      extend credit on the condition that the customer obtain some additional service
      from the bank or its parent company, or refrain from obtaining such service
      from
      a competitor.




**Bank
      Regulation.** Federal
      law mandates frequent examinations of all banks, with the costs of examinations
      assessed against the bank. Valley Business Bank’s primary federal regulator is
      the FDIC. As a California state-chartered bank whose accounts are insured by
      the
      FDIC up to a maximum of $100,000 per depositor, the Bank is subject to
      regulation, supervision and regular examination by the California Commissioner
      of Financial Institutions and the FDIC, and must comply with certain regulations
      of the Federal Reserve Board. The regulations of these agencies govern most
      aspects of the Bank’s business, including the making of periodic reports,
      activities relating to dividends, investments, loans, borrowings, capital
      requirements, certain check-clearing activities, branching, mergers and
      acquisitions, reserves against deposits and numerous other areas. Supervision,
      legal action and examination by these agencies is generally intended to protect
      depositors and is not intended for the protection of shareholders.




**Capital
      Adequacy Requirements.** Valley
      Commerce Bancorp is subject to the capital adequacy regulations of the Federal
      Reserve Board and Valley Business Bank is subject to the capital adequacy
      regulations of the FDIC. The regulations incorporate both risk-based and
      leverage capital requirements and define capital in terms of “core capital
      elements,” or Tier 1 capital, and “supplemental capital elements,” or Tier 2
      capital. The Company’s capital requirements and actual ratios are shown in
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations - Capital Resources, which is included as Item 7.




**Prompt
      Corrective Action Provisions.** Federal
      law requires the federal banking agencies to take prompt corrective action
      to
      resolve the problems of insured financial institutions, including institutions
      that fall below prescribed minimum capital ratios. Regulations of the federal
      banking agencies define five capital categories: *well
      capitalized* (total
      risk-based capital ratio of 10%; tier 1 risk-based capital ratio of 6%; and
      leverage ratio of 5%); *adequately
      capitalized* (total
      risk-based capital l ratio of 8%; tier 1 risk-based capital ratio of 4%; and
      leverage ratio of 4%, or 3% if the institution receives the highest rating
      from
      its primary regulator); *undercapitalized* (total
      risk-based capital ratio of less than 8%; tier 1 risk-based capital ratio of
      less than 4%; or leverage ratio of less than 4%, or 3% if the institution
      receives the highest rating from its primary regulator); *significantly
      undercapitalized* (total
      risk-based capital ratio of less than 6%; tier 1 risk-based capital ratio of
      less than 3%; or leverage ratio less than 3%); and *critically
      undercapitalized* (tangible equity to total assets less than 2%). A bank may be treated as though
      it were in the next lower capital category if regulators find to be in an unsafe
      or unsound condition, but a bank may not be treated as critically
      undercapitalized unless its actual capital ratio warrants such treatment. At
      each successively lower capital category, an insured bank is subject to
      increased restrictions on its operations.




In
      addition to measures taken under the prompt corrective action provisions,
      insured banks may be subject to actions by federal regulators for unsafe or
      unsound practices or for violation of any law, rule, regulation or condition
      imposed in writing by the agency or included in any written agreement with
      the
      agency. Enforcement actions may include the issuance of cease and desist orders,
      termination of insurance of deposits (in the case of a bank), the imposition
      of
      civil money penalties, the issuance of directives to increase capital, formal
      and informal agreements, or removal and prohibition orders against
“institution-affiliated” parties.


8
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          of Contents*




**Safety
      and Soundness Standards.** The
      federal banking agencies have also adopted guidelines establishing safety and
      soundness standards for insured depository institutions. These guidelines relate
      to internal controls, information systems, internal audit systems, loan
      underwriting and documentation, compensation, and interest rate exposure. In
      general, the standards are designed to assist the federal banking agencies
      in
      identifying and addressing problems at insured depository institutions before
      capital becomes impaired. If an institution fails to meet these standards,
      the
      appropriate federal banking agency may require the institution to submit a
      compliance plan or, if an acceptable compliance plan is not submitted, institute
      enforcement proceedings.




**Premiums
      for Deposit Insurance.** FDIC
      regulations implement a risk-based premium system, whereby insured depository
      institutions are required to pay insurance premiums depending on their risk
      classification. Under this system, institutions such as Valley Business Bank
      which are insured by the Bank Insurance Fund are categorized into one of three
      capital categories (well capitalized, adequately capitalized, and
      undercapitalized) and one of three supervisory categories based on federal
      regulatory evaluations: financially sound with only a few minor weaknesses
      (Group A); demonstrates weaknesses that could result in significant
      deterioration (Group B); or poses a substantial probability of loss (Group
      C).




On
      February 8, 2006, the President signed The Federal Deposit Insurance Reform
      Act of 2005 (the Reform Act) into law. The Federal Deposit Insurance Reform
      Conforming Amendments Act of 2005, which the President signed into law on
      February 15, 2006, contains necessary technical and conforming changes to
      implement deposit insurance reform. In addition to several other significant
      changes, the Reform Act provided for merging the Bank Insurance Fund
      (BIF) and the Savings Association Insurance Fund (SAIF) into a new fund,
      the Deposit Insurance Fund (DIF). This change was made effective March 31,
      2006.




The
      Deposit Insurance Fund of the FDIC insures customer deposits up to prescribed
      limits for each depositor. The Federal Deposit Insurance Reform Act of 2005
      and
      the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 amended
      the insurance of deposits by the FDIC and collection of assessments from insured
      depository institutions for deposit insurance. The FDIC approved a final rule
      to
      determine risk-based assessment rates on November 2, 2006. An insured
      depository institution’s assessment rate under the final rule is based on the
      new assessment rate schedule, its long-term debt issuer ratings or recent
      financial ratios and supervisory ratings. Any increase in assessments or the
      assessment rate could have a material adverse effect on our business, financial
      condition, results of operations or cash flows, depending on the amount of
      the
      increase. Furthermore, the FDIC is authorized to raise insurance premiums under
      certain circumstances.




**Community
      Reinvestment Act.** The Bank
      is subject to certain requirements and reporting obligations involving Community
      Reinvestment Act activities. The Community Reinvestment Act generally requires
      the federal banking agencies to evaluate the record of a financial institution
      in meeting the credit needs of its local communities, including low and moderate
      income neighborhoods, and to take into account a financial institution’s record
      of meeting its community credit needs when evaluating applications for, among
      other things, domestic branches, consummating mergers or acquisitions, or
      holding company formations. In its assessment of Community Reinvestment Act
      performance, the FDIC assigns a rating of “outstanding,” “satisfactory,” “needs
      to improve” or “substantial noncompliance. The Bank has a “satisfactory”
rating.




**Other
      Consumer Protection Laws and Regulations.** In
      addition to the other laws and regulations discussed herein, the Bank is subject
      to certain consumer and public interest laws and regulations that are designed
      to protect customers in transactions with banks. While this list is not
      exhaustive, these laws and regulations include the Truth in Lending Act, the
      Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
      Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the
      Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the
      Fair Credit Reporting Act, the Fair Debt Collection Practices Act and the Right
      to Financial Privacy Act. These laws and regulations mandate certain disclosure
      requirements and regulate the manner in which financial institutions must deal
      with customers when taking deposits, making loans, collecting loans and
      providing other services. Failure to comply with these laws and regulations
      can
      subject the Bank to various penalties, including enforcement actions,
      injunctions, fines or criminal penalties, punitive damages to consumers and
      the
      loss of certain contractual rights.




The
      Americans with Disabilities Act, in conjunction with similar California
      legislation, requires employers with 15 or more employees and all businesses
      operating “commercial facilities” or “public accommodations” to accommodate
      disabled employees and customers. The Americans with Disabilities Act has two
      major objectives: (1) to prevent discrimination against disabled job applicants,
      job candidates and employees, and (2) to provide disabled persons
      with




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ready
      access to commercial facilities and public accommodations. Commercial facilities
      such as Valley Business Bank must ensure that all new facilities are accessible
      to disabled persons, and in some instances may be required to adapt existing
      facilities to make them accessible.


**Interstate
        Banking and Branching.** The
        Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
        “Interstate Banking Act”) regulates the interstate activities of banks and bank
        holding companies and establishes a framework for nationwide interstate banking
        and branching. Since June 1, 1997, a bank in one state has generally been
        permitted to merge with a bank in another state without the need for explicit
        state law authorization, although states were given the ability to prohibit
        interstate mergers with banks in their own state. Adequately capitalized
        and
        managed bank holding companies are permitted to acquire banks located in
        any
        state, subject to certain exceptions. Also, a bank may establish and operate
        de
        novo branches in any state in which that bank does not maintain a branch
        if that
        state has enacted legislation to expressly permit all out-of-state banks
        to
        establish branches in that state. California does not permit out-of-state
        banks
        to acquire existing branches or establish de novo branches in California;
        an
        out-of-state bank that wishes to enter California must acquire an existing
        bank
        or establish a new one.




**Financial
      Modernization Act.** The
      Financial Modernization Act repealed provisions of the Glass-Steagall Act which
      restricted the affiliation of Federal Reserve member banks with firms “engaged
      principally” in specified securities activities and which restricted officer,
      director, or employee interlocks between a member bank and any company or person
      “primarily engaged” in specified securities activities. In addition, it contains
      provisions that expressly preempt any state law restricting the establishment
      of
      financial affiliations, primarily related to insurance. The general effect
      of
      the law is to establish a comprehensive framework to permit affiliations among
      commercial banks, insurance companies, securities firms, and other financial
      service providers by revising and expanding the Bank Holding Company Act
      framework to permit a holding company system to engage in a full range of
      financial activities through a new entity known as a financial holding company.
      The Financial Modernization Act also broadens the activities that may be
      conducted by national banks, banking subsidiaries of bank holding companies,
      and
      their financial subsidiaries and provides an enhanced framework for protecting
      the privacy of consumer information.




In
      order
      for the Company to take advantage of the ability to affiliate with other
      financial services providers, it must become a “financial holding company” as
      permitted under an amendment to the Bank Holding Company Act affected by the
      Financial Modernization Act. The Company currently meets the requirements to
      make an election to become a financial holding company but it has not determined
      to become financial holding company.




Pursuant
      to the Financial Modernization Act, the federal banking agencies have released
      joint rules that establish minimum requirements to be followed by financial
      institutions for protecting the privacy of financial and other personal
      information provided by consumers. The rules, which establish privacy standards
      to be followed by state banks such as the Bank, require a financial institution
      to (i) provide notice to customers about its privacy policies and practices,
      (ii) describe the conditions under which the institution may disclose nonpublic
      personal information about consumers to nonaffiliated third parties, and (iii)
      provide a method for consumers to prevent the financial institution from
      disclosing that information to nonaffiliated third parties by “opting out” of
      that disclosure.




The
      Company does not believe that the Financial Modernization Act will have a
      material adverse effect on its operations in the near-term period. 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 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 we face from larger institutions and other types of
      companies offering financial products, many of which may have substantially
      more
      financial resources.




**Sarbanes-Oxley
      Act.** The
      Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) implemented legislative reforms
      intended to address corporate and accounting fraud. Sarbanes-Oxley places
      certain restrictions on the scope of services that may be provided by accounting
      firms to their public company audit clients. Any non-audit services being
      provided to a public company audit client require pre-approval by the company’s
      audit committee. In addition, Sarbanes-Oxley adopted requirements for accounting
      firm partner rotation after five years. Sarbanes-Oxley requires chief executive
      officers and chief financial officers, or their equivalent, to certify to the
      accuracy of periodic reports filed with the SEC, subject to civil and criminal
      penalties if they knowingly or willingly violate the certification requirement.
      In addition, under Sarbanes-Oxley, counsel are required to report evidence
      of a
      material violation of the securities laws or a breach of fiduciary
      duty




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by
      a
      company to its chief executive officer or its chief legal officer, and, if
      such
      officer does not appropriately respond, to report such evidence to the audit
      committee or other similar committee of the board of directors or to the board
      itself.


Sarbanes-Oxley
        accelerates the time frame for disclosures by public companies, as they must
        disclose on a current basis certain changes in their business. In most cases
        directors and executive officers must provide information regarding changes
        in
        ownership in a company’s securities within two business days of the change.
        Sarbanes-Oxley increases responsibilities and codifies certain requirements
        relating to audit committees of public companies and how they interact with
        the
        company’s public accounting firm. Audit committee members must be independent
        and are absolutely barred from accepting consulting, advisory or other
        compensatory fees from the issuer. In addition, companies must disclose whether
        at least one member of the committee is a “financial expert” (as defined by the
        SEC) and if not, why not. Sarbanes-Oxley also requires the public accounting
        firm that issues a company’s audit report to attest to and report on
        management’s assessment of the company’s internal controls. For the Company,
        this component of the legislation will become effective with the audit of
        the
        2008 consolidated financial statements.




**USA
      PATRIOT Act.** The
      terrorist attacks in September 2001 impacted the financial services industry
      and
      led to the Uniting and Strengthening America by Providing Appropriate Tools
      Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT
      Act”). Part of the USA PATRIOT Act is the International Money Laundering
      Abatement and Financial Anti-Terrorism Act of 2001 (“IMLAFATA”). IMLAFATA
      authorizes the Secretary of the Treasury, in consultation with the heads of
      other government agencies, to adopt special measures applicable to banks, bank
      holding companies and other financial institutions. These measures may include
      enhanced recordkeeping and reporting requirements for certain financial
      transactions that are of primary money laundering concern, due diligence
      requirements concerning the beneficial ownership of certain types of accounts,
      and restrictions or prohibitions on certain types of accounts with foreign
      financial institutions.




Among
      its
      other provisions, IMLAFATA requires each financial institution to: (i) establish
      an anti-money laundering program; (ii) establish due diligence policies,
      procedures and controls with respect to its private banking accounts and
      correspondent banking accounts involving foreign individuals and certain foreign
      banks; and (iii) avoid establishing, maintaining, administering, or managing
      correspondent accounts in the United States for, or on behalf of, a foreign
      bank
      that does not have a physical presence in any country. IMLAFATA expands the
      circumstances under which funds in a bank account may be forfeited and requires
      covered financial institutions to respond under certain circumstances to
      requests for information from federal banking agencies within 120 hours.
      Additional regulations implement minimum standards to verify customer identity,
      encourage cooperation among financial institutions, federal banking agencies,
      and law enforcement authorities regarding possible money laundering or terrorist
      activities, prohibit the anonymous use of “concentration accounts,” and require
      all covered financial institutions to have in place a Bank Secrecy Act
      compliance program.




**Recent
      Legislation and Other Changes** .
      Federal
      and state laws affecting banking are enacted from time to time, and similarly
      federal and state regulations affecting banking are also adopted from time
      to
      time. The following include some of the recent laws and regulations affecting
      banking.




·
            The
                FDIC amended its deposit insurance regulations to implement applicable
                revisions to the Federal Deposit Insurance Act made by the Federal
                Deposit
                Insurance Reform Act of 2005 and the Federal Deposit Insurance Reform
                Conforming Amendments Act of 2005 (see “Premiums for Deposit Insurance”
                above). The final rule provides for consideration of inflation adjustments
                to increase the current standard maximum deposit insurance amount
                of
                $100,000 on a five-year cycle beginning in 2010; increases the deposit
                insurance limit for certain retirement accounts from $100,000 to
                $250,000,
                also subject to inflation adjustments; and provides per-participant
                insurance coverage to employee benefit plan accounts, even if the
                depository institution at which the deposits are placed is not authorized
                to accept employee benefit plan deposits. The final rule is effective
                on
                October 12, 2006.




·
            The
                Federal Reserve Board in February 2006 approved a final rule that
                expands the definition of a small bank holding company under its
                Small
                Bank Holding Company Policy Statement and the Board’s risk-based and
                leverage capital guidelines for bank holding companies. The policy
                statement facilitates the transfer of ownership of small community
                banks
                by permitting debt levels at small bank holding companies that are
                higher
                than what would typically be permitted for larger small bank holding
                companies. In its revisions to the Policy Statement, the Federal
                Reserve
                Board has raised the small bank holding company asset size threshold
                from
                $150 million to




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$500 million
      and amended the related qualitative criteria for determining eligibility as
      a
      small bank holding company for the purposes of the policy statement and the
      capital guidelines.




·
            The
                Board of Governors of the Federal Reserve System amended
                Regulation E, which implements the Electronic Fund Transfer Act, and
                the official staff commentary to the regulation, which interprets
                the
                requirements of Regulation E to become effective on July 1,
                2006. The final rule provides that Regulation E covers payroll card
                accounts that are established directly or indirectly through an employer,
                and to which transfers of the consumer’s salary, wages, or other employee
                compensation are made on a recurring basis. The final rule also provides
                financial institutions with an alternative to providing periodic
                statements for payroll card accounts if they make account information
                available to consumers by specified means.




·
            The
                federal financial regulatory agencies in September 2006 issued final
                guidance to address the risks posed by nontraditional residential
                mortgage
                products that allow borrowers to defer repayment of principal and
                sometimes interest, including “interest-only” mortgages and “payment
                option” adjustable-rate mortgages. The guidelines require depository
                institutions to ensure that loan terms and underwriting standards
                are
                consistent with prudent lending practices, including consideration
                of a
                borrower’s repayment capacity. The guidelines also express the need for
                depository institutions to have strong risk management standards,
                capital
                levels commensurate with the risk, and an allowance for loan and
                lease
                losses that reflects the collectibility of the portfolio.




·
            The
                federal financial regulatory agencies in December 2006 issued a new
                interagency policy statement on the allowance for loan and lease
                losses
                (ALLL or ALL in the absence of lease assets) along with supplemental
                frequently asked questions. The policy statement replaced a 1993
                policy
                statement on the ALLL and addresses the responsibilities of the boards
                of
                directors, management, and banking examiners regarding the ALLL,
                primarily
                the responsibility to ensure that the ALLL is stated in accordance
                with
                generally accepted accounting principles (GAAP) and that the methodology
                used for determining the ALLL is consistent with supervisory guidance.
                The
                policy statement states that prudent, conservative, but not excessive,
                loan loss allowances that represent management’s best estimate from within
                an acceptable range of estimated losses are
                appropriate.




·
            The
                Office of the Comptroller of the Currency, the Board of Governors
                of the
                Federal Reserve System, and the Federal Deposit Insurance Corporation
                in
                December 2006 issued final guidance on sound risk management
                practices for concentrations in commercial real estate lending. The
                guidance provides supervisory criteria, including numerical indicators
                to
                assist in identifying institutions with potentially significant commercial
                real estate loan concentrations that may warrant greater supervisory
                scrutiny, but such criteria are not limits on commercial real estate
                lending.




·
            A
                new California law makes it easier for California banks to accept
                deposits
                from local government agencies. Under the old law, local agency deposits
                over $100,000 had to be secured by collateral. Pursuant to the enactment
                of Assembly Bill 2011, banks would be able to acquire surplus public
                deposits exceeding $100,000 without pledging collateral if they
                participate in a deposit placement service where excess amounts are
                placed
                in certificates of deposit at other institutions within a network.
                Such a
                network (of which currently there is only one available in the market)
                permits the entire amount of a customer’s deposit to be FDIC-insured, and
                the bank taking the original deposit retains the benefit of the full
                amount of the deposit for lending or other purposes. AB 2011 clarifies
                that a local agency may deposit up to 30% of its surplus funds in
                certificates of deposit at a bank, savings association, savings bank,
                or
                credit union that participates in such a deposit-sharing network.
                Since
                the entire amount of the deposits would be FDIC-insured, a bank would
                not
                be required to pledge collateral. The bill permits agencies to make
                these
                deposits until January 1, 2012.




Other
      legislative and regulatory initiatives which could affect the Company and the
      banking industry in general are pending, and additional initiatives may be
      proposed or introduced, before the United States Congress, the California
      legislature and other governmental bodies in the future. Such proposals, if
      enacted, may further alter the structure, regulation and competitive
      relationship among financial institutions, and may subject the Company to
      increased regulation, disclosure and reporting requirements. In addition, the
      various banking regulatory agencies often adopt new rules and regulations to
      implement and enforce existing legislation. The Company cannot predict whether,
      or in what form, any such legislation or regulations may be enacted or the
      extent to which it might affect the Company’s business.


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**Recent
      Accounting Pronouncements**




*Accounting
      for Servicing of Financial Assets*




In
      March 2006, the Financial Accounting Standards Board (FASB) issued
      Statement No. 156 (SFAS 156), Accounting for Servicing of Financial Assets
      - An Amendment of FASB Statement No. 140. SFAS 156 requires that all
      separately recognized servicing assets and servicing liabilities be initially
      measured at fair value, if practicable, and permits, but does not require,
      the
      subsequent measurement of servicing assets and servicing liabilities at fair
      value. Under SFAS 156, an entity can elect subsequent fair value measurement
      of
      its servicing assets and servicing liabilities by class. An entity should apply
      the requirements for recognition and initial measurement of servicing assets
      and
      servicing liabilities prospectively to all transactions after the effective
      date. SFAS 156 permits an entity to reclassify certain available-for-sale
      securities to trading securities provided that they are identified in some
      manner as offsetting the entity’s exposure to changes in fair value of servicing
      assets or servicing liabilities subsequently measured at fair value. The
      provisions of SFAS 156 are effective for an entity as of the beginning of its
      first fiscal year that begins after September 15, 2006. Management does not
      expect the adoption of SFAS 156 to have a material impact on the Company’s
      financial position or results of operations.




*Accounting
      for Uncertainty in Income Taxes*




In
      July 2006, the FASB issued Financial Accounting Standards Interpretation
      No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes -An
      Interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting
      for uncertainty in income taxes recognized in an enterprise’s financial
      statements in accordance with FASB Statement No. 109, Accounting for Income
      Taxes. FIN 48 prescribes a recognition threshold and measurement standard for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosures and transitions. FIN 48 is effective for fiscal years
      beginning after December 15, 2006.




The
      Company presently recognizes income tax positions based on management’s estimate
      of whether it is reasonably possible that a liability has been incurred for
      unrecognized income tax benefits by applying FASB Statement No. 5,
      Accounting for Contingencies.




The
      provisions of FIN 48 will be effective for the Company on January 1, 2007
      and are to be applied to all tax positions upon initial application of this
      standard. Only tax positions that meet the more-likely-than-not recognition
      threshold at the effective date may be recognized or continue to be recognized
      upon adoption.




The
      cumulative effect of applying the provisions of FIN 48, if any, will be reported
      as an adjustment to the opening balance of retained earnings for the fiscal
      year
      of adoption. Management does not expect the adoption of FIN 48 to have a
      material impact on the Company’s financial position or results of operations.




*Consideration
      of the Effects of Prior Year Misstatements*




In
      September 2006, the Securities and Exchange Commission published Staff
      Accounting Bulleting No. 108 (SAB 108) Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements. The interpretations in this Staff Accounting Bulleting were issued
      to address diversity in practice in quantifying financial statement
      misstatements and the potential under current practice to build up improper
      amounts on the balance sheet. This guidance will apply to the first fiscal
      year
      ending after November 15, 2006 or December 31, 2006 for the Company.
      The adoption of SAB 108 did not have a material impact on the Company’s
      financial position, results of operations or cash flows and no cumulative
      adjustment was required.


13
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**ITEM
      1A- RISK FACTORS**




**Deterioration
      of local real estate values could reduce profitability** .
      At
      December 31, 2006, approximately 83% of the Company’s loan portfolio was secured
      by real estate. There has been a rapid increase in real estate values in our
      market area in recent years, and the occurrence of a real estate recession
      affecting our market area would likely reduce the security for many of our
      loans
      and adversely affect the ability of many of our borrowers to repay their loan
      from us. Therefore, our financial condition may be adversely affected by a
      decline in the value of the real estate securing our loans.




**Deterioration
      of local economic conditions could reduce profitability.** Our
      lending operations and customer base are concentrated in Tulare and Fresno
      Counties which are located in the Central Valley region of California. As a
      result of this geographic concentration, our financial results depend largely
      upon economic conditions in these areas. Tulare and Fresno Counties are among
      the leading counties in the United States for agricultural production and a
      significant downturn in the local agricultural economy due to commodity prices,
      real estate prices, public policy decisions, natural disaster, or other factors
      could result in a decline in the local economy in general, which could in turn
      negatively impact the Company. General recessionary conditions in our market
      area could directly affect the Company by causing us to incur losses associated
      with higher default rates and decreased collateral values in our loan
      portfolio.




**The
      Company’s strategies for growth may prove to be unsuccessful and reduce
      profitability.** The
      Company intends to continue expanding within the South San Joaquin Valley by
      opening de novo branches and loan production offices, and by acquiring branches
      from other institutions. The success of such expansion is dependent upon the
      Company’s ability to attract and retain qualified personnel, negotiate
      effectively, manage a growing number of customer relationships, and maintain
      cost controls and asset quality while attracting additional loans and deposits
      on favorable terms. If the Company is unsuccessful in any of these areas, its
      financial performance could be adversely affected. In addition, future expansion
      may result in compliance and operational deficiencies which may require less
      aggressive growth or additional expenditures to expand the operational
      infrastructure.




**Loss
      of executive officers or key personnel could reduce the Company’s future
      profitablity** .
      The
      Company depends upon the skills and reputations of its executive officers and
      other key employees for its future success. The loss of any of these key persons
      could adversely affect the Company. No employment or non-compete agreements
      have
      been executed with any Company employee and therefore no assurance can be given
      that the Company will be able to retain its existing key personnel or that
      key
      personnel will not, upon leaving the Company’s employment, become employed by a
      competing institution.





**Credit
      risk could reduce profitability.** The
      Company manages credit risk on an ongoing basis through stringent credit review
      and approval policies, extensive internal monitoring and established formal
      lending policies. In addition, a loan review covering both new and existing
      loans is performed annually by an independent loan review firm. The Company’s
      ability to identify and assess the risk characteristics of the loan portfolio
      is
      critical for continued profitability and growth. Management strives to maintain
      the Company’s historically low level of loan losses by placing continuing
      emphasis on credit quality in the loan approval process, and through active
      monitoring of the portfolio. The Company has a comprehensive loan review and
      grading system that continually assesses the credit risk inherent in the loan
      portfolio. The Company’s credit administration personnel closely evaluate the
      primary and secondary sources of repayment of all credits granted with strong
      emphasis on cash flows.




The
      credit quality of the loan portfolio may be influenced by local and national
      economic trends and business cycles. Management closely monitors these trends
      and makes timely adjustments to lending policies and underwriting standards
      to
      mitigate losses in an economic downturn; however, no assurance can be given
      that
      losses will not occur should adverse economic circumstances
      materialize.


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The
      Company maintains an allowance for loan losses (ALL) based upon the Company’s
      actual losses over a relevant time period and management’s assessment of all
      relevant factors that may cause future loss experience to differ from its
      historical loss experience. Although the Company maintains a rigorous process
      for determining the ALL, it can give no assurance that it will be sufficient
      to
      cover future loan losses. If the allowance for loan losses is not adequate
      to
      absorb future losses, or if bank regulatory agencies require the Company to
      increase its ALL, earnings could be significantly and adversely
      impacted.




**Interest
      rate risk could reduce profitability.** The
      Company’s earnings depend largely upon net interest income, which is the
      difference between the total interest income earned on interest earning assets
      (primarily loans and investment securities) and the total interest expense
      incurred on interest bearing liabilities (primarily deposits and borrowed
      funds). Net interest income is affected by changes in the interest rates earned
      on interest earning assets, the interest rates paid on interest bearing
      liabilities, and the average balance of interest-earning assets and
      interest-bearing liabilities. The interest rates earned on assets and paid
      on
      liabilities are affected principally by direct competition, and general economic
      conditions at the state and national level and other factors beyond the
      Company’s control such as actions of the Federal Reserve Board, the general
      supply of money in the economy, legislative tax policies, governmental budgetary
      matters, and other state and federal economic policies.




Because
      the Company is highly dependent on net interest income, it faces the risk that
      its profitability and economic value will be adversely impacted by changes
      in
      interest rates. The Company reduces its exposure to interest rate fluctuations
      by managing the balances and maturities of its interest sensitive assets and
      liabilities in order to stabilize net interest income and economic value across
      a variety of interest rate environments. Although the Company maintains a
      rigorous process for managing interest rate risk, the Company can provide no
      assurance that its interest rate risk management efforts will prevent earnings
      from being significantly and adversely impacted by changes in interest
      rates.




**Strong
      competition may reduce profitability** .
      Along
      with larger national and regional banks and other local banks, the Company
      competes for customers with finance companies, brokerage firms, insurance
      companies, credit unions, and internet-based banks. Certain of these non-bank
      competitors have advantages over the Company in accessing funding and in
      providing various services, or, in the case of credit unions, are significantly
      tax advantaged. Major banks have substantially larger lending limits than the
      Company and can perform certain functions for their customers which the Company
      is not presently able to offer directly. Other existing single or multi-branch
      community banks, or new community bank start-ups, have marketing strategies
      similar to the Company’s and compete for the same management personnel and the
      same potential acquisition and merger candidates. Ultimately, competition can
      reduce our profitability, as well as make it more difficult to increase the
      size
      of our loan portfolio and deposit base.




**ITEM
      1B - UNRESOLVED STAFF COMMENTS**




The
      Company has no unresolved staff comments with the Securities and Exchange
      Commission


15
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**ITEM2 - PROPERTIES**




The
      following table summarizes certain information about the Company’s main office
      and branch offices:







**Office
                location**
            
            **Year
                opened**
            
            **Approximate****square
                footage**
            
            **Owned
                or leased**Main
                office
              200
                South Court Street
              Visalia,
                California
            
            
            1996
            
            
            8,700
            
            
            LeasedAdministrative
                office
              100
                Willow Plaza, Suites 101 & 105
              Visalia,
                California
            
            
            2003
            
            
            4,972
            
            
            LeasedFresno
                branch
              1377
                West Shaw Avenue, Suite 101
              Fresno,
                California
            
            
            2003
            
            
            3,216
            
            
            LeasedWoodlake
                branch
              232
                North Valencia
              Woodlake,
                California
            
            
            1998
            
            
            5,000
            
            
            OwnedTipton
                branch
              174
                South Burnett
              Tipton,
                California
            
            
            1998
            
            
            5,610
            
            
            OwnedTulare
                Loan Production Office
              1635
                E. Prosperity, Suite B
              Tulare,
                California
            
            
            2005
            
            
            1,192
            
            
            Leased




The
      Visalia main office is leased under a noncancelable operating lease with a
      nonaffiliated third party expiring 2009 with the option to extend the lease
      for
      two additional five-year terms. The primary operating area consists of
      approximately 8,700 square feet of space comprising the entire usable space
      in a
      single-story building. The lease arrangement for the primary operating area
      is a
“triple net lease” with monthly rent of $11,200 until the term expires on
      November 30, 2009. In the event the renewal option is exercised, the annual
      rent
      to be paid will be equivalent to 10% of the fair market value of the leased
      premises.




In
      close
      proximity to the main office is the Willow Plaza administrative office housing
      credit and finance personnel which is comprised of two connected office suites
      of approximately 4,972 square feet located in a four-story office building.
      These premises are leased from a related party under noncancelable operating
      leases which expire June 30, 2008 with an option to extend for two additional
      years. The lease arrangement is a “triple net lease” with combined monthly rent
      of $7,408 until the term expires on June 30, 2008. In the event the renewal
      option is exercised, the annual rent to be paid will increase by approximately
      3.5% in each of the extension years.




The
      Fresno branch is leased under a noncancelable operating lease with a
      nonaffiliated third party for five years with no option to extend. The primary
      operating area consists of approximately 3,216 square feet of space comprising
      the entire usable space in a single-story building. The lease arrangement for
      the primary operating area is a “triple net lease” expiring October 31, 2007.
      Monthly rent under the lease is $5,429 for the fifth year. This lease will
      not
      be renewed since the Fresno branch will be relocated prior to the lease
      expiration date. Commencing approximately September 1, 2007, the Fresno branch
      will be relocated to a 3,775 square foot office in a desirable Fresno area.
      The
      lease arrangement for this space is a 10-year triple net lease with monthly
      rent
      of $6,040 for the first five years, and $7,738 for the last five years.




The
      Tulare loan production office is leased under a nine month noncancelable
      operating lease with a non affiliated third party, with options to renew every
      six months. The primary operating area consists of approximately 1,192 square
      feet of office space in a single-story building. The lease arrangement for
      the
      primary operating area has been extended to January 1, 2008. The current monthly
      rent is $1,560 over the term of the lease. A new Tulare Branch office is
      scheduled to open during 2008 which will result in the closing of the Tulare
      loan production office. The Company will therefore seek a lease extension in
      2008 until the new office is opened.


16
 *Table
          of Contents*




At
      December 31, 2006, the total net book value of the Company’s land, buildings,
      leasehold improvements and equipment was approximately $1,832,000. Each of
      the
      Company’s facilities is considered to be in good condition and adequately
      covered by insurance.




**ITEM
      3- LEGAL PROCEEDINGS**




From
      time
      to time the Company may be subject to legal proceedings and claims in the
      ordinary course of business. These claims, even if not meritorious, could result
      in the expenditure of significant financial and managerial resources. Management
      is not aware of any legal proceedings or claims that it believes could
      materially harm the Company’s business or revenues.




**ITEM
      4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**




No
      matter
      was submitted to a vote of shareholders during the fourth quarter of the fiscal
      year covered by this annual report. The 2007 Annual Meeting of Shareholders
      will
      be held at 6 p.m., local time, on May 15, 2007, at the Visalia Convention
      Center, Charter Oak Ballrooms A and B, 303 East Acequia Avenue, Visalia,
      California 93291.




17
 *Table
          of Contents*




**PART
      II**




**ITEM
      5- MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES**




**General**




The
      Company’s common stock is traded on the OTC Bulletin Board under the symbol
“VCBP.OB.” Historically, there has been a limited over-the-counter market for
      the Company’s common stock although trading activity increased markedly in the
      aftermath of the common stock offering in 2004 - 2005. Wedbush Morgan Securities
      Inc. and Howe Barnes Hoefer & Arnett Inc. have acted as market makers for
      the Company’s common stock. These market makers have no obligation to make a
      market in the Company’s common stock, and they may discontinue making a market
      at any time.




The
      information in the following table indicates the high and low “bid” quotations
      for the Company’s common stock for each quarterly period since January 1, 2005,
      and is based upon information provided by market makers. These quotations
      reflect inter-dealer prices, without retail mark-up, mark-down, or commission,
      do not reflect actual transactions, which have been very sporadic, and do not
      include nominal amounts traded directly by shareholders or through other dealers
      who are not market makers. In addition, the quotations have been adjusted for
      a
      5% stock dividend paid in May 2006. There was no stock dividend or stock split
      in 2005.





**High
                                  and low bid quotations****High**
                              
                              
                              **Low****2006**Fourth
                                  quarter
                              
                              
                              $
                              24.00
                              
                              
                              $
                              19.90Third
                                  quarter
                              
                              
                              
                              21.00
                              
                              
                              
                              19.95Second
                                  quarter
                              
                              
                              
                              20.71
                              
                              
                              
                              19.00First
                                  quarter
                              
                              
                              
                              20.71
                              
                              
                              
                              17.62**2005**Fourth
                                  quarter
                              
                              
                              $
                              19.05
                              
                              
                              $
                              15.29Third
                                  quarter
                              
                              
                              
                              17.62
                              
                              
                              
                              15.95Second
                                  quarter
                              
                              
                              
                              15.96
                              
                              
                              
                              15.24First
                                  quarter
                              
                              
                              
                              15.96
                              
                              
                              
                              14.76




As
      of
      March 25, 2007, there were 467 record holders of the Company’s common stock and
      approximately 363 beneficial holders.





**Dividend
      Policy.** The
      Company has not paid any cash dividends on common stock since its inception
      in
      1996. The Company intends to retain any future earnings for the development
      and
      operations of its business and accordingly does not anticipate paying cash
      dividends on capital stock in the foreseeable future.




Holders
      of the Company’s common stock will be entitled to receive such cash dividends as
      may be declared by the board of directors out of funds legally available for
      that purpose. The Company is subject to certain restrictions on dividends under
      the California General Corporation Law. Generally, California law permits the
      Company to pay dividends not exceeding its retained earnings. In the
      alternative, the Company may pay a greater amount as dividends if its tangible
      assets after the dividends would be at least 125% of its liabilities (other
      than
      certain deferred items) and certain financial ratio tests are met. However,
      a
      bank holding company ordinarily cannot meet these alternative requirements.
      In
      addition, the Company has agreed not to pay cash dividends if it is in default
      or deferring interest payments on trust preferred securities.




The
      Company’s ability to pay cash dividends will also depend to a large extent upon
      the amount of cash dividends paid by the Bank to Valley Commerce Bancorp. The
      ability of the Bank to pay cash dividends will depend upon its earnings and
      financial condition. Under California law, a California-chartered bank may
      pay
      dividends not exceeding the lesser of its retained earnings or its net income
      for the last three fiscal years (less any previous dividends; provided, with
      the
      prior regulatory approval, a bank may pay dividends not exceeding the greatest
      of (a) its retained earnings, (b) its net income




18
 *Table
          of Contents*


for
        the
        previous fiscal year or (c) its net income for the current fiscal year).
        The
        Company’s ability to pay dividends is also subject to certain covenants
        contained in the indentures related to its trust preferred securities. However,
        the Bank has no formal dividend policy, and dividends are issued in the sole
        discretion of the Bank’s board of directors. There can be no assurance as to
        when or whether a dividend will be paid or the amount of any dividend. The
        Bank
        currently has a policy of retaining earnings to support the growth of the
        Bank
        except as necessary to enable Valley Commerce Bancorp to pay its direct expenses
        and amounts due under subordinated debentures issued in connection with trust
        preferred securities.
  The
        Company paid 5% stock dividends in each year from 2000 to 2006, except for
        2005.
        The Company issued a three-for-two stock split in September
        2004.




**Repurchases** .
      The
      Company did not repurchase any of its securities during the fourth quarter
      of
      the period covered by this report.




**Equity
      Compensation Plan Information**





In
      1997,
      the Company established a Stock Option Plan for which shares of stock are
      reserved for issuance to employees and directors under incentive and
      nonstatutory agreements. During 2006, 1,542 incentive stock options and 22,596
      non-statutory stock options were exercised, and 10,000 stock options were
      granted. No stock options were granted or exercised during 2005.




The
      information in the following table is provided as of the end of the fiscal
      year
      ended December 31, 2006, with respect to compensation plans (including
      individual compensation arrangements) under which equity securities are
      issuable:





**Plan
                category**
            
            **Column
                (a) Number of securities to be issued upon exercise of outstanding
                options, warrants and rights**
            
            **Weighted-average****exercise
                price of outstanding options, warrants and rights**
            
            **Number
                of securities remaining available for future issuance under****equity
                compensation plans (excluding securities reflected in Column
                (a))**Equity
                compensation plans approved by security holders
            
            
            224,349
            
            $
            7.95
            
            
            115,618Equity
                compensation plans not approved by security holders
            
            
            None
            
            
            Not
                applicable.
            
            
            None




19
 *Table
          of Contents*


**Valley
      Commerce Bancorp Stock Performance Graph**





The
      graph
      below compares the cumulative total shareholder return on Valley Commerce
      Bancorp’s (Valley Business Bank’s prior to November 2002) common stock to
      the cumulative total return of the NASDAQ Composite Index, the NASDAQ Bank
      Index, and the S & P 500 Index. The graph assumes that a $100 investment was
      made in the Company’s Common Stock as well as the other indexes on
      December 31, 2001 and that all dividends were reinvested. The chart
      represents the average closing price for the month of December in each of the
      years presented.









**Period
                    Ending****Index**
                12/31/01
                12/31/02
                12/31/03
                12/31/04
                12/31/05
                12/31/06Valley
                    Commerce Bancorp
                100
                121
                120
                205
                248
                293S&P
                    500
                100
                78
                100
                111
                117
                135NASDAQ
                    - Total US
                100
                69
                104
                113
                116
                128NASDAQ
                    - Bank Index
                100
                103
                133
                152
                148
                166




**Registrar
      and Transfer Agent**




Registrar
      and Transfer Company is the registrar and transfer agent for the Company’s
      common stock. Its address is 10 Commerce Drive, Cranford, New Jersey 07016.
      Its
      phone number is (800) 368-5948 and its email address is invrelations@rtco.com .


20
 *Table
          of Contents*




**ITEM6 - SELECTED FINANCIAL DATA**




The
      following table presents a five year summary of selected financial information
      which should be read in conjunction with the Company’s consolidated financial
      statements and notes thereto included in Item 8, Financial Statements, and
      with
      the Management’s Discussion and Analysis of Financial Condition and Results of
      Operations which is included as Item 7. The financial information contained
      in
      the table is unaudited. The results of operations for 2006 are not necessarily
      indicative of the results of operations that may be expected for future
      years.




*(dollars
                in thousands*
            
            As
                of and for the year ended December 31,*except
                per share data)*
            
            2002
            
            2003
            
            2004
            
            2005
            
            2006**Statement
                of Income**Interest
                income
            
            $
            6,404
            
            $
            7,188
            
            $
            8,737
            
            $
            12,504
            
            $
            16,750Interest
                expense
            
            
            1,454
            
            
            1,426
            
            
            1,622
            
            
            2,683
            
            
            5,561Net
                interest income
            
            
            4,950
            
            
            5,762
            
            
            7,115
            
            
            9,821
            
            
            11,189Provision
                for loan losses
            
            
            405
            
            
            315
            
            
            138
            
            
            369
            
            
            -Net
                interest income after provision for loan losses
            
            
            4,545
            
            
            5,447
            
            
            6,977
            
            
            9,452
            
            
            11,189Non-interest
                income
            
            
            1,065
            
            
            1,055
            
            
            1,341
            
            
            888
            
            
            996Non-interest
                expense
            
            
            4,079
            
            
            4,648
            
            
            5,662
            
            
            6,810
            
            
            7,653Income
                before income taxes
            
            
            1,531
            
            
            1,854
            
            
            2,656
            
            
            3,530
            
            
            4,532Income
                taxes
            
            
            600
            
            
            705
            
            
            1,027
            
            
            1,367
            
            
            1,576Net
                income
            
            
            931
            
            
            1,149
            
            
            1,629
            
            
            2,163
            
            
            2,956**Per
                Share Data (4):**Basic
                earnings per share
            
            $
            0.63
            
            $
            0.77
            
            $
            1.08
            
            $
            1.00
            
            $
            1.34Diluted
                earnings per share
            
            $
            0.61
            
            $
            0.74
            
            $
            1.01
            
            $
            0.94
            
            $
            1.28Book
                value - end of period
            
            $
            6.67
            
            $
            7.29
            
            $
            8.70
            
            $
            10.00
            
            $
            11.43Average
                shares outstanding-basic
            
            
            1,488,978
            
            
            1,492,796
            
            
            1,512,402
            
            
            2,165,803
            
            
            2,202,038Average
                shares outstanding-diluted
            
            
            1,525,202
            
            
            1,558,152
            
            
            1,614,957
            
            
            2,292,955
            
            
            2,313,409Shares
                outstanding - end of period
            
            
            1,350,547
            
            
            1,437,956
            
            
            1,877,671
            
            
            2,191,628
            
            
            2,215,765**Balance
                Sheet**Total
                loans, net
            
            $
            76,988
            
            $
            101,177
            
            $
            114,834
            
            $
            149,991
            
            $
            182,332Allowance
                for loan losses
            
            
            1,102
            
            
            1,393
            
            
            1,401
            
            
            1,766
            
            
            1,746Total
                assets
            
            
            120,365
            
            
            139,611
            
            
            186,007
            
            
            228,011
            
            
            263,800Total
                deposits
            
            
            107,759
            
            
            119,668
            
            
            156,424
            
            
            192,581
            
            
            207,576Total
                shareholders' equity
            
            
            9,937
            
            
            11,020
            
            
            16,333
            
            
            21,909
            
            
            25,448**Selected
                Performance Ratios:**Return
                on average assets
            
            
            0.85
            %
            
            0.89
            %
            
            1.04
            %
            
            1.05
            %
            
            1.22
            %Return
                on average equity
            
            
            9.85
            %
            
            11.01
            %
            
            13.84
            %
            
            10.44
            %
            
            12.59
            %Net
                interest margin(1)
            
            
            5.03
            %
            
            4.85
            %
            
            5.00
            %
            
            5.23
            %
            
            5.15
            %Average
                net loans as a percentage of average deposits
            
            
            81.9
            %
            
            81.4
            %
            
            80.2
            %
            
            78.3
            %
            
            85.8
            %Efficiency
                ratio
            
            
            66.8
            %
            
            67.4
            %
            
            66.2
            %
            
            63.6
            %
            
            62.3
            %




21
 *Table
          of Contents*


**Selected
      Financial Data (continued)**





As
                of and for the year ended December 31,2002
            
            2003
            
            2004
            
            2005
            
            2006**Selected
                Asset Quality Ratios:**Nonperforming
                assets to total assets
            
            
            1.0
            %
            
            0.7
            %
            
            0.0%(3)
            
            
            0.0%(3)
            
            
            0.0
            %Nonperforming
                loans to total loans
            
            
            1.5
            %
            
            1.0
            %
            
            0.1
            %
            
            0.0%(3)
            
            
            0.0
            %Net
                loan charge-offs to average loans
            
            
            0.5
            %
            
            0.0
            %
            
            0.1
            %
            
            0.0%(3)
            
            
            0.0%(3)Allowance
                for loan lossesto
                total loans
            
            
            1.41
            %
            
            1.40
            %
            
            1.20
            %
            
            1.16
            %
            
            0.95
            %Allowance
                for loan losses to nonperforming loans
            
            
            92.8
            %
            
            138.2
            %
            
            1729.6
            %
            
            8409.5
            %
            
            ----
                (2
            )**Capital
                Ratios:**BankLeverage
            
            
            8.0
            %
            
            9.8
            %
            
            8.4
            %
            
            11.3
            %
            
            11.0
            %Tier
                1 Risk-Based
            
            
            10.8
            %
            
            12.7
            %
            
            11.4
            %
            
            14.6
            %
            
            13.4
            %Total
                Risk-Based
            
            
            12.1
            %
            
            14.0
            %
            
            12.5
            %
            
            15.6
            %
            
            14.2
            %ConsolidatedLeverage
            
            
            8.0
            %
            
            10.0
            %
            
            10.8
            %
            
            11.5
            %
            
            11.1
            %Tier
                1 Risk-Based
            
            
            10.8
            %
            
            13.0
            %
            
            14.7
            %
            
            14.8
            %
            
            13.5
            %Total
                Risk-Based
            
            
            12.1
            %
            
            14.2
            %
            
            15.8
            %
            
            15.9
            %
            
            14.3
            %





Notes:
            (1)
            Interest
                income is not presented on a taxable-equivalent basis, however, the
                net
                interest margin was calculated on a taxable-equivalent basis by using
                a
                marginal tax rate of 34%


(2)
            There
                were no nonperforming loans at December 31,
                2006


(3)
            Less
                than .05% (4)
            All
              share and per share data has been retroactively restatedto
              reflect the  September 2004 three-for-two stock split and the5%
              stock dividends issued in May 2006, 2004 and
              2003.


22
 *Table
          of Contents*




**ITEM7
      - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS**




*The
      following discussion and analysis should be read together with the selected
      financial data appearing in Item 1, Business, and the financial statements
      and
      notes thereto appearing in Item 8, Financial Statements and Supplementary Data,
      included in this Annual Report on Form 10-K.*




**Overview**




The
      Company is the holding company for Valley Business Bank, a California state
      chartered bank.  The Company’s principal business is to provide, through
      its banking subsidiary, financial services in its primary market area in
      California. The Company serves Tulare and Fresno Counties and the surrounding
      area through the Bank. The Company derives its income primarily from interest
      earned on loans, and, to a lesser extent, interest on investment securities,
      fees for services provided to deposit customers, and fees from the brokerage
      of
      loans. The Bank’s major operating expenses are the interest paid on deposits and
      borrowings, and general operating expenses, including salaries and employee
      benefits and, to a lesser extent, occupancy and equipment, data processing
      and
      operations. The Company does not currently conduct any operations other than
      through the Bank.




**Critical
      Accounting Policies**




The
      Company’s financial statements are prepared in accordance with accounting
      principles generally accepted in the United States of America (GAAP). The
      Company’s accounting policies are integral to understanding the financial
      results reported. The most complex of these accounting policies require
      management’s judgment to ascertain the valuation of assets, liabilities,
      commitments and contingencies. The Company has established detailed policies
      and
      control procedures that are intended to ensure valuation methods are well
      controlled and consistently applied from period to period. In addition, the
      policies and procedures are intended to ensure that the process for changing
      methodologies occurs in an appropriate manner. The accounting areas where
      management’s judgment is most likely to materially impact the Company’s
      financial results are:




**Allowance
      for Loan Losses.** The
      allowance for loan losses is maintained to provide for estimated credit losses
      that it is probable the Company will incur as of the balance sheet date. Loans
      determined to be impaired are evaluated individually by management for
      determination of the specific loss, if any, that exists as of the balance sheet
      date. In addition, reserve factors are assigned to currently performing loans
      by
      loan type based on historical loss rates and adjusted for various qualitative
      factors such as economic and market conditions, concentrations and other trends
      within the loan portfolio. When management believes that additional reserves
      are
      needed, the allowance for loan losses is increased by recording a charge to
      operations through the provision for loan losses. The allowance is decreased
      as
      loans are charged-off, net of recoveries.




Management
      believes the allowance for loan losses is a “critical accounting estimate”
because management’s estimate of credit losses on loans not already identified
      as impaired; i.e., loans that are currently performing, requires management
      to
      carefully evaluate the pertinent facts and circumstances as of the balance
      sheet
      date to determine how much, if any, adjustment is required to the historical
      loss rate for each loan type. In addition, estimates of credit losses on
      currently performing loans are subject to change in future reporting periods
      as
      facts and circumstances change. For example, a decline in the California real
      estate market may result in management raising its estimate of credit losses
      if
      such estimated losses are considered probable at the balance sheet
      date.




Management
      reviews the adequacy of the allowance for loan losses at least quarterly.
      Further information is provided in the “Provision for Loan Losses” and
“Allowance for Loan Losses” sections of this discussion and
      analysis.




**Available
      for Sale Securities.** Available-for-sale
      securities are required to be carried at fair value. Management believes this
      is
      a “critical accounting estimate” in that the fair value of a security is based
      on quoted market prices or if quoted market prices are not available, fair
      values are extrapolated from the quoted prices of similar instruments. Changes
      in the fair value of available-for-sale securities impact the consolidated
      financial statements by increasing or decreasing assets and shareholders’
equity. ****


23
 *Table
          of Contents*




**Deferred
      Income Taxes.** Deferred
      income taxes reflect the estimated future tax effects of temporary differences
      between the reported amount of assets and liabilities for financial reporting
      purposes and such amounts as measured by tax laws and regulations. Management
      believes this is a “critical accounting estimate” in that an estimate of future
      earnings is required to support its position that the benefit of the Company’s
      deferred tax assets will be realized. If future income should prove non-existent
      or less than the amount of the deferred tax assets within the tax years to
      which
      they may be applied, the asset may not be realized and the Company’s net income
      will be reduced.




**Stock-Based
      Compensation** .
      Effective January 1, 2006, the Company adopted Statement of Financial Accounting
      Standards No. 123 (R), *Share-Based
      Payment* (“SFAS
      123 (R)”). Under
      SFAS 123(R), compensation cost is recognized for all awards that vest subsequent
      to the date of adoption based on the grant-date fair value estimated in
      accordance with SFAS No. 123, *Accounting
      for Stock-Based Compensation* and SFAS
      123(R). We believe this is a “critical accounting estimate” since the grant-date
      fair value is estimated using the Black-Scholes option-pricing formula, which
      involves making estimates of the assumptions used, including the expected term
      of the option, expected volatility over the option term, expected dividend
      yield
      over the option term and risk-free interest rate. In addition, when determining
      the compensation expense to amortize over the vesting period, management makes
      estimates about the expected forfeiture rate of options.




**Results
      of Operations**




**Overview**




The
      Company earned net income of $2.96 million, or $1.28 per diluted share, for
      the
      year ended December 31, 2006, compared to $2.16 million, or $0.94 per diluted
      share, for the year ended December 31, 2005. Net income was $1.63 million,
      or
      $1.01 per diluted share, for the year ended December 31, 2004. The return on
      average assets was 1.22% for 2006, 1.05% for 2005, and 1.04% for 2004. The
      return on average shareholders’ equity for 2006, 2005, and 2004 was 12.59%,
      10.44%, and 13.84%, respectively.




The
        increase in earnings for 2006 was related to the Company’s continued strong loan
        growth, partially offset by an increase in the cost of funds and additional
        personnel and occupancy costs associated with the Company’s continued
        expansion.  The ratio of non-interest expense to net operating revenue
        (efficiency ratio) improved to 62.8% for 2006 from 63.6% for 2005 and 66.2%
        for
        2004.  This ratio reflects changes in non-interest expense as well as
        changes in revenue from interest and non-interest sources.  The
        improvement in the efficiency ratio resulted primarily from the $1.4 million
        increase in net interest income in 2006 as discussed below, which more than
        offset the increase in non-interest expense.  A significant component
        of 2004 earnings not present in 2006 or 2005 was income resulting from the
        sale
        of other real estate acquired upon foreclosure.  During the third
        quarter of 2004, the Company recognized $0.4 million in interest income from
        the
        collection of interest previously reversed, and a $0.4 million gain on sale
        of
        other real estate.  The after tax effect of these items on 2004
        earnings was approximately $0.5 million.




At
      December 31, 2006, the Company’s total assets were $263.7 million, an increase
      of $35.7 million or 16% compared to December 31, 2005. Total loans, net of
      the
      allowance for loan losses, were $182.3 million at December 31, 2006,
      representing an increase of $32.3 million or 22% compared to December 31, 2005.
      Total deposits were $207.6 million at December 31, 2006, representing an
      increase of $15.0 million or 8% compared to December 31, 2005.




At
      December 31, 2006, the Company’s leverage ratio was 11.1% while its tier 1
      risk-based capital ratio and total risk-based capital ratios were 13.5% and
      14.3%, respectively. The leverage, tier 1 risk-based capital and total
      risk-based capital ratios at December 31, 2005 were 11.5%, 14.8% and 15.9%,
      respectively. The decrease in the Company’s capital ratios resulted from the
      Company’s strong asset growth during 2006 which outweighed the increase in
      capital attributable to earnings.




A
      detailed presentation of the Company’s financial results as of, or for the
      fiscal years ended December 31, 2006, 2005, and 2004 follows.




24
 *Table
          of Contents*






**Net
        Interest Income**
  The
        following table presents the Company’s average balance sheet, including weighted
        average yields calculated on a daily average basis and rates on a
        taxable-equivalent basis, for the years indicated:




**Average
                                                                                                                        balances
                                                                                                                        and
                                                                                                                        weighted
                                                                                                                        average
                                                                                                                        yields
                                                                                                                        and
                                                                                                                        rates****Fiscal
                                                                                                                        year
                                                                                                                        ended
                                                                                                                        December
                                                                                                                        31,****2006**
                                                                                                                    
                                                                                                                    
                                                                                                                    **2005**
                                                                                                                    
                                                                                                                    
                                                                                                                    **2004****Interest**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Average**
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    **Interest**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Average**
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    **Interest**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Average****Average**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Income/**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Yield/**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Average**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Income/**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Yield/**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Average**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Income/**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Yield/***(dollars
                                                                                                                        in
                                                                                                                        thousands)*
                                                                                                                    
                                                                                                                    **Balance**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Expense**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Cost**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Balance**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Expense**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Cost**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Balance**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Expense**
                                                                                                                    
                                                                                                                    
                                                                                                                    **Cost****ASSETS**Federal
                                                                                                                        funds
                                                                                                                        sold
                                                                                                                    
                                                                                                                    $
                                                                                                                    3,019
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    138
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.57
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    8,244
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    229
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2.78
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    9,022
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    136
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1.55
                                                                                                                    %Due
                                                                                                                      from
                                                                                                                      Bank
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    41
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.88
                                                                                                                    %Available-for-sale
                                                                                                                        investment
                                                                                                                        securities:Taxable
                                                                                                                    
                                                                                                                    
                                                                                                                    36,983
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1,445
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.91
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    40,564
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1,461
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.60
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    23,653
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    773
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1.51
                                                                                                                    %Exempt
                                                                                                                        from
                                                                                                                        Federal
                                                                                                                        income
                                                                                                                        taxes
                                                                                                                    
                                                                                                                    
                                                                                                                    17,936
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    719
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    6.07
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    7,856
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    303
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    5.84
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    3,806
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    133
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.27
                                                                                                                    %Total
                                                                                                                        securities
                                                                                                                        (1)
                                                                                                                    
                                                                                                                    
                                                                                                                    54,919
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2,164
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.61
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    48,420
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1,764
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.97
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    27,459
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    906
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    5.29
                                                                                                                    %Loans
                                                                                                                        (2)
                                                                                                                        (3)
                                                                                                                    
                                                                                                                    
                                                                                                                    166,620
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    14,448
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    8.67
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    134,008
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    10,511
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    7.84
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    107,262
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    7,693
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.55
                                                                                                                    %Total
                                                                                                                        interest-earning
                                                                                                                        assets
                                                                                                                        (1)
                                                                                                                    
                                                                                                                    
                                                                                                                    224,558
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    16,750
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    7.62
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    190,672
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    12,504
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    6.64
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    143,784
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    8,737
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    7.17
                                                                                                                    %Noninterest-earning
                                                                                                                        assets,
                                                                                                                        net
                                                                                                                        of
                                                                                                                        allowance
                                                                                                                        for
                                                                                                                        loan
                                                                                                                        losses
                                                                                                                    
                                                                                                                    
                                                                                                                    17,244
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    16,280
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    12,223
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    6.12
                                                                                                                    %Total
                                                                                                                        assets
                                                                                                                    
                                                                                                                    $
                                                                                                                    241,802
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    206,952
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    156,007**LIABILITIES
                                                                                                                        AND
                                                                                                                        SHAREHOLDERS’
EQUITY**Deposits:Interest
                                                                                                                        bearing
                                                                                                                    
                                                                                                                    $
                                                                                                                    73,534
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    1,996
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2.71
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    61,057
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    829
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1.36
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    50,167
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    417
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    0.83
                                                                                                                    %Time
                                                                                                                        deposits
                                                                                                                        less
                                                                                                                        than
                                                                                                                        $100,000
                                                                                                                    
                                                                                                                    
                                                                                                                    20,268
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    820
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.05
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    18,927
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    460
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2.43
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    18,428
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    351
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1.90
                                                                                                                    %Time
                                                                                                                        deposits
                                                                                                                        $100,000
                                                                                                                        or
                                                                                                                        more
                                                                                                                    
                                                                                                                    
                                                                                                                    34,220
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1,491
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.36
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    24,864
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    739
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2.97
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    18,229
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    427
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2.34
                                                                                                                    %Total
                                                                                                                        interest-bearing
                                                                                                                        deposits
                                                                                                                    
                                                                                                                    
                                                                                                                    128,022
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4,307
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.36
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    104,848
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2,028
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1.93
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    86,824
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1,195
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1.38
                                                                                                                    %Short-term
                                                                                                                        debt
                                                                                                                    
                                                                                                                    
                                                                                                                    11,488
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    611
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    5.32
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    1,423
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    53
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.72
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    -
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    0.00
                                                                                                                    %Long-term
                                                                                                                        debt
                                                                                                                    
                                                                                                                    
                                                                                                                    8,836
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    380
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.30
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    9,227
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    393
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    4.26
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    6,406
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    218
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.40
                                                                                                                    %Junior
                                                                                                                        subordinated
                                                                                                                        deferrable
                                                                                                                        interest
                                                                                                                        debentures
                                                                                                                    
                                                                                                                    
                                                                                                                    3,093
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    263
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    8.50
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    3,093
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    209
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    6.76
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    3,093
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    209
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    6.76
                                                                                                                    %Total
                                                                                                                        interest-bearing
                                                                                                                        liabilities
                                                                                                                    
                                                                                                                    
                                                                                                                    151,439
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    5,561
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    3.67
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    118,951
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2,683
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    2.26
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    96,323
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1,622
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1.68
                                                                                                                    %Noninterest
                                                                                                                        bearing
                                                                                                                        deposits
                                                                                                                    
                                                                                                                    
                                                                                                                    65,440
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    65,698
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    46,265Other
                                                                                                                        liabilities
                                                                                                                    
                                                                                                                    
                                                                                                                    1,437
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1,949
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    1,645Total
                                                                                                                        liabilities
                                                                                                                    
                                                                                                                    
                                                                                                                    218,316
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    186,238
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    144,233Shareholders’
                                                                                                                        equity
                                                                                                                    
                                                                                                                    
                                                                                                                    23,486
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    20,714
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    11,774Total
                                                                                                                        liabilities
                                                                                                                        and
                                                                                                                        shareholders’
equity
                                                                                                                    
                                                                                                                    $
                                                                                                                    241,802
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    206,952
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    156,007Net
                                                                                                                        interest
                                                                                                                        income
                                                                                                                        and
                                                                                                                        margin
                                                                                                                        (1)
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    11,189
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    5.15
                                                                                                                    %
                                                                                                                    
                                                                                                                    $
                                                                                                                    206,952
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    9,821
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    5.23
                                                                                                                    %
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    $
                                                                                                                    7,115
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    5.00
                                                                                                                    %





(1)
            Interest
                income is not presented on a taxable-equivalent basis, however, the
                average yield was calculated on a taxable- equivalent basis by using
                a
                marginal tax rate of 34%.


(2)
            Nonaccrual
                loans are included in total loans. Interest income is included on
                nonaccrual loans only to the extent cash payments have been received.
                No
                interest was received on nonaccrual loans for the 2006 and 2005 periods.
                Interest income for the 2004 period includes $423 from loans previously
                designated as nonaccrual.


(3)
            Interest
                income includes amortized loan fees of $633, $622, and $463 for 2006,
                2005, and 2004, respectively.


25
 *Table
          of Contents*




The
      following table sets forth a summary of the changes in interest income and
      interest expense from changes in average earning assets and interest-bearing
      liabilities (volume) and changes in average interest rates for the years
      indicated. Changes not solely attributable to volume or rates have been
      allocated in proportion to the respective volume and rate
      components.




**Changes
                              in net interest income due to changes in volumes and
                              rates****2006
                              vs 2005**
                          
                          
                          **2005
                              vs 2004****Increase
                              (decrease) due to change in:**
                          
                          
                          **Increase
                              (decrease) due to change in:****Average**
                          
                          
                          **Average**
                          
                          
                          
                          
                          
                          **Average**
                          
                          
                          **Average****Volume**
                          
                          
                          **Rate
                              (1)**
                          
                          
                          **Total**
                          
                          
                          **Volume**
                          
                          
                          **Rate
                              (1)**
                          
                          
                          **Total***(In
                              thousands)*Increase
                              (decrease) in interest income:Federal
                              funds sold
                          
                          $
                          (145
                          )
                          
                          $
                          54
                          
                          
                          $
                          (91
                          )
                          
                          $
                          (12
                          )
                          
                          $
                          105
                          
                          
                          $
                          93Due
                                from banks
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2
                          )
                          
                          
                          -
                          
                          
                          
                          (2
                          )Investment
                              securitiesTaxable
                          
                          
                          (129
                          )
                          
                          
                          113
                          
                          
                          
                          (16
                          )
                          
                          
                          602
                          
                          
                          
                          86
                          
                          
                          
                          688Exempt
                              from Federal Income taxes
                          
                          
                          589
                          
                          
                          
                          (173
                          )
                          
                          
                          416
                          
                          
                          
                          142
                          
                          
                          
                          28
                          
                          
                          
                          170Total
                              securities
                          
                          
                          460
                          
                          
                          
                          (60
                          )
                          
                          
                          400
                          
                          
                          
                          744
                          
                          
                          
                          114
                          
                          
                          
                          858Loans
                          
                          
                          2,558
                          
                          
                          
                          1,379
                          
                          
                          
                          3,937
                          
                          
                          
                          1,918
                          
                          
                          
                          900
                          
                          
                          
                          2,818Total
                              interest income
                          
                          
                          2,873
                          
                          
                          
                          1,373
                          
                          
                          
                          4.246
                          
                          
                          
                          2,648
                          
                          
                          
                          1,119
                          
                          
                          
                          3,767(Decrease)
                              increase in interest expense:Interest-bearing
                              deposits
                          
                          
                          169
                          
                          
                          
                          998
                          
                          
                          
                          1,167
                          
                          
                          
                          91
                          
                          
                          
                          321
                          
                          
                          
                          412Time
                              deposits less than $100,000
                          
                          
                          33
                          
                          
                          
                          327
                          
                          
                          
                          360
                          
                          
                          
                          10
                          
                          
                          
                          99
                          
                          
                          
                          109Time
                              certificates $100,000 or more
                          
                          
                          278
                          
                          
                          
                          474
                          
                          
                          
                          752
                          
                          
                          
                          155
                          
                          
                          
                          157
                          
                          
                          
                          312Total
                              interest-bearing deposits
                          
                          
                          480
                          
                          
                          
                          1,798
                          
                          
                          
                          2,278
                          
                          
                          
                          256
                          
                          
                          
                          577
                          
                          
                          
                          833Short-term
                              debt
                          
                          
                          375
                          
                          
                          
                          183
                          
                          
                          
                          558
                          
                          
                          
                          53
                          
                          
                          
                          -
                          
                          
                          
                          53Long-term
                              debt
                          
                          
                          (17
                          )
                          
                          
                          4
                          
                          
                          
                          (13
                          )
                          
                          
                          131
                          
                          
                          
                          (15
                          )
                          
                          
                          116Junior
                              subordinated deferrable interest debentures
                          
                          
                          -
                          
                          
                          
                          54
                          
                          
                          
                          54
                          
                          
                          
                          -
                          
                          
                          
                          59
                          
                          
                          
                          59Total
                              interest expense
                          
                          
                          838
                          
                          
                          
                          2,040
                          
                          
                          
                          2,878
                          
                          
                          
                          440
                          
                          
                          
                          621
                          
                          
                          
                          1,061Increase
                              (decrease) in net interest income
                          
                          $
                          2,035
                          
                          
                          $
                          (667
                          )
                          
                          $
                          1,368
                          
                          
                          $
                          2,208
                          
                          
                          $
                          498
                          
                          
                          $
                          2,706




(1)
            Factors
                contributing to both changes in rate and volume have been attributed
                to
                changes in rates.




**2006
      compared to 2005.** Total
      interest income increased from $12.5 million in 2005 to $16.7 million in 2006
      due to higher average interest earning assets and higher yields during 2006.
      Average earning assets in 2006 were $33.9 million or 18% greater than in 2005
      due to an increase of $32.6 million or 24% in average loans outstanding, and
      an
      increase of $6.5 million or 13% in average available-for-sale investment
      securities. The average yield on loans was 8.67% and 7.84% for 2006 and 2005,
      respectively, while the average tax equivalent yield on investment securities
      was 4.61% and 3.97%, respectively. The increase in average loans was due to
      the
      Company’s continued marketing efforts which resulted in growth in real estate
      mortgage and construction segments of the loan portfolio, while the increase
      in
      average investment securities resulted from the purchase of municipal bonds.
      The
      increase in weighted average yield on loans resulted primarily from the Federal
      funds rate increases that occurred in the latter part of 2005 as well as the
      four 25-basis point increases in the Federal funds rate that occurred during
      2006. The increase in weighted average tax equivalent yield on investment
      securities resulted primarily from the higher yields earned on municipal
      bonds.




Total
      interest expense increased from $2.7 million in 2005 to $5.6 million in 2006.
      This was due primarily to an increase of $2.3 million or 112% in interest on
      deposits. Average interest-bearing deposits increased by $23.2 million or 22%
      in
      2006 while average noninterest-bearing deposits were unchanged. During 2006,
      higher market interest rate pressure on deposit accounts and increased
      competition for deposits caused the Company to increase the interest rates
      paid
      on its interest-bearing deposits to levels which were significantly higher
      than
      in 2005. In addition interest expense increased due to a decrease in average
      noninterest-bearing deposits as a percentage of average total deposits. For
      2006, this percentage was 34%, compared to 39% for 2005. Although the Federal
      Reserve discontinued raising interest rates in June of 2006, the movement of
      deposit volume to higher interest rate categories was evident through the end
      of
      2006.


26
 *Table
          of Contents*




Interest
        expense on short-term borrowings from the Federal Home Loan Bank of San
        Francisco (FHLB) increased from $53,000 in 2005 to $611,000 in
        2006.  This was due primarily to average volume of this debt
        increasing from $1.4 million in 2005 to $11.5 million in 2006 as the Company
        relied more heavily on this source to fund asset growth.
  As
        noted
        above, average non-interest bearing deposits remained basically unchanged
        at
        $65.4 million and $65.7 million for 2006 and 2005,
        respectively.  These deposits represented 34% of average total
        deposits during 2006, but only 39% of average total deposits during
        2005.  This further highlights the increased reliance on
        interest-bearing deposits and short-term borrowings to fund asset growth
        in
        2006.
  Net
        interest income before provision for loan losses increased to $11.2 million
        for
        2006 from $9.8 million for 2005, an increase of $1.4 million or
        14%.  The increase generally resulted from growth of earning assets in
        a rising rate environment offset in part by rising costs of
        funds.  The change in net interest income attributable to higher
        volume of average interest-earning assets in 2006 was an increase of $2.9
        million while the change attributable to higher volume of average
        interest-bearing liabilities was a decrease of $0.9 million, a net increase
        of
        $2.0 million.  The increase in net interest income attributable to
        higher interest rates on average interest-earning assets was $1.4 million
        and
        was offset by a $2.1 million decrease in net interest income resulting from
        higher interest rates on average interest-bearing liabilities.
  The
        Company’s net interest margin for 2006 was 5.15% compared to 5.23% in 2005, a
        decrease of 8 basis points.  As discussed above, rising interest costs
        for deposits and other funding sources outpaced the rise in asset yields
        during
        2006.
  **2005
        compared to 2004.** Total interest income increased from $8.7 million in
        2004 to $12.5 million in 2005 due to higher average interest earning assets
        and
        higher yields during 2005. Average earning assets in 2005 were $46.9 million
        or
        33% greater than in 2004 due to an increase of $26.7 million or 25% in average
        loans outstanding, and an increase of $21.0 million or 76% in available-for-sale
        investment securities.  The average yield on loans was 7.84% and 7.17%
        for 2005 and 2004, respectively.  The increase in loans was due to the
        Company’s continued marketing efforts which resulted in growth in the commercial
        and real estate segments of the loan portfolio.  The increase in
        weighted average yield resulted primarily from the eight 25-basis point
        increases in the Federal funds rate that occurred during 2005.
  Total
        interest expense increased from $1.62 million in 2004 to $2.68 million in
        2005
        due primarily to an increase of $833,000 or 70% in interest on
        deposits.  Interest expense in 2005 on other borrowings increased
        $169,000 or 61% during 2004, due to increased borrowings from Federal Home
        Loan
        Bank and higher interest cost on junior subordinated interest debentures
        caused
        by rising market interest rates.
  Net
        interest income before provision for loan losses increased to $9.82 million
        for
        2005 from $7.12 million for 2004 due to the factors described
        above.  Increased volume of net average earning assets resulted in an
        increase in the Company’s net interest income of $2.2 million, while the
        increase in interest rates increased net interest income by an additional
        $0.5
        million.
  The
        Company’s net interest margin increased 23 bps (from 5.00% to 5.23%) in 2005
        compared to 2004.  The improvement was attributable to the Company
        being positioned to benefit from the interest rate increases noted above
        as the
        aggregate yield on loans and other interest-earning assets increased more
        quickly than the aggregate cost of interest-bearing deposits and other funding
        sources during 2005.  The net interest margin for 2004 reflects
        interest income earned in previous years but recorded in connection with
        the
        sale of other real estate as described above.
  Average
        non-interest bearing deposits totaled $65.7 million, representing 39% of
        average
        deposits during 2005, compared to $46.3 million, representing 35% of average
        deposits, during 2004.
  **Provision
        for Loan Losses**
  The
        provision for loan losses, which is included in operations to support the
        required level of the allowance for loan losses, is based on credit experience
        and management’s ongoing evaluation of loan portfolio risk and economic
        conditions.  The Company did not record a provision for loan losses in
        2006 based on management’s assessment of the loan portfolio and related credit
        quality.  This compared to provisions for loan losses of $369,000 and
        $138,000 in 2005 and 2004, respectively.  See the sections below
        titled “Allowance for Loan Losses.”







27
 *Table
          of Contents*




**Non-Interest
      Income**




Non-interest
      income for 2006 totaled $996,000 compared with $888,000 in 2005 and $1.34
      million in 2004. The components of non-interest income during each year were
      as
      follows:





**Non-interest
      income**





**Years
                Ended December 31,**
            
            **Change
                during year***(in
                thousands)*
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2006**
            
            **2005**Service
                charges
            
            $
            547
            
            $
            514
            
            $
            517
            
            $
            33
            
            $
            (3
            )(Loss) gain on
                sale of available-for-sale investment securities
            
            
            (53
            )
            
            (48
            )
            
            7
            
            
            (5
            )
            
            (55
            )Gain
                on other real estate
            
            
            -
            
            
            -
            
            
            373
            
            
            -
            
            
            (373
            )Mortgage
                loan brokerage fees
            
            
            125
            
            
            136
            
            
            176
            
            
            (11
            )
            
            (40
            )Earnings
                on cash surrender value of life insurance policies
            
            
            153
            
            
            104
            
            
            99
            
            
            49
            
            
            5Other
            
            
            224
            
            
            182
            
            
            169
            
            
            42
            
            
            13Total
                non-interest income
            
            $
            996
            
            $
            888
            
            $
            1,341
            
            $
            108
            
            $
            (453
            )




**2006
      Compared to 2005** .
      Non-interest income increased during 2006 due primarily to the purchase of
      bank-owned life insurance policies resulting in increased earnings on cash
      surrender value of life insurance. Income from service charges on deposit
      accounts increased in 2006 due to a $5,000 increase in service charges, a
      $19,000 increase in account analysis charges and a $5,000 increase in NSF and
      overdraft charges. Other non-interest income increased by $42,000 due to FHLB
      dividend income which was $65,000 higher in 2006 and decreases in other
      accounts. FHLB dividend income increased in 2006 due to mandatory additional
      investments in FHLB stock resulting from higher short term borrowings. A slowing
      residential real estate market caused a $11,000 decrease in mortgage loan
      brokerage fees.




**2005
        Compared to 2004**.  Non-interest income decreased during 2005
        as non-interest income recorded in the third quarter of 2004 included a $373,000
        gain on the sale of other real estate.  In addition, a $48,000 loss on
        sale of investment securities was recorded in the fourth quarter of 2005
        compared to a gain of $7,000 in 2004.  The loss was recorded upon the
        sale of approximately $4 million of investment securities that were due to
        mature in 2006.  The proceeds from the sale were reinvested in longer
        term securities offering higher yields.  The Company has no
        established program of selling securities other than  to achieve
        interest rate risk management goals.  From time to time, management
        evaluates the portfolio of investment securities and may initiate sales of
        selected securities.  Sales of securities can produce either gains or
        losses depending upon the prevailing interest rate
        environment.




Despite
      deposit growth during 2005, income from service charges on deposit accounts
      decreased slightly from 2004. This was primarily due to higher average balances
      maintained by business and professional customers which mitigated growth in
      service charges. During 2005, the Company brokered fewer residential mortgage
      loans and therefore earned less loan brokerage fees. This was due to a slowdown
      in refinance activity that was experienced throughout the mortgage
      industry.


28
 *Table
          of Contents*




**Non-Interest
      Expense**




Total
      non-interest expense was $7.65 million in 2006, up $843,000 or 12%, from the
      $6.81 million in non-interest expense in 2005. The following table presents
      the
      major components of non-interest expense for the years indicated.




**Non-interest
      expense**




**Years
                Ended December 31,**
            
            **Change
                during year***(in
                thousands)*
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2006**
            
            **2005**Salaries
                and employee benefits
            
            $
            4,261
            
            $
            3,777
            
            $
            3,130
            
            $
            484
            
            $
            647Occupancy
                and equipment
            
            
            890
            
            
            757
            
            
            656
            
            
            133
            
            
            101Data
                processing
            
            
            460
            
            
            422
            
            
            408
            
            
            38
            
            
            14Operations
            
            
            454
            
            
            414
            
            
            367
            
            
            40
            
            
            47Professional
                and legal
            
            
            330
            
            
            311
            
            
            216
            
            
            19
            
            
            95Advertising
                and business development
            
            
            268
            
            
            258
            
            
            200
            
            
            10
            
            
            58Telephone
                and postal
            
            
            206
            
            
            171
            
            
            131
            
            
            35
            
            
            40Supplies
            
            
            180
            
            
            237
            
            
            137
            
            
            (57
            )
            
            100Assessment
                and insurance
            
            
            114
            
            
            125
            
            
            131
            
            
            (11
            )
            
            (6
            )Amortization
                expense
            
            
            63
            
            
            63
            
            
            63
            
            
            0
            
            
            0Other
                expenses
            
            
            427
            
            
            275
            
            
            223
            
            
            152
            
            
            52Total
                non-interest expense
            
            $
            7,653
            
            $
            6,810
            
            $
            5,662
            
            $
            843
            
            $
            1,148




**2006
      Compared to 2005.** The
      increase in non-interest expense resulted primarily from increased employee
      costs associated with the Company’s growth and the highly competitive
      environment for qualified bank personnel. Salary and benefits increased by
      $484,000 due to promotional and merit pay raises, increased cost of employee
      benefits, expanded employee incentive programs, and the addition of 4 full-time
      positions. Also included in 2006 salaries and employee benefits was a salary
      continuation plan designed to retain bank officers. This plan was implemented
      in
      the latter part of 2006 and added $37,000 to 2006 expense.




Occupancy
      and equipment costs increased $133,000 in 2006 due to increased maintenance
      and
      repairs, leasehold improvements and computer system upgrades. Operations costs
      increased $40,000 due to significantly higher costs in the areas of
      correspondent bank charges and courier/armored car charges, both of which were
      reflective of the Company’s growth. Telephone and postal costs increased $35,000
      due to upgrades to bundled telephone and internet services. Other expenses
      increased $152,000 due to a $58,000 increase in employee recruitment and hiring
      costs, a $26,000 increase in employee and director training expenses, and a
      $17,000 increase in staff related expenses.




**2005
      Compared to 2004.** The
      increase in non-interest expense resulted primarily from increased employee
      costs associated with the Company’s growth and normal salary increases. The
      Tulare loan production office was opened in the first quarter of 2005 and
      additional administrative office was leased in November 2005 which, along with
      equipment upgrades, caused occupancy and equipment expense to increase over
      the
      prior year. The professional and legal expense category increased significantly
      due to increased audit costs required by the Company’s first full year as a
      public reporting company. Operations costs increased due to significantly higher
      costs in the areas of correspondent bank charges and courier/armored car
      charges. In addition, the Bank changed its name effective July 7, 2005 which
      resulted in increased expenditures for supplies and advertising.




**Provision
      for Income Taxes**




The
        provision for income taxes for 2006 increased to $1.58 million compared to
        $1.37
        million in 2005 and $1.03 million in 2004.  The increases were
        primarily due to increased pretax net income. The Company’s effective tax rate
        decreased to 34.8% for 2006 from 38.7% for the 2005 and 2004
        periods.  The effective tax rate decreased in 2006 primarily as a
        result of the increased amount of tax exempt income from municipal bonds
        and
        earnings on bank-owned life insurance.


29
 *Table
          of Contents*


**Financial
      Condition**




**Investment
      Securities**




The
      Company purchases investment securities to maintain liquidity and manage
      interest rate risk within board approved parameters, as well as to generate
      interest revenues. The investment security portfolio consists of obligations
      of
      U.S. Government agencies, mortgage-backed securities of U.S. government
      sponsored enterprises, obligations of states and political subdivisions, and
      other investment grade securities.




At
        December 31, 2006 and 2005, all investment securities were classified as
        available-for-sale.  In classifying its investments as
        available-for-sale, securities are reported at fair value, with unrealized
        gains
        and losses excluded from earnings and reported, net of taxes, as accumulated
        other comprehensive loss within shareholders’ equity.




The
      following tables set forth the estimated market value of available-for-sale
      investment securities at the dates indicated:





**Market
                            value of securities available for sale****December
                            31, 2006***(in
                            thousands)*
                        
                        Amortized
                            Cost
                        
                        
                        Unrealized
                            Gain
                        
                        
                        Unrealized
                            Loss
                        
                        
                        FairValueU.S.
                            government  agencies
                        
                        $
                        20,325
                        
                        
                        $
                        6
                        
                        
                        $
                        (282
                        )
                        
                        $
                        20,049Mortgage-backed
                            securities
                        
                        
                        12,422
                        
                        
                        
                        65
                        
                        
                        
                        (250
                        )
                        
                        
                        12,237Municipal
                            securities
                        
                        
                        18,950
                        
                        
                        
                        142
                        
                        
                        
                        (36
                        )
                        
                        
                        19,056Corporate
                            debt securities
                        
                        
                        4,033
                        
                        
                        
                        -
                        
                        
                        
                        (77
                        )
                        
                        
                        3,956Total
                        
                        $
                        55,730
                        
                        
                        $
                        213
                        
                        
                        $
                        (645
                        )
                        
                        $
                        55,298





**December
                          31, 2005**Amortized
                          Cost
                      
                      
                      Unrealized
                          Gain
                      
                      
                      Unrealized
                          Loss
                      
                      
                      FairValueU.S.
                          government  agencies
                      
                      $
                      21,388
                      
                      
                      $
                      6
                      
                      
                      $
                      (416
                      )
                      
                      $
                      20,978Mortgage-backed
                          securities
                      
                      
                      9,683
                      
                      
                      
                      -
                      
                      
                      
                      (293
                      )
                      
                      
                      9,390Municipal
                          securities
                      
                      
                      15,640
                      
                      
                      
                      53
                      
                      
                      
                      (119
                      )
                      
                      
                      15,574Corporate
                          debt securities
                      
                      
                      4,569
                      
                      
                      
                      -
                      
                      
                      
                      (120
                      )
                      
                      
                      4,449Total
                      
                      $
                      51,280
                      
                      
                      $
                      59
                      
                      
                      $
                      (948
                      )
                      
                      $
                      50,391




Management
      periodically evaluates each investment security for other than temporary
      impairment, relying primarily on industry analyst reports, observation of market
      conditions and interest rate fluctuations. Management believes it will be able
      to collect all amounts due according to the contractual terms of the underlying
      investment securities and that the noted decline in fair value is considered
      temporary and due only to interest rate fluctuations.


30
 *Table
          of Contents*




The
      following table summarizes the amounts and distribution of investment securities
      and their weighted average yields as of December 31, 2006. Expected maturities
      may differ from contractual maturities where the issuers of the securities
      have
      the right to call or prepay obligations without penalty.




**Maturities
                of securities available for sale****After
                one**
            
            **After
                five****Within**
            
            **but
                within**
            
            **but
                within**
            
            **After****One
                year**
            
            **five
                years**
            
            **ten
                years**
            
            **ten
                years**
            
            **Total***(dollars
                in thousands)*
            
            **Amount**
            
            **Yield**
            
            **Amount**
            
            **Yield**
            
            **Amount**
            
            **Yield**
            
            **Amount**
            
            **Yield**
            
            **Amount**
            
            **Yield**U.S.
                government agencies
            
            $
            4,959
            
            
            3.59
            %
            $
            12,740
            
            
            4.02
            %
            $
            2,350
            
            
            5.00
            %
            $
            -
            
            
            -
            
            $
            20,049
            
            
            4.03
            %Mortgage-backed
                securities
            
            
            78
            
            
            3.87
            %
            
            2,424
            
            
            4.05
            %
            
            5,022
            
            
            4.72
            %
            
            4,713
            
            
            5.16
            %
            
            12,237
            
            
            4.75
            %Municipal
                securities (1)
            
            
            -
            
            
            -
            
            
            354
            
            
            7.22
            %
            
            2,337
            
            
            5.70
            %
            
            16,365
            
            
            5.85
            %
            
            19,056
            
            
            5.86
            %Corporate
                debt securities
            
            
            995
            
            
            3.61
            %
            
            2,961
            
            
            3.68
            %
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,956
            
            
            3.66
            %Total
            
            $
            6,032
            
            
            3.60
            %
            $
            18,479
            
            
            4.03
            %
            $
            9,709
            
            
            5.02
            %
            $
            21,078
            
            
            5.70
            %
            $
            55,298
            
            
            4.79
            %




(1)
            Yields
                shown are not computed on a tax equivalent
                basis.




**Loan
      Portfolio**




The
      Company’s lending activities are geographically concentrated in the South San
      Joaquin Valley, primarily in Tulare and Fresno counties. The Company offers
      both
      fixed and floating rate loans and obtains collateral in the form of real
      property, business assets and deposit accounts but looks to business and
      personal cash flows as the primary source of repayment.




The
      following table sets forth the breakdown of loans outstanding by type at the
      dates indicated by amount and percentage of the portfolio:





*(dollars
                                      in thousands)*
                                  
                                  **December
                                      31, 2006**
                                  
                                  
                                  **December
                                      31, 2005**Commercial
                                  
                                  $
                                  41,104
                                  
                                  
                                  
                                  22
                                  %
                                  
                                  $
                                  40,271
                                  
                                  
                                  
                                  26
                                  %Real
                                      estate - mortgage (1)
                                  
                                  
                                  92,639
                                  
                                  
                                  
                                  50
                                  %
                                  
                                  
                                  72,753
                                  
                                  
                                  
                                  48
                                  %Real
                                      estate - construction
                                  
                                  
                                  44,273
                                  
                                  
                                  
                                  24
                                  %
                                  
                                  
                                  32,560
                                  
                                  
                                  
                                  21
                                  %Agricultural
                                  
                                  
                                  4,693
                                  
                                  
                                  
                                  3
                                  %
                                  
                                  
                                  4,432
                                  
                                  
                                  
                                  3
                                  %Consumer
                                      and other
                                  
                                  
                                  1,805
                                  
                                  
                                  
                                  1
                                  %
                                  
                                  
                                  2,376
                                  
                                  
                                  
                                  2
                                  %Subtotal
                                  
                                  
                                  184,514
                                  
                                  
                                  
                                  100
                                  %
                                  
                                  
                                  152,392
                                  
                                  
                                  
                                  100
                                  %Deferred
                                      loan fees, net
                                  
                                  
                                  (436
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (635
                                  )Allowance
                                      for loan losses
                                  
                                  
                                  (1,746
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (1,766
                                  )Total
                                      loans, net
                                  
                                  $
                                  182,332
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  149,991





(1)
            Consists
                primarily of commercial mortgage
                loans.




Retail
      loan products are offered primarily for the benefit of commercial business
      owners and professionals who typically maintain depository and other lending
      relationships with the Company. Loans outstanding at December 31, 2006 increased
      by $32.3 million or 22% compared to December 31, 2005. Although the Company’s
      marketing efforts are focused primarily on commercial loans, the strongest
      growth for 2006 occurred in the real estate mortgage and construction segments
      of the portfolio, which was indicative of the continued economic growth in
      the
      Company’s lending territory. Tulare and Fresno counties are two of the top
      counties in the United States for agricultural production, but are growing
      in
      population more rapidly than many other areas of California due to the low
      cost
      of real estate relative to California’s urban areas.


31
 *Table
          of Contents*




The
      following table presents the maturity distribution of the loan portfolio as
      of
      December 31, 2006. The table shows the distribution of such loans between those
      loans with fixed interest rates and those with floating (variable) interest
      rates. Floating rates generally fluctuate with changes in the prime rate. A
      majority of the Company’s floating rate loans have rate floors. During 2006, the
      Company’s volume of loans with fixed interest rates increased due to customer
      demand. Management considers the risk associated with fixed interest rate loans
      in its periodic analysis of interest rate risk.




**Maturity
                of loans***(in
                thousands)*
            
            **Within****one
                year**
            
            **After
                one but within five****years**
            
            **After****five
                years**
            
            **Total**Commercial
            
            $
            22,224
            
            $
            10,739
            
            $
            8,141
            
            $
            41,104Real
                estate - mortgage (1)
            
            
            2,716
            
            
            12,243
            
            
            77,680
            
            
            92,639Real
                estate - construction
            
            
            22,215
            
            
            17,517
            
            
            4,541
            
            
            44,273Agriculture
            
            
            4,223
            
            
            375
            
            
            95
            
            
            4,693Consumer
                and other
            
            
            867
            
            
            635
            
            
            303
            
            
            1,805Total
            
            $
            52,245
            
            $
            41,509
            
            $
            90,760
            
            $
            184,514Loans
                with fixed interest rates
            
            
            5,353
            
            
            13,052
            
            
            63,979
            
            
            82,384Loans
                with floating interest rates
            
            
            46,892
            
            
            28,457
            
            
            26,781
            
            
            102,130Total
            
            $
            52,245
            
            $
            41,509
            
            $
            90,760
            
            $
            184,514





(1)
            Consists
                primarily of commercial mortgage
                loans.




**Nonperforming
      Assets.** The
      following table presents nonaccrual loans, loans past due 90 days and still
      accruing interest, restructured loans, and other real estate owned, as of the
      dates indicated:




**Nonperforming
                assets**
            
            **December
                31,***(dollars
                in thousands)*
            
            **2006**
            
            **2005**
            
            **2004**Nonaccrual
                loans
            
            $
            -
            
            $
            21
            
            $
            81Loans
                90 days or more past due and still accruing
            
            
            -
            
            
            -
            
            
            -Restructured
                loans
            
            
            -
            
            
            -
            
            
            -Other
                real estate owned
            
            
            -
            
            
            -
            
            
            -Total
                nonperforming assets
            
            $
            -
            
            $
            21
            
            $
            81Nonperforming
                assets to total loans
            
            
            .00
            %
            
            .01
            %
            
            .07
            %




Generally,
      loans are placed on nonaccrual status when full collectibility of principal
      or
      interest is uncertain or when principal or interest is past due for 90 days
      (unless the loan is well secured and in the process of collection). From the
      time a loan is placed on nonaccrual status, interest previously accrued but
      not
      collected is reversed from interest income. Any interest or principal payments
      received on a nonaccrual loan are normally applied as a principal reduction.
      A
      nonaccrual loan may be restored to accrual status when none of its principal
      and
      interest is past due and unpaid, and certain other factors are satisfied.
      Classification of a loan as nonaccrual does not necessarily indicate that
      collection of principal and interest will be uncollectible in whole or in
      part.




**Impaired
      Loans.** A
      loan is
      considered impaired when collection of all amounts due according to the original
      contractual terms is not probable. The category of impaired loans is not
      coextensive with the category of nonaccrual loans, although the two categories
      may overlap in part or in full and did overlap in full at December 31, 2006,
      2005, and 2004. The recorded investment in loans that were considered to be
      impaired totaled $0, $21,000, and $81,000 at December 31, 2006, 2005, and 2004,
      respectively. There was no specific allowance for loan losses for impaired
      loans
      at December 31, 2006, 2005, and 2004. The average recorded investment in
      impaired loans for the years ended December 31, 2006, 2005, and 2004 was $9,000,
      $26,000, and $978,000, respectively. At December 31, 2006, the Company had
      not
      identified any other potential problem loans that would result in those loans
      being included as nonperforming loans at a future date.


32
 *Table
          of Contents*




**Allowance
      for Loan Losses**




The
      Company maintains an allowance for loan losses to provide for estimated credit
      losses that it is probable the Company will incur as of the balance sheet date.
      Loans determined to be impaired are evaluated individually by management for
      determination of the specific loss, if any, that exists as of the balance sheet
      date. In addition, reserve factors are assigned to currently performing loans
      based on historical loss rates for each identified loan type adjusted to reflect
      current economic and market conditions.




The
      allowance for loan losses totaled $1.75 million or 0.95% of total loans at
      December 31, 2006 compared to $1.77 million or 1.16% at December 31, 2005,
      and
      $1.40 million or 1.20% at December 31, 2004. No provision for loan losses was
      recorded in 2006 due to continued strong credit quality and the absence of
      nonperforming loans. Management believes that the allowance for loan losses
      was
      adequate at December 31, 2006. However, no prediction of the ultimate level
      of
      loans charged off in future years can be made with any certainty.




The
      following table summarizes the changes in the allowance for loan losses for
      the
      periods indicated:





**Changes
                in allowance for loan losses****Year
                ended December 31,***(dollars
                in thousands)*
            
            **2006**
            
            **2005**
            
            ******2004**Balance,
                beginning
            
            $
            1,766
            
            $
            1,401
            
            $
            1,393Provision
                for loan losses
            
            
            -
            
            
            369
            
            
            138Charge-offs
            
            
            (21
            )
            
            (4
            )
            
            (148
            )Recoveries
            
            
            1
            
            
            -
            
            
            18Balance,
                ending
            
            $
            1,746
            
            $
            1,766
            
            $
            1,401Net
                charge-offs to average loans outstanding
            
            
            .013
            %
            
            .003
            %
            
            0.12
            %Average
                loans outstanding
            
            $
            166,620
            
            $
            134,008
            
            $
            107,262Ending
                allowance to total loans outstanding
            
            
            0.95
            %
            
            1.16
            %
            
            1.20
            %




**Deposits**




Deposits
      are obtained primarily from local businesses and residents. The average deposits
      and the average rates paid for 2006, 2005, and 2004 are presented in the
“Results of Operations” section under the heading “Net Interest Income.” Average
      total deposits for 2006 were $193.5 million compared to $170.5 million for
      2005,
      an increase of $23.0 million or 13%. In December 2006, the Company acquired
      brokered time deposits totaling $9.9 million. These deposits did not
      significantly increase average total deposits for 2006. The Company utilized
      brokered deposits as a way of diversifying its funding sources and the $9.9
      million in funds were used primarily to reduce FHLB short-term
      borrowings.




In
      2006,
      the Company continued its strong marketing effort to attract local deposits,
      particularly from business customers. However, the interest rate environment
      in
      2006 was not conducive to attracting and retaining core deposits. Total deposits
      at December 31, 2006 were $207.6 million compared to $192.6 million at December
      31, 2005, an increase of $15.0 million or 8%. If the brokered time deposits
      acquired in late 2006 are excluded, total deposits at December 31, 2006
      increased by $5.4 million or 3%.


33
 *Table
          of Contents*




The
      following chart sets forth the distribution of the Company’s average daily
      deposits for the periods indicated.




**For
                the Twelve months ended December 31,****2006**
            
            **2005**
            
            **2004****Average**
            
            
            
            **Average**
            
            
            
            **Average****Average**
            
            **Yield/**
            
            **Average**
            
            **Yield/**
            
            **Average**
            
            **Yield/***(dollars
                in thousands)*
            
            **Balance**
            
            **Rate**
            
            **Balance**
            
            **Rate**
            
            **Balance**
            
            **Rate****Deposits:**Non-interest
                bearing deposits
            
            $
            65,440
            
            
            
            
            $
            65,698
            
            
            
            
            $
            46,265Interest-bearing
                deposits:Interest
                bearing demand deposits
            
            $
            21,530
            
            
            2.81
            %
            $
            20,266
            
            
            1.90
            %
            $
            19,013
            
            
            0.80
            %Money
                market accounts
            
            
            42,047
            
            
            3.08
            %
            
            31,308
            
            
            1.20
            %
            
            23,195
            
            
            0.99
            %Savings
            
            
            9,957
            
            
            0.96
            %
            
            9,483
            
            
            0.71
            %
            
            7,959
            
            
            0.44
            %Time
                deposits $100,000 or more
            
            
            54,488
            
            
            4.24
            %
            
            43,791
            
            
            2.74
            %
            
            36,657
            
            
            2.12
            %Total
                interest-bearing deposits
            
            
            128,022
            
            
            3.36
            %
            
            104,848
            
            
            1.93
            %
            
            86,824
            
            
            1.38
            %Total
                deposits
            
            $
            193,462
            
            
            
            
            $
            170,546
            
            
            
            
            $
            133,089




The
      following table summarizes by time remaining to maturity, the amount of
      certificates of deposit issued in amounts of $100,000 or more as of December
      31,
      2006.




**Maturities
                of certificates of deposit of $100,000 or
                more***(dollars
                in thousands)*
            
            **Balance**
            
            **Percent
                of****total**Three
                months or less
            
            $
            10,444
            
            
            22
            %Over
                three months through nine months
            
            
            25,302
            
            
            53
            %Over
                nine months through twelve months
            
            
            7,136
            
            
            15
            %Over
                twelve months
            
            
            4,989
            
            
            10
            %Total
                certificates of deposit of $100,000 and more
            
            $
            47,871
            
            
            100
            %




**Borrowings**




**Federal
      Home Loan Bank.** The
      Company maintains a borrowing relationship with the Federal Home Loan Bank
      of
      San Francisco (FHLB) which offers both long-term and short-term borrowing
      facilities. The Company has pledged investment securities and qualifying loans
      as collateral for its borrowing lines as required by FHLB.




At
      December 31, 2006, long-term debt outstanding from the FHLB totaled $8.5 million
      compared to $9.1 million at December 31, 2005. The Company incurred long-term
      debt from FHLB at various times to match the cash flow characteristics of
      certain fixed rate loans made by the Company. There was no new long-term debt
      incurred during 2006 and the reduction from the prior year was attributable
      to
      scheduled principal repayments. Average total long-term borrowings from FHLB
      totaled $8.8 million for 2006 at an average cost of 4.30% compared to average
      long-term borrowings of $9.2 million at an average cost of 4.26% for 2005.




There
      were $17.6 million in short-term borrowings from FHLB at December 31, 2006
      compared to $0 at December 31, 2005. The Company utilized short-term borrowings
      from FHLB to fund a significant portion of its asset growth in 2006 as rising
      interest rates adversely affected the ability of the Company to attract new
      core
      deposits. Average total short-term borrowings from FHLB totaled $11.5 million
      for 2006 at an average cost of 5.32% compared to average short-term borrowings
      of $1.4 million in 2005 at an average cost of 3.72%. The increase in interest
      rate on short-term borrowings was reflective of the increase in short-term
      market rates.


34
 *Table
          of Contents*




**Other
      Borrowing Arrangements.** In
      addition to FHLB borrowing lines, the Company maintains short-term unsecured
      borrowing arrangements with correspondent banks to meet unforeseen cash needs.
      These borrowing lines totaled $13.0 million at December 31, 2006. The borrowing
      lines are utilized infrequently and there were no balances outstanding at
      December 31, 2006 or 2005.




**Junior
      Subordinated Deferrable Interest Debentures.** During
      2003, the Company formed Valley Commerce Trust I with a capital investment
      of
      $93,000 for the sole purpose of issuing trust preferred securities. During
      the
      second quarter of 2003, Valley Commerce Trust I issued trust preferred
      securities for gross proceeds of $3.0 million and invested this amount plus
      the
      $93,000 of capital proceeds in floating rate junior subordinated deferrable
      interest debentures issued by the Company. The Subordinated Debentures mature
      on
      April 7, 2033 and are repriced quarterly to an interest rate that is the sum
      of
      3-month Libor plus 3.30%. The interest rate at December 31, 2006 and December
      31, 2005 was 8.67% and 7.45%, respectively.




Trust
      preferred securities are includable in the Company’s Tier 1 capital for
      regulatory purposes subject to certain limitations. The action taken to form
      Valley Commerce Trust I and issue trust preferred securities was made for the
      purpose of enhancing the Company’s capital position and to provide for the
      continued growth of the Bank.




**Off-Balance
      Sheet Items**




The
      Company has certain ongoing commitments under operating leases for branch,
      administrative and other office space in Visalia, Fresno, and Tulare which
      expire at various dates through 2009. As of December 31, 2006 and December
      31,
      2005, commitments to extend credit and letters of credit were the only financial
      instruments with off-balance sheet risk. As of December 31, 2006 and December
      31, 2005, commitments to extend credit totaled $44.1 million and $46.7 million,
      respectively, and letters of credit totaled $1.2 million and $1.6 million,
      respectively. The Company has not entered into any contracts for financial
      derivative instruments such as futures, swaps, options or similar
      instruments.




The
        Company’s contractual obligations and commitments are comprised of the junior
        subordinated deferrable interest debentures and operating lease obligations,
        salary continuation plans and a mortgage for various banking
        facilities.  As of December 31, 2006, future contractual obligations
        of the Company are as follows:
  
 Contractual
                            Obligations Due by Period*(dollars
                            in thousands)*
                        
                        Total
                        
                        
                        Less
                            than 1 year
                        
                        
                        1
                            to 3 years
                        
                        
                        3
                            to 5 years
                        
                        
                        More
                            than 5 yearsLong-term
                            debt obligations:Junior
                            subordinated deferrable
                          Interest
                            debentures
                        
                        $
                        3,093
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        3,093Operating
                            lease obligations
                        
                        
                        1,428
                        
                        
                        $
                        54
                        
                        
                        $
                        710
                        
                        
                        $
                        200
                        
                        
                        
                        464Other
                            long-term liabilities:Salary
                            continuation
                        
                        
                        716
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        716Total
                            contractual liabilities
                        
                        $
                        5,237
                        
                        
                        $
                        54
                        
                        
                        $
                        710
                        
                        
                        $
                        200
                        
                        
                        $
                        4,273
 **Capital
        Resources**




Federal
      regulations establish guidelines for calculating “risk-adjusted” capital ratios.
      These guidelines, which apply to banks and bank holding companies, establish
      a
      systematic approach of assigning risk weights to assets and commitments making
      capital requirements more sensitive to differences in risk profiles. For these
      purposes, “Tier 1” capital consists of common equity, non-cumulative perpetual
      preferred stock, trust preferred securities subject to regulatory limitation,
      and minority interests in the equity accounts of consolidated subsidiaries
      and
      excludes goodwill. “Tier 2” capital consists of cumulative perpetual preferred
      stock, limited-life preferred stock, mandatory convertible securities,
      subordinated debt and (subject to a limit of 1.25% of risk-weighted assets)
      general loan loss reserves. In calculating the relevant ratio, a company’s
      assets and off-balance sheet commitments are risk-weighted; thus, for example,
      loans are included at 100% of their book value while assets considered less
      risky are included at a percentage of their book value (20%, for example, for
      U.
      S. Government Agency securities, and 0% for vault cash and U. S. Government
      Treasury securities).


35
 *Table
          of Contents*




The
      Board
      of Directors regularly reviews the Company’s capital ratios to ensure that
      capital exceeds the prescribed regulatory minimums and is otherwise adequate
      to
      meet future needs. The following table summarizes the Company’s risk-based
      capital ratios as of December 31, 2006 and December 31, 2005:




**Capital
                  and capital adequacy ratios****Year
                  ended December 31,****2006**
              
              **2005***(dollars
                  in thousands)*
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio****Leverage
                  Ratio**Valley
                  Commerce Bancorp and Subsidiary
              
              $
              28,654
              
              
              11.1
              %
              $
              25,322
              
              
              11.5
              %Minimum
                  regulatory requirement
              
              $
              11,462
              
              
              4.0
              %
              $
              10,129
              
              
              4.0
              %Valley
                  Business Bank
              
              $
              28,336
              
              
              11.0
              %
              $
              24,927
              
              
              11.3
              %Minimum
                  requirement for “Well- Capitalized” institution
              
              $
              14,168
              
              
              5.0
              %
              $
              12,464
              
              
              5.0
              %Minimum
                  regulatory requirement
              
              $
              11,334
              
              
              4.0
              %
              $
              9,971
              
              
              4.0
              %**Tier
                  1 Risk-Based Capital Ratio**Valley
                  Commerce Bancorp and Subsidiary
              
              $
              28,654
              
              
              13.5
              %
              $
              25,322
              
              
              14.8
              %Minimum
                  regulatory requirement
              
              $
              8,500
              
              
              4.0
              %
              $
              6,836
              
              
              4.0
              %Valley
                  Business Bank
              
              $
              28,336
              
              
              13.4
              %
              $
              24,927
              
              
              14.6
              %Minimum
                  requirement for “Well- Capitalized” institution
              
              $
              12,738
              
              
              6.0
              %
              $
              10,242
              
              
              6.0
              %Minimum
                  regulatory requirement
              
              $
              8,492
              
              
              4.0
              %
              $
              6,828
              
              
              4.0
              %**Total
                  Risk-Based Capital Ratio**Valley
                  Commerce Bancorp and Subsidiary
              
              $
              30,399
              
              
              14.3
              %
              $
              27,088
              
              
              15.9
              %Minimum
                  regulatory requirement
              
              $
              17,000
              
              
              8.0
              %
              $
              13,672
              
              
              8.0
              %Valley
                  Business Bank
              
              $
              30,081
              
              
              14.2
              %
              $
              26,693
              
              
              15.6
              %Minimum
                  requirement for “Well- Capitalized” institution
              
              $
              21,230
              
              
              10.0
              %
              $
              17,070
              
              
              10.0
              %Minimum
                  regulatory requirement
              
              $
              16,984
              
              
              8.0
              %
              $
              13,656
              
              
              8.0
              %




At
      December 31, 2006 and December 31, 2005, all of the Company’s capital ratios
      were in excess of minimum regulatory requirements, and Valley Business Bank
      exceeded the minimum requirements of a “well capitalized”
institution.




In
      the
      second quarter of 2003, Valley Commerce Trust I issued $3.0 million of trust
      preferred securities. Trust preferred securities are includable in Tier 1
      capital, subject to regulatory limitation. At December 31, 2006, and December
      31, 2005, the entire $3.0 million was included in Tier 1 capital.




The
      Company’s average equity as a percentage of average assets was 9.71% for 2006
      and 10.01% for 2005. Year-end shareholders’ equity as a percentage of year-end
      assets was 9.65% and 9.62% at December 31, 2006 and 2005, respectively. The
      slight decrease in these ratios reflects asset growth in 2006 being largely
      offset by capital generated through earnings.




The
      Company issued a 5% stock dividend in 2006. There was no stock dividend or
      split
      during 2005. The Company has not declared or paid cash dividends since
      inception. Stock splits and dividends are not dilutive to capital
      ratios.


36
 *Table
          of Contents*




On
      September 9, 2004, the Company filed a registration statement with the SEC
      for
      the public sale of 650,000 shares of common stock. The SEC declared the
      registration statement effective on December 23, 2004. On December 29, 2004,
      the
      Company sold 350,750 shares of common stock to the Company’s underwriter,
      Wedbush Morgan Securities, at the offering price of $13.00 per share, less
      a 5%
      underwriting discount. The proceeds received from this portion of the sale,
      net
      of commission, totaled $4,332,000 and were recorded as an increase to common
      stock on the Company’s balance sheet. Other offering costs, consisting of legal
      fees, accounting fees, and printing charges, totaling $583,000, were recorded
      as
      a decrease to common stock on the Company’s balance sheet. The remaining 299,250
      shares were sold directly by the Company in January 2005 for net proceeds of
      $3,880,000. The entire stock offering added $7.6 million to the Company’s
      capital.




**Liquidity
      Management**





Liquidity
      is the ability to provide funds to meet customers’ loan and deposit needs and to
      fund operations in a timely and cost effective manner. The Company’s primary
      source of funds is deposits. On an ongoing basis, management anticipates funding
      needs for loans, asset purchases, maturing deposits, and other needs and
      initiates deposit promotions as needed. Management measures the Company’s
      liquidity position monthly through the use of short-term and medium-term
      internal liquidity calculations. These are monitored on an ongoing basis by
      the
      Board of Directors and ALCO.





Despite
      the Company’s successful history of establishing and retaining deposit
      relationships with business customers, the rising interest rate environment
      of
      the past few years has curtailed the availability of favorably priced deposits.
      Accordingly, the Company has developed wholesale funding resources to supplement
      local deposit growth. These include expansion of borrowing lines with FHLB
      and
      correspondent banks, and utilization of brokered time deposits. At December
      31,
      2006, the Company had available credit of $26.4 million from the FHLB and $10.0
      million from correspondent banks.





The
      Company’s off-balance sheet financing arrangements are primarily limited to
      commitments to extend credit and standby letters of credit, which totaled $44.1
      million and $1.2 million, respectively, at December 31, 2006. Management
      monitors these arrangements monthly in the overall assessment of the Company’s
      liquidity needs. The Company has no other off-balance sheet arrangements that
      are likely to have a material effect on its financial condition, results of
      operations, liquidity, capital expenditures or capital resources. The Company
      does not retain a repurchase option or contingent interest in any of its loan
      participations.





As
      discussed above, the Company’s wholly-owned subsidiary, Valley Commerce Trust I,
      issued trust preferred securities for gross proceeds of $3.0 million on April
      7,
      2003. Quarterly interest payments on these securities are considered in
      management’s normal evaluation of liquidity needs. Although the trust preferred
      securities do not mature until April 7, 2033, Valley Commerce Trust I has the
      option to redeem the trust preferred securities on or at any time after April
      7,
      2008. The securities may not be redeemed prior to this date without penalty.
      The
      Company will carefully evaluate the impact on capital and liquidity if and
      when
      consideration is given to redemption of trust preferred securities.





The
      Company’s strategic objectives include expanding through opening of “de novo”
branches and loan production offices and acquiring branch offices from other
      institutions. The addition of branch offices is expected to involve significant
      cash outlays; e.g., for buildings, improvements, and equipment.





In
      2003,
      the Company acquired the deposits and office equipment of the Fresno branch
      of
      Capitol Valley Bank, a Division of Humboldt Bank, and assumed the branch office
      lease. The acquisition resulted in the receipt of $5.7 million from Humboldt
      Bank, comprised primarily of funds from time certificates. The Fresno Branch
      commenced as a full service branch of Valley Business Bank in October 2003.
      Fresno Branch deposits are providing the underlying funding for lending
      operations in the Fresno market.





In
      2005,
      the Company opened a loan production office in Tulare. The Company also
      purchased land in Tulare which closed escrow in 2006 and will be used for
      construction of a full service branch office to be opened in 2008. The Company’s
      planning efforts consider the impact of known and anticipated cash outlays
      so
      that sufficient liquidity is maintained for both capital and operational
      needs.


37
 *Table
          of Contents*


ITEM
7A
      - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK




**Risk
      Management**




The
      Company maintains policies and guidelines for managing risks related to
      on-balance sheet and off-balance sheet activities. Such policies and guidelines
      are integral to the asset/liability management process conducted by the
      Company’s asset-liability management committee (ALCO). Certain policies may be
      governed and implemented by committees or persons other than the ALCO as
      directed by the Board of Directors. Asset/liability management generally
      encompasses the management and monitoring of asset quality, liquidity and
      capital needs, and in particular, interest rate risk inherent in the
      interest-earning assets and interest-bearing liabilities appearing on the
      Company’s balance sheet.




The
      Company’s earnings depend largely upon net interest income, which is the
      difference between the total interest income earned on interest earning assets
      (primarily loans and investment securities) and the total interest expense
      incurred on interest bearing liabilities (primarily deposits and borrowed
      funds). Net interest income is affected by changes in the interest rates earned
      on interest earning assets, the interest rates paid on interest bearing
      liabilities, and the average account balances included in each category. One
      of
      the principal objectives of asset/liability management is to manage the risks
      associated with changing interest rates and the potential impact on earnings
      and
      stockholder value. The goal of interest rate risk management is to maintain
      a
      balance sheet that generates stable earnings and stockholder value across a
      variety of interest rate environments.




**Net
      Interest Income Simulation** .
      To
      analyze its interest rate risk at December 31, 2006 and 2005, the Company
      used a financial simulation model that projected changes in net interest income
      arising from hypothetical changes in market interest rates, i.e., +/- 100 basis
      points (bps), +/- 200 bps, and +/- 300 bps parallel shifts in the interest
      rate
      yield curve. The income simulation model applied the hypothetical rate change
      to
      each interest-earning asset and interest-bearing deposit on the Company’s
      balance sheet, taking into consideration the repricing characteristics and
      options of each account. The simulation model then forecasted the Company’s net
      interest income over a two-year period employing further assumptions such as
      estimated loan prepayment rates. In addition, the financial simulation model
      calculated the approximate change in the market value of interest-earning assets
      and interest-bearing deposits; i.e., to determine the change in the Company’s
      economic value of equity.




This
      analysis described above is performed quarterly and reviewed by the Company’s
      ALCO. The ALCO determines if the forecasted results comply with the ALCO’s
      established parameters for change in net interest income and economic value
      of
      equity. The change is measured by comparing the forecasted results with a base
      scenario; i.e., a forecast that assumes no change in interest rates.




The
      following table reflects the Company’s projected net interest income sensitivity
      analysis based on year-end data:




December
                31, 2006
            
            December
                31, 2005Change
                in Rates
            
            Adjusted
                Net Interest Income (in thousands)
            
            Percent
                Change From Base
            
            Adjusted
                Net Interest Income (in thousands)
            
            Percent
                Change From BaseUp
                300 basis points
            
            $
            13,854
            
            
            9.3
            %
            $
            14,819
            
            
            18.0
            %Up
                200 basis points
            
            
            13,424
            
            
            5.9
            %
            
            14,100
            
            
            12.3
            %Up
                100 basis points
            
            
            12,997
            
            
            2.5
            %
            
            13,361
            
            
            6.4
            %Base
                scenario
            
            
            12,676
            
            
            --
            
            
            12,560
            
            
            --Down
                100 basis points
            
            
            12,310
            
            
            -2.9
            %
            
            11,906
            
            
            -5.2
            %Down
                200 basis points
            
            
            11,895
            
            
            -6.2
            %
            
            11,206
            
            
            -10.8
            %Down
                300 basis points
            
            
            11,427
            
            
            -9.9
            %
            
            10,655
            
            
            -15.2
            %





For
      the
      rising and falling interest rate scenarios, the base market interest rate
      forecast was increased or decreased, on an instantaneous and sustained basis,
      by
      100, 200 and 300 basis points. At December 31, 2006, the Company's net interest
      income exposure related to these hypothetical changes in market interest rate
      was within the current guidelines established by the Company.




38
 *Table
          of Contents*




**Unaudited
                Quarterly Statement of Operations Data***(dollars
                in thousands)***Q4**
              **2006**
            
            **Q3**
              **2006**
            
            **Q2**
              **2006**
            
            **Q1**
              **2006**
            
            **Q4**
              **2005**
            
            **Q3**
              **2005**
            
            **Q2**
              **2005**
            
            **Q1**
              **2005**Net
                interest income
            
            $
            2,744
            
            $
            2,883
            
            $
            2,795
            
            $
            2,767
            
            $
            2,831
            
            $
            2,638
            
            $
            2,319
            
            $
            2,033Provision
                for loan losses
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            157
            
            
            181
            
            
            31Non-interest
                income
            
            
            307
            
            
            281
            
            
            184
            
            
            224
            
            
            173
            
            
            250
            
            
            238
            
            
            227Non-interest
                expense
            
            
            1,923
            
            
            1,893
            
            
            1,952
            
            
            1,885
            
            
            1,847
            
            
            1,741
            
            
            1,614
            
            
            1,608Income
                before income taxes
            
            
            1,128
            
            
            1,271
            
            
            1,027
            
            
            1,106
            
            
            1,157
            
            
            990
            
            
            762
            
            
            621Income
                taxes
            
            
            382
            
            
            454
            
            
            362
            
            
            378
            
            
            447
            
            
            387
            
            
            293
            
            
            240Net
                income
            
            $
            746
            
            $
            817
            
            $
            665
            
            $
            728
            
            $
            710
            
            $
            603
            
            $
            469
            
            $
            381Per
                share:Basic
                earnings per share
            
            $
            0.36
            
            $
            0.35
            
            $
            0.30
            
            $
            0.33
            
            $
            0.32
            
            $
            0.28
            
            $
            0.22
            
            $
            0.18Diliuted
                earnings per share
            
            $
            0.35
            
            $
            0.34
            
            $
            0.28
            
            $
            0.31
            
            $
            0.30
            
            $
            0.26
            
            $
            0.21
            
            $
            0.17





39
 *Table
          of Contents*




**ITEM
      8 -FINANCIAL STATEMENTS AND SUPPLEMENTARY
      DATA**




The
      independent auditors’ report and financial statements listed below are included
      herein:




PageI.
            Report
                of Independent Registered Public Accounting Firm
            41II.
            Consolidated
                Balance Sheet
            42III.
            Consolidated
                Statement of Income
            43IV.
            Consolidated
                Statement of Changes in Shareholders’ Equity
            44V.
            Consolidated
                Statement of Cash Flows
            46VI.
            Notes
                to Consolidated Financial Statements
            48




40
 *Table
          of Contents*




***REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM***




The
      Shareholders and


Board
      of
      Directors


Valley
      Commerce Bancorp





We
      have
      audited the accompanying consolidated balance sheet of Valley Commerce Bancorp
      and subsidiary (the "Company") as of December 31, 2006 and 2005, and the
      related consolidated statements of income, changes in shareholders' equity
      and
      cash flows for each of the years in the three-year period ended December 31,
      2006. These consolidated financial statements are the responsibility of the
      Company's management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provided a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Valley Commerce
      Bancorp and subsidiary as of December 31, 2006 and 2005, and the consolidated
      results of their operations and their cash flows for each of the years in the
      three-year period ended December 31, 2006, in conformity with accounting
      principles generally accepted in the United States of America.








/s/
              Perry-Smith LLP




Sacramento,
      California


March
      23,
      2007


41
 *Table
          of Contents*




**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEET**





**December
      31, 2006 and 2005**





**2006**
            
            **2005****ASSETS**Cash
                and due from banks
            
            $
            13,265,547
            
            $
            17,733,285Federal
                funds sold
            
            
            -
            
            
            1,885,000Total
                cash and cash equivalents
            
            
            13,265,547
            
            
            19,618,285Available-for-sale
                investment securities, at fair value (Notes 3 and 7)
            
            
            55,298,000
            
            
            50,391,000Loans,
                less allowance for loan losses of $1,745,582in
                2006 and $1,766,115in
                2005 (Notes 4, 7, 9 and 13)
            
            
            182,331,506
            
            
            149,990,614Bank
                premises and equipment, net (Note 5)
            
            
            1,832,177
            
            
            1,223,316Cash
                surrender value of bank-owned life insurance (Note 14)
            
            
            5,934,563
            
            
            2,781,169Accrued
                interest receivable and other assets (Note 12)
            
            
            5,002,900
            
            
            4,007,007Total
                Assets
            
            $
            263,664,693
            
            $
            228,011,391**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Deposits:Non-interest
                bearing
            
            $
            63,019,956
            
            $
            75,419,073Interest
                bearing (Note 6)
            
            
            75,292,723
            
            
            63,549,104Time
                (Note 6)
            
            
            69,263,490
            
            
            53,612,937Total
                deposits
            
            
            207,576,169
            
            
            192,581,114Accrued
                interest payable and other liabilities
            
            
            1,399,787
            
            
            1,288,400Short-term
                debt (Note 7)
            
            
            17,600,000
            
            
            -Long-term
                debt (Note 7)
            
            
            8,547,638
            
            
            9,139,620Junior
                subordinated deferrable interest debentures (Note 8)
            
            
            3,093,000
            
            
            3,093,000Total
                liabilities
            
            
            238,216,594
            
            
            206,102,134Commitments
                and contingencies (Note 9)Shareholders'
                equity (Note 10):Serial
                preferred stock - no par value; 10,000,000 shares authorized; none
                issued
            
            
            -
            
            
            -Common
                stock - no par value; 30,000,000 shares authorized; issued and outstanding
                - 2,215,765 shares in 2006 and 2,087,508 shares in 2005
            
            
            20,683,720
            
            
            18,332,290Retained
                earnings
            
            
            5,040,381
            
            
            4,122,088Accumulated
                other comprehensive loss, net of taxes(Notes 3 and 15)
            
            
            (276,002
            )
            
            (545,121
            )Total
                shareholders' equity
            
            
            25,448,099
            
            
            21,909,257Total
                liabilities and shareholders’ equity
            
            $
            263,664,693
            
            $
            228,011,391





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


42
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENT OF INCOME**





**For
      the Years Ended December 31, 2006, 2005 and 2004**





**2006**
                                        
                                        
                                        **2005**
                                        
                                        
                                        **2004**Interest
                                            income:Interest
                                            and fees on loans
                                        
                                        $
                                        14,448,209
                                        
                                        
                                        $
                                        10,511,090
                                        
                                        
                                        $
                                        7,692,903Interest
                                            on investment securities:Taxable
                                        
                                        
                                        1,444,707
                                        
                                        
                                        
                                        1,459,998
                                        
                                        
                                        
                                        772,604Exempt
                                            from Federal income taxes
                                        
                                        
                                        719,117
                                        
                                        
                                        
                                        303,267
                                        
                                        
                                        
                                        133,233Interest
                                            on Federal funds sold
                                        
                                        
                                        137,749
                                        
                                        
                                        
                                        229,197
                                        
                                        
                                        
                                        136,276Interest
                                            on deposits in banks
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,783Total
                                            interest income
                                        
                                        
                                        16,749,782
                                        
                                        
                                        
                                        12,503,552
                                        
                                        
                                        
                                        8,736,799Interest
                                            expense:Interest
                                            on deposits (Note 6)
                                        
                                        
                                        4,306,344
                                        
                                        
                                        
                                        2,028,091
                                        
                                        
                                        
                                        1,195,237Interest
                                            on short-term borrowings (Note 7)
                                        
                                        
                                        610,911
                                        
                                        
                                        
                                        52,523
                                        
                                        
                                        
                                        -Interest
                                            on long-term borrowings (Note 7)
                                        
                                        
                                        380,212
                                        
                                        
                                        
                                        393,303
                                        
                                        
                                        
                                        276,966Interest
                                            on junior subordinated deferrable interest
                                            debentures (Note
                                            8)
                                        
                                        
                                        263,310
                                        
                                        
                                        
                                        208,787
                                        
                                        
                                        
                                        149,974Total
                                            interest expense
                                        
                                        
                                        5,560,777
                                        
                                        
                                        
                                        2,682,704
                                        
                                        
                                        
                                        1,622,177Net
                                            interest income before provision for
                                            loan losses
                                        
                                        
                                        11,189,005
                                        
                                        
                                        
                                        9,820,848
                                        
                                        
                                        
                                        7,114,622Provision
                                            for loan losses (Note 4)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        368,768
                                        
                                        
                                        
                                        138,000Net
                                            interest income after provision for loan
                                            losses
                                        
                                        
                                        11,189,005
                                        
                                        
                                        
                                        9,452,080
                                        
                                        
                                        
                                        6,976,622Non-interest
                                            income:Service
                                            charges
                                        
                                        
                                        546,514
                                        
                                        
                                        
                                        513,859
                                        
                                        
                                        
                                        516,976(Loss)
                                            gain on sale of available-for-sale investment
                                            securities, net (Note
                                            3)
                                        
                                        
                                        (52,737
                                        )
                                        
                                        
                                        (48,494
                                        )
                                        
                                        
                                        7,390Mortgage
                                            loan brokerage fees
                                        
                                        
                                        125,085
                                        
                                        
                                        
                                        136,183
                                        
                                        
                                        
                                        176,242Gain
                                            on sale of other real estate
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        373,391Earnings
                                              on cash surrender value of life insurancepolicies (Note
                                              14)
                                        
                                        
                                        153,394
                                        
                                        
                                        
                                        103,851
                                        
                                        
                                        
                                        98,625Other
                                        
                                        
                                        223,693
                                        
                                        
                                        
                                        182,347
                                        
                                        
                                        
                                        168,834Total
                                            non-interest income
                                        
                                        
                                        995,949
                                        
                                        
                                        
                                        887,746
                                        
                                        
                                        
                                        1,341,458Non-interest
                                            expense:Salaries
                                            and employee benefits (Notes 4 and 14)
                                        
                                        
                                        4,260,909
                                        
                                        
                                        
                                        3,777,496
                                        
                                        
                                        
                                        3,129,629Occupancy
                                            and equipment (Notes 5 and 9)
                                        
                                        
                                        890,337
                                        
                                        
                                        
                                        756,664
                                        
                                        
                                        
                                        656,152Other
                                            (Note 11)
                                        
                                        
                                        2,501,930
                                        
                                        
                                        
                                        2,275,859
                                        
                                        
                                        
                                        1,876,052Total
                                            non-interest expense
                                        
                                        
                                        7,653,176
                                        
                                        
                                        
                                        6,810,019
                                        
                                        
                                        
                                        5,661,833Income
                                            before provision for income taxes
                                        
                                        
                                        4,531,778
                                        
                                        
                                        
                                        3,529,807
                                        
                                        
                                        
                                        2,656,247Provision
                                            for income taxes (Note 12)
                                        
                                        
                                        1,576,000
                                        
                                        
                                        
                                        1,367,000
                                        
                                        
                                        
                                        1,027,000Net
                                            income
                                        
                                        $
                                        2,955,778
                                        
                                        
                                        $
                                        2,162,807
                                        
                                        
                                        $
                                        1,629,247Basic
                                            earnings per share (Note 10)
                                        
                                        $
                                        1.34
                                        
                                        
                                        $
                                        1.00
                                        
                                        
                                        $
                                        1.08Diluted
                                            earnings per share (Note 10)
                                        
                                        $
                                        1.28
                                        
                                        
                                        $
                                        0.94
                                        
                                        
                                        $
                                        1.01





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


43
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY**





**For
      the Years Ended December 31, 2006, 2005 and 2004**





**Accumulated**
              **Other**
              **Compre-**
              **hensive**
            
            **Total
                Share-**
            
            **Total
                Compre-****Common
                Stock**
            
            **Retained**
            
            **Loss**
            
            **holders’**
            
            **hensive****Shares**
            
            **Amount**
            
            **Earnings**
            
            **(Net
                of Taxes)**
            
            **Equity**
            
            **Income**Balance,
                January 1, 2004
            
            
            1,369,369
            
            $
            9,837,372
            
            $
            1,201,124
            
            $
            (18,622
            )
            $
            11,019,874Comprehensive
                income (Note 15):Net
                income
            
            
            
            
            
            
            
            
            1,629,247
            
            
            
            
            
            1,629,247
            
            $
            1,629,247Other
                comprehensive loss, net of tax:Net
                change in unrealized losses on available-for-sale investment
                securities
            
            
            
            
            
            
            
            
            
            
            
            (59,990
            )
            
            (59,990
            )
            
            (59,990
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,569,257Stock
                dividend
            
            
            68,139
            
            
            865,364
            
            
            (865,364
            )Cash
                paid for fractional shares
            
            
            
            
            
            
            
            
            (5,726
            )
            
            
            
            
            (5,726
            )Proceeds
                from sale of stock (Note 10):
            
            
            350,750
            
            
            3,749,233
            
            
            
            
            
            
            
            
            3,749,233Balance,
                December 31, 2004
            
            
            1,788,258
            
            
            14,451,969
            
            
            1,959,281
            
            
            (78,612
            )
            
            16,332,638Comprehensive
                income (Note 15):Net
                income
            
            
            
            
            
            
            
            
            2,162,807
            
            
            
            
            
            2,162,807
            
            $
            2,162,807Other
                comprehensive loss, net of tax:Net
                change in unrealized losses on available-for-sale investment
                securities
            
            
            
            
            
            
            
            
            
            
            
            (466,509
            )
            
            (466,509
            )
            
            (466,509
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,696,298Proceeds
                from sale of stock (Note 10)
            
            
            299,250
            
            
            3,880,321
            
            
            
            
            
            
            
            
            3,880,321Balance,
                December 31, 2005
            
            
            2,087,508
            
            
            18,332,290
            
            
            4,122,088
            
            
            (545,121
            )
            
            21,909,257Comprehensive
                income (Note 15):Net
                income
            
            
            
            
            
            
            
            
            2,955,778
            
            
            
            
            
            2,955,778
            
            $
            2,955,778Other
                comprehensive income, net of tax:Net
                change in unrealized losses on available-for-sale investment
                securities
            
            
            
            
            
            
            
            
            
            
            
            269,119
            
            
            269,119
            
            
            269,119Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            3,224,897Stock
                dividend
            
            
            104,123
            
            
            2,032,481
            
            
            (2,032,481
            )Cash
                paid for fractional shares
            
            
            
            
            
            
            
            
            (5,004
            )
            
            
            
            
            (5,004
            )Stock
                options exercised and related tax benefit
            
            
            24,134
            
            
            280,230
            
            
            
            
            
            
            
            
            280,230Stock-based
                compensation expense
            
            
            
            
            
            38,719
            
            
            
            
            
            
            
            
            38,719Balance,
                December 31, 2006
            
            
            2,215,765
            
            $
            20,683,720
            
            $
            5,040,381
            
            $
            (276,002
            )
            $
            25,448,099





(Continued )


44
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY**





(Continued)


**For
      the Years Ended December 31, 2006, 2005 and 2004**





**2006**
            
            **2005**
            
            **2004**Disclosure
                of reclassification amount, net of taxes (Note 15):Unrealized
                holding gains (losses) arising during the year
            
            $
            235,394
            
            $
            (496,223
            )
            $
            (55,446
            )Less:
                reclassification adjustment for (losses) gains included in net
                income
            
            
            (33,725
            )
            
            (29,714
            )
            
            4,544Net
                change in unrealized losses on available-for-sale investment
                securities
            
            $
            269,119
            
            $
            (466,509
            )
            $
            (59,990
            )





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


45
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**




**For
      the Years Ended December 31, 2006, 2005 and 2004**





**2006**
            
            **2005**
            
            **2004**Cash
                flows from operating activities:Net
                income
            
            $
            2,955,778
            
            $
            2,162,807
            
            $
            1,629,247Adjustments
                to reconcile net income to net cash provided by operating
                activities:Provision
                for loan losses
            
            
            -
            
            
            368,768
            
            
            138,000(Decrease)
                increase in deferred loan origination fees, net
            
            
            (199,771
            )
            
            176,033
            
            
            127,690Depreciation
            
            
            242,116
            
            
            194,531
            
            
            160,570Amortization
                of intangibles
            
            
            62,538
            
            
            62,538
            
            
            62,538Net
                loss (gain) on sale of available-for-sale investment securities,
                net
            
            
            52,737
            
            
            48,494
            
            
            (7,390
            )Dividends
                on Federal Home Loan Bank stock
            
            
            (54,900
            )
            
            (29,300
            )
            
            (17,600
            )Amortization
                and accretion of investment securities, net
            
            
            38,099
            
            
            819,551
            
            
            302,465Gain
                on sale of other real estate
            
            
            -
            
            
            -
            
            
            (373,391
            )Loss
                on disposition of premises and equipment
            
            
            -
            
            
            8,208
            
            
            1,485Provision
                for deferred income taxes
            
            
            2,000
            
            
            (251,000
            )
            
            (42,000
            )Tax
                benefits on stock-based compensation
            
            
            (125,828
            )
            
            -
            
            
            -Increase
                in cash surrender value of bank owned life insurance
            
            
            (153,394
            )
            
            (103,851
            )
            
            (98,625
            )Stock-based
                compensation expense
            
            
            38,719
            
            
            -
            
            
            -Increase
                in accrued interest receivable and other assets
            
            
            (354,558
            )
            
            (512,561
            )
            
            (190,874
            )Increase
                in accrued interest payable and other liabilities
            
            
            111,387
            
            
            453,812
            
            
            196,274Net
                cash provided by operating activities
            
            
            2,614,923
            
            
            3,398,030
            
            
            1,888,389Cash
                flows from investing activities:Proceeds
                from matured and called available-for-sale investment
                securities
            
            
            1,658,100
            
            
            4,500,000
            
            
            7,800,000Proceeds
                from sales of available-for-sale investment securities
            
            
            2,731,795
            
            
            3,951,507
            
            
            1,297,000Purchases
                of available-for-sale investment securities
            
            
            (11,082,486
            )
            
            (24,836,258
            )
            
            (27,940,875
            )Proceeds
                from principal repayments from available-for-sale mortgage-backed
                securities
            
            
            2,152,829
            
            
            2,462,904
            
            
            2,239,983Decrease
                in interest-bearing deposits with banks
            
            
            -
            
            
            -
            
            
            198,000Net
                increase in loans
            
            
            (32,141,121
            )
            
            (35,701,170
            )
            
            (14,558,735
            )Purchase
                of Federal Home Loan Bank stock
            
            
            (714,100
            )
            
            (405,000
            )
            
            (342,700
            )Purchase
                of premises and equipment
            
            
            (850,977
            )
            
            (392,469
            )
            
            (189,031
            )Proceed
                from sale of other real estate
            
            
            -
            
            
            -
            
            
            1,818,922Purchase
                of other real estate
            
            
            -
            
            
            -
            
            
            (809,286
            )Premiums
                paid for life insurance policies
            
            
            (3,000,000
            )
            
            -
            
            
            (1,000,000
            )Net
                cash used in investing activities
            
            
            (41,245,960
            )
            
            (50,420,486
            )
            
            (31,486,722
            )





(Continued)


46
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**




(Continued)


**For
      the Years Ended December 31, 2006, 2005 and 2004**





**2006**
            
            **2005**
            
            **2004**Cash
                flows from financing activities:Net
                (decrease) increase in noninterest bearing and interest-bearing deposits
            
            $
            (655,498
            )
            $
            25,884,925
            
            $
            26,741,821Net
                increase in time deposits
            
            
            15,650,553
            
            
            10,272,285
            
            
            10,014,112Proceeds
                from the issuance of stock
            
            
            -
            
            
            3,880,321
            
            
            3,749,233Proceeds
                from exercised stock options
            
            
            154,402
            
            
            -
            
            
            -Tax
                benefits from stock-based compensation
            
            
            125,828
            
            
            -
            
            
            -Net
                increase in short-term borrowings
            
            
            17,600,000
            
            
            -
            
            
            -Proceeds
                from long-term advances
            
            
            -
            
            
            -
            
            
            4,150,000Payments
                on long-term advances
            
            
            (591,982
            )
            
            (182,852
            )
            
            (19,630
            )Cash
                paid to repurchase fractional shares
            
            
            (5,004
            )
            
            -
            
            
            (5,726
            )Net
                cash provided by financing activities
            
            
            32,278,299
            
            
            39,854,679
            
            
            44,629,810Decrease
                (increase) in cash and cash equivalents
            
            
            (6,352,738
            )
            
            (7,167,777
            )
            
            15,031,477Cash
                and cash equivalents at beginning of year
            
            
            19,618,285
            
            
            26,786,062
            
            
            11,754,585Cash
                and cash equivalents at end of year
            
            $
            13,265,547
            
            $
            19,618,285
            
            $
            26,786,062Supplemental
                disclosure of cash flow information:Cash
                paid during the year for:Interest
                expense
            
            $
            5,472,442
            
            $
            2,613,323
            
            $
            1,601,626Income
                taxes
            
            $
            1,750,000
            
            $
            1,453,000
            
            $
            1,095,000Non-cash
                investing activities:Net
                decrease (increase) in unrealized loss on available-for-sale
                securities
            
            $
            458,074
            
            $
            (761,802
            )
            $
            (97,817
            )





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


47
 *Table
          of Contents*


**VALLEY
        COMMERCE BANCORP AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




**1.**
            **THE
                BUSINESS OF VALLEY COMMERCE
                BANCORP**





On
      February 2, 2002, Valley Commerce Bancorp (the "Company") was incorporated
      as a
      bank holding company for the purpose of acquiring Valley Business Bank (the
      "Bank"), formerly Bank of Visalia, in a one bank holding company reorganization.
      The new corporate structure provides the Company and the Bank greater
      flexibility to expand and diversify. The reorganization was completed on
      November 21, 2002, subsequent to which the Bank continued its operations as
      previously conducted, but as a wholly owned subsidiary of the
      Company.





The
      Bank
      commenced operations in 1996 under the name Bank of Visalia and changed its
      name
      during 2005 to Valley Business Bank. The Bank operates branches in Visalia,
      Fresno, Woodlake and Tipton, and a loan production office in Tulare. The Bank's
      deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up
      to
      applicable legal limits. The Bank's primary source of revenue is generated
      from
      providing loans to customers who are predominately small and middle market
      businesses and individuals residing in the surrounding areas.





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**




Consolidation
      and Basis of Presentation




The
      consolidated financial statements include the accounts of the Company and the
      accounts of its wholly-owned subsidiary, Valley Business Bank. All significant
      intercompany balances and transactions have been eliminated.





Valley
      Commerce Trust I, a wholly-owned subsidiary formed for the exclusive purpose
      of
      issuing trust preferred securities, is not consolidated into the Company's
      consolidated financial statements and, accordingly, is accounted for under
      the
      equity method. The Company’s investment in the Trust is included in accrued
      interest receivable and other assets on the consolidated balance sheet. The
      junior subordinated debentures issued and guaranteed by the Company and held
      by
      the Trust are reflected as debt in the consolidated balance sheet.





The
      accounting and reporting policies of Valley Commerce Bancorp and subsidiary
      conform with accounting principles generally accepted in the United States
      of
      America and prevailing practices within the banking industry.





Segment
      Information





Management
      has determined that since all of the banking products and services offered
      by
      the Company are available in each branch of the Bank, all branches are located
      within the same economic environment and management does not allocate resources
      based on the performance of different lending or transaction activities, it
      is
      appropriate to aggregate the Bank branches and report them as a single operating
      segment. No customer accounts for more than 10 percent of revenues for the
      Company or the Bank.


48
 *Table
          of Contents*


**VALLEY
        COMMERCE BANCORP AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 (Continued)




**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES**(Continued)




Reclassifications




Certain
      reclassifications have been made to prior years’ balances to conform to
      classifications used in 2006.





Stock
      Dividends





On
      February 21, 2006 the Board of Directors declared a 5% stock dividend payable
      on
      May 16, 2006, to shareholders of record on April 28, 2006. All per share and
      stock option data in the consolidated financial statements have been
      retroactively restated to reflect the stock dividend. There were no stock
      dividends in 2005.





Use
      of
      Estimates





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions. These estimates and assumptions affect the reported
      amounts of assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from these estimates.




Investment
      Securities




Investments
      are classified as available-for-sale. Available-for-sale securities are reported
      at fair value, with unrealized gains and losses excluded from earnings and
      reported, net of taxes, as accumulated other comprehensive income (loss) within
      shareholders' equity.





Gains
      or
      losses on the sale of securities are computed on the specific identification
      method. Interest earned on investment securities is reported in interest income,
      net of applicable adjustments for accretion of discounts and amortization of
      premiums.





Investment
      securities are evaluated for impairment on at least a quarterly basis and more
      frequently when economic or market conditions warrant such an evaluation to
      determine whether a decline in their value is other than temporary. Management
      utilizes criteria such as the magnitude and duration of the decline and the
      intent and ability of the Company to retain its investment in the issues for
      a
      period of time sufficient to allow for an anticipated recovery in fair value,
      in
      addition to the reasons underlying the decline, to determine whether the loss
      in
      value is other than temporary. The term "other than temporary" is not intended
      to indicate that the decline is permanent, but indicates that the prospects
      for
      a near-term recovery of value is not necessarily favorable, or that there is
      a
      lack of evidence to support a realizable value equal to or greater than the
      carrying value of the investment. Once a decline in value is determined to
      be
      other than temporary, the value of the security is reduced and a corresponding
      charge to earnings is recognized.


49
 *Table
          of Contents*


**VALLEY
        COMMERCE BANCORP AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 (Continued)




**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES**(Continued)




Investment
      in Federal Home Loan Bank Stock




As
      a
      member of the Federal Home Loan Bank System, the Bank is required to maintain
      an
      investment in the capital stock of the Federal Home Loan Bank. The investment
      is
      carried at cost. At December 31, 2006, 2005, and 2004, Federal Home Loan Bank
      stock totaled $1,825,900, $1,056,900, and $622,600 respectively. On the
      consolidated balance sheet, Federal Home Loan Bank stock is included in accrued
      interest receivable and other assets.




Loans




Loans
      are
      stated at principal balances outstanding. Interest is accrued daily based upon
      outstanding loan balances. However, when, in the opinion of management, loans
      are considered to be impaired and the future collectibility of interest and
      principal is in serious doubt, loans are placed on nonaccrual status and the
      accrual of interest income is suspended. Any interest accrued but unpaid is
      charged against income. Payments received are applied to reduce principal to
      the
      extent necessary to ensure collection. Subsequent payments on these loans,
      or
      payments received on nonaccrual loans for which the ultimate collectibility
      of
      principal is not in doubt, are applied first to earned but unpaid interest
      and
      then to principal.





A
      loan is
      considered impaired when, based on current information and events, it is
      probable that the Bank will be unable to collect all amounts due (including
      both
      principal and interest) in accordance with the contractual terms of the loan
      agreement. An impaired loan is measured based on the present value of expected
      future cash flows discounted at the loan's effective interest rate or, as a
      practical matter, at the loan's observable market price or the fair value of
      collateral if the loan is collateral dependent.





Substantially
      all loan origination fees, commitment fees, direct loan origination costs and
      purchased premiums and discounts on loans are deferred and recognized as an
      adjustment of yield, to be amortized to interest income over the contractual
      term of the loan. The unamortized balance of deferred fees and costs is reported
      as a component of net loans.





The
      Company may acquire loans through a business combination or a purchase for
      which
      differences may exist between the contractual cash flows and the cash flows
      expected to be collected due, at least in part, to credit quality. When the
      Company acquires such loans, the yield that may be accreted (accretable yield)
      is limited to the excess of the Company's estimate of undiscounted cash flows
      expected to be collected over the Company's initial investment in the loan.
      The
      excess of contractual cash flows over cash flows expected to be collected may
      not be recognized as an adjustment to yield, loss, or a valuation allowance.
      Subsequent increases in cash flows expected to be collected generally are
      recognized prospectively through adjustment of the loan's yield over its
      remaining life. Decreases in cash flows expected to be collected are recognized
      as an impairment. The Company may not "carry over" or create a valuation
      allowance in the initial accounting for loans acquired under these
      circumstances. At December 31, 2006 and 2005, there were no loans being
      accounted for under this policy.


50
 *Table
          of Contents*


**VALLEY
        COMMERCE BANCORP AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 (Continued)




**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES**(Continued)





Allowance
      for Loan Losses





The
      allowance for loan losses is maintained to provide for losses related to
      impaired loans and other losses that can be expected to occur in the normal
      course of business. The determination of the allowance is based on estimates
      made by management, to include consideration of the character of the loan
      portfolio, specifically identified problem  loans,
      potential losses inherent in the portfolio taken as a whole and economic
      conditions in the Company's service area.





Classified
      loans and loans determined to be impaired are evaluated by management for
      specific risk of loss. In addition, reserve factors are assigned to currently
      performing loans based on historical loss rates for each identified loan type
      adjusted to reflect current economic and market conditions.





The
      allowance is established through a provision for loan losses which is charged
      to
      expense. Management reviews the adequacy of the allowance for loan losses at
      least quarterly, to include consideration of the relative risks in the portfolio
      and current economic conditions. The allowance is adjusted based on that review
      if, in management’s judgment, changes are warranted.





Allowance
      for Losses Related to Undisbursed Loan Commitments





The
        Company maintains a separate allowance for losses related to undisbursed
        loan
        commitments.  Management estimates the amount of probable losses by
        applying a loss reserve factor to the unused portion of undisbursed lines
        of
        credit.  The allowance totaled $40,000 at December 31, 2006 and 2005,
        respectively and is included in accrued interest payable and other liabilities
        in the consolidated balance sheet.
  Other
        Real Estate
  Other
        real estate includes real estate acquired in full or partial settlement of
        loan
        obligations.  When property is acquired, any excess of the Bank's
        recorded investment in the loan balance and accrued interest income over
        the
        estimated fair market value of the property is charged against the allowance
        for
        loan losses.  Subsequent gains or losses on sales or writedowns
        resulting from impairment are recorded in other income or expenses as
        incurred.  The Company did not hold other real estate as of December
        31, 2006 and 2005.





51
 *Table
          of Contents*




**VALLEY
        COMMERCE BANCORP AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 (Continued)


**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES**(Continued)




Bank
      Premises and Equipment




Bank
      premises and equipment are carried at cost. Depreciation is determined using
      the
      straight-line method over the estimated useful lives of the related assets.
      The
      useful lives of premises are estimated to be twenty to thirty years. The useful
      lives of furniture, fixtures and equipment are estimated to be two to ten years.
      Leasehold improvements are amortized over the life of the asset or the life
      of
      the related lease, whichever is shorter. When assets are sold or otherwise
      disposed of, the cost and related accumulated depreciation or amortization
      are
      removed from the accounts, and any resulting gain or loss is recognized in
      income for the period. The cost of maintenance and repairs is charged to expense
      as incurred.





Intangible
      Assets





Intangible
      assets consist of core deposit intangibles related to branch acquisitions and
      are amortized using the straight-line method over ten years. The Bank
      periodically evaluates whether events and circumstances have occurred that
      may
      affect the estimated useful life or the remaining balance of the core deposit
      intangible resulting in impairment of the intangible asset. Amortization expense
      totaled $62,538 for each of the years in the three-year period ended December
      31, 2006. The core deposit intangibles totaled $70,256, $132,794 and $195,332
      at
      December 31, 2006, 2005 and 2004, respectively.




Income
      Taxes




The
      Company files its income taxes on a consolidated basis with its subsidiary.
      The
      allocation of income tax expense (benefit) represents each entity's
      proportionate share of the consolidated provision for income taxes.





Deferred
      tax assets and liabilities are recognized for the tax consequences of temporary
      differences between the reported amount of assets and liabilities and their
      tax
      bases. Deferred tax assets and liabilities are adjusted for the effects of
      changes in tax laws and rates on the date of enactment. On the consolidated
      balance sheet, net deferred tax assets are included in accrued interest
      receivable and other assets.





Cash
      and Cash Equivalents





For
      the
      purpose of the statement of cash flows, cash and due from banks and Federal
      funds sold are considered to be cash equivalents. Generally, Federal funds
      are
      sold for one day periods. Cash held with other federally insured institutions
      in
      excess of FDIC insured limits as of December 31, 2006 was
      $2,612,000.




Earnings
      Per Share




Basic
      earnings per share (EPS), which excludes dilution, is computed by dividing
      income available to common stockholders by the weighted-average number of common
      shares outstanding for the period. Diluted EPS reflects the potential dilution
      that could occur if securities or other contracts to issue common stock, such
      as
      stock options, result in the issuance of common stock. The treasury stock method
      has been applied to determine the dilutive effect of stock options in computing
      diluted EPS.


52
 *Table
          of Contents*


**VALLEY
        COMMERCE BANCORP AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 (Continued)




**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES**(Continued)





Stock-Based
      Compensation




At
        December 31, 2006, the Company had one stock-based compensation plan, the
        Valley
        Commerce Bancorp Amended and Restated 1997 Stock Option Plan, which is more
        fully described in Note 10.  Effective January 1, 2006, the Company
        adopted Statement of Financial Accounting Standards No. 123(R), *Share Based
        Payment* (“SFAS 123(R)”), using the modified prospective application
        transition method, which requires recognizing expense for options granted
        prior
        to the adoption date equal to the fair value of the unvested amounts over
        their
        remaining vesting period based on the grant date fair value estimated in
        accordance with the original provisions of SFAS No. 123 *Accounting for Stock
        Based Compensation*and compensation cost for all share based payments
        granted subsequent to January 1, 2006 based on the grant date fair values
        estimated in accordance with the provisions of SFAS 123(R). The Company applied
        the alternative transition method in calculating its pool of excess tax benefits
        available to absorb future tax deficiencies as provided by FSP FAS 123(R)-3,
        *Transition Election Related to Accounting for the Tax Effects of Share-Based
        Payment Awards.* Results for prior periods have not been
        restated.   During the year ended December 31, 2006, 10,000
        options were awarded. There were no options granted in 2005. Prior periods
        have
        not been restated to reflect the results of operations in 2005 as if the
        Company
        had recorded compensation expense based on the fair value of the options
        granted
        as prescribed by SFAS No. 123.
 
 Prior
        to
        January 1, 2006, the Company accounted for the stock-based compensation plan
        under the recognition and measurement principles of Accounting Practice Bulletin
        Opinion No. 25, (“APB25”) *Accounting for Stock Issued to Employees*, and
        related Interpretations.  No stock-based compensation expense was
        reflected in net income, as all options granted under the plan had an exercise
        price equal to the market value of the underlying common stock on the date
        of
        grant.
 
 As
        a
        result of adopting SFAS 123(R), the Company’s income before provision for income
        taxes and net income for year ended December 31, 2006 was $38,719 and $31,510
        respectively, lower than if management had continued to account for share-based
        compensation under APB 25.  Basic and diluted earnings per share for
        year ended December 31, 2006 did not change as a result of the adoption of
        SFAS
        123(R) compared to $1.34 and $1.28, respectively, as reported.
 
 In
        accordance with SFAS 123 (R), beginning in 2006 the Company has presented
        excess
        tax benefits from the exercise of stock-based compensation awards as a financing
        activity in the consolidated statement of cash flows.


53
 *Table
          of Contents*


**VALLEY
        COMMERCE BANCORP AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 (Continued)




The
      following table illustrates the pro forma effect on consolidated net income
      and
      earnings per share as if the Company had recorded compensation expense based
      on
      the fair value of the options granted as prescribed by SFAS No.
      123:




For
                the Year
            
            For
                the YearEnded
                December 31, 2005
            
            Ended
                December 31, 2004(In
                Thousands)Net
                income as reported
            
            $
            2,162,807
            
            $
            1,629,247Deduct:
                Total stock-based compensation expense determined under the fair
                value
                based method for all awards, net of related tax effects
            
            
            (29,000
            )
            
            (31,000
            )Pro
                forma net income
            
            $
            2,133,807
            
            $
            1,598,247Basic
                earnings per share - as reported
            
            $
            1.00
            
            $
            1.08Basic
                earnings per share - pro forma
            
            $
            0.99
            
            $
            1.06Diluted
                earnings per share - as reported
            
            $
            0.94
            
            $
            1.01Diluted
                earnings per share - pro forma
            
            $
            0.93
            
            $
            0.99





The
      Company determines the fair value of the options previously granted on the
      date
      of grant using a Black-Scholes option pricing model that uses assumptions based
      on expected option life, expected stock volatility and the risk-free interest
      rate. The expected volatility assumptions used by the Company are based on
      the
      historical volatility of the Company’s common stock over the most recent period
      commensurate with the estimated expected life of the Company’s stock options.
      The Company bases its expected life assumption on its historical experience
      and
      on the terms and conditions of the stock options it grants to employees. The
      risk-free rate is based on the U.S. Treasury yield curve for the periods within
      the contractual life of the options in effect at the time of the grant. The
      Company also makes assumptions regarding estimated forfeitures that will impact
      the total compensation expenses recognized under the Plans.





The
      fair
      value of each option is estimated on the date of grant using the following
      assumptions.





There
      were 10,000 stock options granted in 2006 and approximately 35,875 in 2004.
      There were no stock options granted in 2005. The fair value of each option
      granted in 2006 and 2004 was estimated on the date of grant using an
      option-pricing model with the following assumptions:





2006
            
            2004Weighted
                average fair valued of options granted
            
            $
            7.99
            
            $
            4.10Dividend
                yield
            
            
            N/A
            
            
            N/AExpected
                volatility
            
            
            11.27
            %
            
            41.16
            %Risk-free
                interest rate
            
            
            5.11
            %
            
            4.00
            %Expected
                option life
            
            
            7.5
                years
            
            
            7.5
                years




54
 *Table
          of Contents*




**VALLEY
        COMMERCE BANCORP AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 (Continued)


**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES**(Continued)





Recent
      Accounting Developments





*Accounting
      for Servicing of Financial Assets*





In
      March
      2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156,
“Accounting for Servicing of Financial Assets, an amendment of FASB Statement
      No. 140.”  SFAS No. 156 requires all separately recognized servicing assets
      and liabilities to be initially measured at fair value, if practicable and
      permits, but does not require, the subsequent measurement of servicing assets
      and servicing liabilities at fair value. Under SFAS 156, an entity can elect
      subsequent fair value measurement of its servicing assets and servicing
      liabilities by class. An entity should apply the requirements for recognition
      and initial measurement of servicing assets and servicing liabilities
      prospectively to all transactions after the effective date. SFAS 156 permits
      an
      entity to reclassify certain available-for-sale securities to trading securities
      provided that they are identified in some manner as offsetting the entity’s
      exposure to changes in fair value of servicing assets or servicing liabilities
      subsequently measured at fair value. The provisions of SFAS 156 are effective
      for an entity as of the beginning of its first fiscal year that begins after
      September 15, 2006.  Management does not expect the adoption of SFAS 156 to
      have a material impact on the Company’s financial position or results of
      operations.





*Accounting
      for Uncertainty in Income Taxes*




In
      July
      2006, the FASB issued Financial Accounting Standards Interpretation No. 48
      (FIN
      48), Accounting for Uncertainty in Income Taxes –An Interpretation of FASB
      Statement No. 109.. FIN 48 clarifies the accounting for uncertainty in income
      taxes recognized in an enterprise’s financial statements in accordance with FASB
      Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition
      threshold and measurement standard for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax
      return.  FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosures and transitions.  FIN 48 is effective for fiscal years
      beginning after December 15, 2006.  The Company presently recognizes
      income tax positions based on management’s estimate of whether it is reasonably
      possible that a liability has been incurred for unrecognized income tax benefits
      by applying FASB Statement No. 5, Accounting for Contingencies.


The
        provisions of FIN 48 will be effective for the Company on January 1, 2007
        and
        are to be applied to all tax positions upon initial application of this
        standard.  Only tax positions that meet the more-likely-than-not
        recognition threshold at the effective date may be recognized or continue
        to be
        recognized upon adoption.  The cumulative effect of applying the
        provisions of FIN 48, if any, will be reported as an adjustment to the opening
        balance of retained earnings for the fiscal year of adoption. Management
        does not expect the adoption of FIN 48 to have a material impact on the
        Company’s financial position or results of operations.
 
 *Consideration
        of the Effects of Prior Year Misstatements*
 
 In
        September, 2006, the Securities and Exchange Commission published Staff
        Accounting Bulleting No. 108 (SAB 108) *Considering the Effects of Prior Year
        Misstatements when Quantifying Misstatements in Current Year Financial
        Statements*.  The interpretations in SAB 108 were issued to
        address diversity in practice in quantifying financial statement misstatements
        and the potential under current practice to build up improper amounts on
        the
        balance sheet.  This guidance will apply to the first fiscal year
        ending after November 15, 2006 and early application in interim periods is
        encouraged.  The adoption of SAB 108 did not have a material impact on
        the Company’s financial position, results of operations or cash flows and no
        cumulative adjustment was required.







55
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          of Contents*


**VALLEY
        COMMERCE BANCORP AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 (Continued)




**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES**(Continued)





*Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements*





In
      September 2006, the FASB ratified the consensuses reached by the Task Force
      on
      Issue No. 06-4 (EITF 06-4) *Accounting
      for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
      Split-Dollar Life Insurance Arrangements* .
      A
      question arose when an employer enters into an endorsement split-dollar life
      insurance arrangement related to whether the employer should recognize a
      liability for the future benefits or premiums to be provided to the employee.
      EITF 06-4 indicates that an employer should recognize a liability for future
      benefits and that a liability for the benefit obligation has not been settled
      through the purchase of an endorsement type policy. An entity should apply
      the
      provisions of EITF 06-4 either through a change in accounting principle through
      a cumulative-effect adjustment to retained earnings as of the beginning of
      the
      year of adoption or a change in accounting principle through retrospective
      application to all prior periods. The provisions of EITF 06-4 are effective
      for
      fiscal years beginning after December 15, 2007. Management has not yet completed
      its evaluation of the impact that EITF 06-4 will have.





*Accounting
      for Purchases of Life Insurance*





In
      September 2006, the FASB ratified the consensuses reached by the Emerging Issues
      Task Force (“EITF”) on Issue No. 06-5, “Accounting for Purchases of Life
      Insurance — Determining the Amount That Could Be Realized in Accordance with
      FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life
      Insurance.”  FTB 85-4 indicates that the amount of the asset included in
      the balance sheet for life insurance contracts within its scope should be “the
      amount that could be realized under the insurance contract as of the date of
      the
      statement of financial position.” Questions arose in applying the guidance in
      FTB 85-4 to whether “the amount that could be realized” should consider 1) any
      additional amounts included in the contractual terms of the insurance policy
      other than the cash surrender value and 2) the contractual ability to surrender
      all of the individual-life policies (or certificates in a group policy) at
      the
      same time. EITF 06-5 determined that “the amount that could be realized” should
      1) consider any additional amounts included in the contractual terms of the
      policy and 2) assume the surrender of an individual-life by individual-life
      policy (or certificate by certificate in a group policy). Any amount that is
      ultimately realized by the policy holder upon the assumed surrender of the
      final
      policy (or final certificate in a group policy) shall be included in the “amount
      that could be realized.” An entity should apply the provisions of EITF 06-5
      through either a change in accounting principle through a cumulative-effect
      adjustment to retained earnings as of the beginning of the year of adoption
      or a
      change in accounting principle through retrospective application to all prior
      periods. The provisions of EITF 06-5 are effective for fiscal years beginning
      after December 15, 2006. Management has not yet completed its evaluation of
      the
      impact that EITF No. 06-5 will have.


56
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          of Contents*


**VALLEY
        COMMERCE BANCORP AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 (Continued)




**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES**(Continued)





*Fair
      Value Measurements*





In
      September 2006, the FASB issued Statement No. 157 (SFAS 157), *Fair
      Value Measurements* .
      SFAS
      157 defines fair value, establishes a framework for measuring fair value and
      expands disclosures about fair value measurements. SFAS 157 applies whenever
      other standards require (or permit) assets or liabilities to be measured at
      fair
      value but does not expand the use of fair value in any new circumstances. In
      support of this principle, SFAS 157 establishes a fair value hierarchy that
      prioritizes the information used to develop those assumptions. The provisions
      of
      SFAS 157 are effective for financial statements issued for fiscal years
      beginning after November 15, 2007 and interim periods within those fiscal years.
      The provisions should be applied prospectively, except for certain specifically
      identified financial instruments. Management does not expect the adoption of
      SFAS 157 to have a material impact to the Company’s financial position or result
      of operations.





**3.**
            **AVAILABLE-FOR-SALE
                INVESTMENT SECURITIES**





The
      amortized cost and estimated fair value of available-for-sale investment
      securities at December 31, 2006 and 2005 consisted of the
      following:





2006Gross
            
            Gross
            
            EstimatedAmortized
            
            Unrealized
            
            Unrealized
            
            FairCost
            
            Gains
            
            Losses
            
            ValueDebt
                securities:U.S.
                Government agencies
            
            $
            20,324,780
            
            $
            6,276
            
            $
            (282,056
            )
            $
            20,049,000Mortgage-backed
                securities
            
            
            12,422,446
            
            
            65,105
            
            
            (250,551
            )
            
            12,237,000Municipal
                securities
            
            
            18,949,602
            
            
            141,331
            
            
            (34,933
            )
            
            19,056,000Corporate
                debt securities
            
            
            4,032,762
            
            
            -
            
            
            (76,762
            )
            
            3,956,000$
            55,729,590
            
            $
            212,712
            
            $
            (644,302
            )
            $
            55,298,000





Net
      unrealized losses on available-for-sale investment securities totaling $431,590
      were recorded, net of $155,588 in tax benefits, as accumulated other
      comprehensive loss within shareholders' equity at December 31, 2006. Proceeds
      and realized losses from the sale of available-for-sale investment securities
      for the year ended December 31, 2006 totaled $3,907,737 and $52,737,
      respectively.





2005Gross
            
            Gross
            
            EstimatedAmortized
            
            Unrealized
            
            Unrealized
            
            FairCost
            
            Gains
            
            Losses
            
            ValueDebt
                securities:U.S.
                Government agencies
            
            $
            21,388,349
            
            $
            6,233
            
            $
            (416,582
            )
            $
            20,978,000Mortgage-backed
                securities
            
            
            9,682,917
            
            
            -
            
            
            (292,917
            )
            
            9,390,000Municipal
                securities
            
            
            15,640,077
            
            
            52,475
            
            
            (118,552
            )
            
            15,574,000Corporate
                debt securities
            
            
            4,569,321
            
            
            -
            
            
            (120,321
            )
            
            4,449,000$
            51,280,664
            
            $
            58,708
            
            $
            (948,372
            )
            $
            50,391,000




57
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          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**3.**
            **AVAILABLE-FOR-SALE
                INVESTMENT SECURITIES**(Continued)





Net
      unrealized losses on available-for-sale investment securities totaling $889,664
      were recorded, net of $344,543 in tax benefits, as accumulated other
      comprehensive loss within shareholders' equity at December 31, 2005. Proceeds
      and realized losses from the sale of available-for-sale investment securities
      for the year ended December 31, 2005 totaled $3,951,507 and $48,494,
      respectively. Proceeds and realized gains from the sale of available-for-sale
      investment securities for the year ended December 31, 2004 totaled $1,297,000
      and $7,390, respectively.





Investment
      securities with unrealized losses at December 31, 2006 are summarized and
      classified according to the duration of the loss period as follows:





Less
                than 12 Months
            
            12
                Months or More
            
            TotalFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            UnrealizedValue
            
            Losses
            
            Value
            
            Losses
            
            Value
            
            LossesDebt
                securities:U.S.
                Government Agencies
            
            $
            364,000
            
            $
            (4,459
            )
            $
            18,689,000
            
            $
            (277,597
            )
            $
            19,233,000
            
            $
            (282,056
            )Mortgage-backed
                securities
            
            
            1,357,000
            
            
            (3,745
            )
            
            7,529,000
            
            
            (246,806
            )
            
            8,886,000
            
            
            (250,551
            )Municipal
                securities
            
            
            4,004,000
            
            
            (14,759
            )
            
            2,341,000
            
            
            (20,174
            )
            
            6,345,000
            
            
            (34,933
            )Corporate
                debt securities
            
            
            -
            
            
            -
            
            
            3,956,000
            
            
            (76,762
            )
            
            3,956,000
            
            
            (76,762
            )$
            5,725,000
            
            $
            (22,963
            )
            $
            32,515,000
            
            $
            (621,339
            )
            $
            38,420,000
            
            $
            (644,302
            )





Investment
      securities with unrealized losses at December 31, 2005 are summarized and
      classified according to the duration of the loss period as follows:





Less
                                              than 12 Months
                                          
                                          12
                                              Months or More
                                          
                                          TotalUnrealized
                                          
                                          Fair
                                          
                                          Unrealized
                                          
                                          Fair
                                          
                                          Fair
                                          
                                          UnrealizedLosses
                                          
                                          Value
                                          
                                          Losses
                                          
                                          Value
                                          
                                          Value
                                          
                                          LossesDebt
                                              securities:U.S.
                                              Government Agencies
                                          
                                          $
                                          7,875,000
                                          
                                          $
                                          (112,215
                                          )
                                          $
                                          11,675,000
                                          
                                          $
                                          (304,367
                                          )
                                          $
                                          19,550,000
                                          
                                          $
                                          (416,582
                                          )Mortgage-backed
                                              securities
                                          
                                          
                                          5,993,000
                                          
                                          
                                          (158,132
                                          )
                                          
                                          3,397,000
                                          
                                          
                                          (134,785
                                          )
                                          
                                          9,390,000
                                          
                                          
                                          (292,917
                                          )Municipal
                                              securities
                                          
                                          
                                          10,267,000
                                          
                                          
                                          (94,607
                                          )
                                          
                                          1,079,000
                                          
                                          
                                          (23,945
                                          )
                                          
                                          11,346,000
                                          
                                          
                                          (118,552
                                          )Corporate
                                              debt Securities
                                          
                                          
                                          2,016,000
                                          
                                          
                                          (50,667
                                          )
                                          
                                          2,433,000
                                          
                                          
                                          (69,654
                                          )
                                          
                                          4,449,000
                                          
                                          
                                          (120,321
                                          )$
                                          26,151,000
                                          
                                          $
                                          (415,621
                                          )
                                          $
                                          18,584,000
                                          
                                          $
                                          (532,751
                                          )
                                          $
                                          44,735,000
                                          
                                          $
                                          (948,372
                                          )




58
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          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**3.**
            **AVAILABLE-FOR-SALE
                INVESTMENT SECURITIES**(Continued)




U.S.
        Government Agencies
 
 At
        December 31, 2006, the Company held 39 U.S. Government agency securities
        of
        which 1 was in a loss position for less than twelve months and 37 were in
        a loss
        position and had been in a loss position for twelve months or
        more.  Management believes the unrealized losses on the Company's
        investments in direct obligations of the U.S. Government Agencies were caused
        by
        interest rate increases.  The contractual terms of those investments
        do not permit the issuer to settle the securities at a price less than the
        amortized costs of the investment.  Because the decline in market
        value is attributable to changes in interest rates and not credit quality,
        and
        because the Company has the ability and intent to hold those investments
        until a
        recovery of fair value, which may be maturity, the Company does not consider
        those investments to be other-than-temporarily impaired at December 31,
        2006.
 
 Mortgage-backed
        Obligations
 
 At
        December 31, 2006, the Company held 37 mortgage-backed obligations of which
        2
        were in a loss position for less than twelve months and 30 were in a loss
        position and had been in a loss position for twelve months or
        more.  Management believes the unrealized losses on the Company's
        investments in mortgage obligations were caused by interest rate
        increases.  The contractual cash flows of these investments are
        guaranteed by an agency of the U.S. government.  Accordingly, it is
        expected that the securities will not be settled at a price less than the
        amortized cost of the Company's investment. Because the decline in market
        value
        is attributable to changes in interest rates and not credit quality, and
        because
        the Company has the ability and intent to hold those investments until a
        recovery of fair value, which may be maturity, the Company does not consider
        those investments to be other-than-temporarily impaired at December 31,
        2006.
 
 Obligations
        of States and Political Subdivision
 
 At
        December 31, 2006, the Company held 65 obligations of states and political
        subdivision securities of which 14 were in a loss position for less than
        twelve
        months and 7 were in a loss position and had been in a loss position for
        twelve
        months or more.  Management believes the unrealized losses on the
        Company's investments in obligations of states and political subdivision
        securities were caused by interest rate increases.  Because the
        decline in market value is attributable to changes in interest rates and
        not
        credit quality, and because the Company has the ability and intent to hold
        those
        investments until a recovery of fair value, which may be maturity, the Company
        does not consider those investments to be other-than-temporarily impaired
        at
        December 31, 2006.
 
 Corporate
        Debt Securities
 
 At
        December 31, 2006, the Company held 8 corporate debt securities all of which
        were in a loss position and had been in a loss position for twelve months
        or
        more.  Management believes the unrealized losses on the Company's
        investments in corporate debt securities were caused by interest rate
        increases.  Because the decline in market value is attributable to
        changes in interest rates and not credit quality, and because the Company
        has
        the ability and intent to hold those investments until a recovery of fair
        value,
        which may be maturity, the Company does not consider those investments to
        be
        other-than-temporarily impaired at December 31, 2006.


59
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          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**3.**
            **AVAILABLE-FOR-SALE
                INVESTMENT SECURITIES**(Continued)





The
      amortized cost and estimated fair value of investment securities at
      December 31, 2006 by contractual maturity are shown below. Expected
      maturities will differ from contractual maturities because the issuers of the
      securities may have the right to call or prepay obligations with or without
      call
      or prepayment penalties.





EstimatedAmortized
            
            FairCost
            
            ValueWithin
                one year
            
            $
            6,009,801
            
            $
            5,954,000After
                one year through five years
            
            
            16,932,685
            
            
            16,673,000After
                five years through ten years
            
            
            4,584,430
            
            
            4,547,000After
                ten years
            
            
            15,780,228
            
            
            15,887,00043,307,144
            
            
            43,061,000Investment
                securities not due at a single maturity date:Mortgage-backed
                securities
            
            
            12,422,446
            
            
            12,237,000$
            55,729,590
            
            $
            55,298,000





At
      December 31, 2006 and 2005, all investment securities were pledged to secure
      either public deposits or borrowing arrangements.


60
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          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**4.**
            **LOANS
                AND THE ALLOWANCE FOR LOAN
                LOSSES**





Outstanding
      loans are summarized below:





December
                31,2006
            
            2005Commercial
            
            $
            41,103,607
            
            $
            40,270,435Real
                estate - mortgage
            
            
            92,639,046
            
            
            72,753,447Real
                estate - construction
            
            
            44,272,460
            
            
            32,560,215Agricultural
            
            
            4,693,307
            
            
            4,432,029Consumer
                and other
            
            
            1,804,343
            
            
            2,376,049184,512,763
            
            
            152,392,175Deferred
                loan fees, net
            
            
            (435,675
            )
            
            (635,446
            )Allowance
                for loan losses
            
            
            (1,745,582
            )
            
            (1,766,115
            )$
            182,331,506
            
            $
            149,990,614





Certain
      loans were pledged to secure borrowing arrangements (see Note 7).





Changes
      in the allowance for loan losses were as follows:




Year
                Ended December 31,2006
            
            2005
            
            2004Balance,
                beginning of year
            
            $
            1,766,115
            
            $
            1,400,818
            
            $
            1,392,735Provision
                charged to operations
            
            
            -
            
            
            368,768
            
            
            138,000Losses
                charged to allowance
            
            
            (20,833
            )
            
            (3,471
            )
            
            (148,405
            )Recoveries
            
            
            300
            
            
            -
            
            
            18,488Balance,
                end of year
            
            $
            1,745,582
            
            $
            1,766,115
            
            $
            1,400,818





At
        December 31, 2006, there were no loans considered to be impaired.  At
        December 31, 2005, there was a $21,000 loan considered to be impaired with
        no
        related allowance for loan losses identified.  The average recorded
        investment in impaired loans for the years ended December 31, 2006, 2005
        and
        2004 was $8,680, $26,476 and $978,200, respectively. Interest income recognized
        by the Company on a cash basis during the years ended December 31, 2006,
        and
        2005 was not considered significant.  The Company recognized $423,000
        in interest income on a cash basis for impaired loans during the year ended
        December 31, 2004.
 
 At
        December 31, 2006 and 2005, nonaccrual loans totaled $0 and $21,000,
        respectively.  Interest foregone on nonaccrual loans was not
        significant for the years ended December 31, 2006, 2005, and 2004.
 
 Salaries
        and employee benefits totaling $551,154, $221,278 and $207,899 have been
        deferred as loan origination costs during the years ended December 31, 2006,
        2005 and 2004, respectively.


61
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          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**5.**
            **PREMISES
                AND EQUIPMENT**





Premises
      and equipment consisted of the following:





December
                31,2006
            
            2005Furniture
                and equipment
            
            $
            1,851,496
            
            $
            1,569,322Premises
            
            
            653,273
            
            
            548,702Leasehold
                improvements
            
            
            303,286
            
            
            243,820Land
            
            
            452,320
            
            
            51,8943,260,375
            
            
            2,413,738Less
                    accumulated depreciation and
                    amortization
            
            
            (1,428,198
            )
            
            (1,190,422
            )$
            1,832,177
            
            $
            1,223,316





Depreciation
      and amortization included in occupancy and equipment expense totaled $242,116,
      $194,531 and $160,570 for the years ended December 31, 2006, 2005 and 2004,
      respectively.




**6.**
            **INTEREST-BEARING
                DEPOSITS**





Interest-bearing
      deposits consisted of the following:





December
                31,2006
            
            2005Savings
            
            $
            8,575,919
            
            $
            10,610,990Money
                market
            
            
            40,000,066
            
            
            28,498,692NOW
                accounts
            
            
            26,716,738
            
            
            24,439,422Time,
                $100,000 or more
            
            
            47,871,287
            
            
            33,764,013Other
                time
            
            
            21,392,203
            
            
            19,848,924$
            144,556,213
            
            $
            117,162,041


62
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**6.**
              **INTEREST-BEARING
                  DEPOSITS**(Continued)





Aggregate
      annual maturities of time deposits are as follows:





Year
                Ending December 31,2007
            
            $
            62,900,0762008
            
            
            5,189,3712009
            
            
            928,9012010
            
            
            245,1422011
            
            
            -$
            69,263,490





Interest
      expense recognized on interest-bearing deposits consisted of the
      following:





Year
                Ended December 31,2006
            
            2005
            
            2004Savings
            
            $
            95,780
            
            $
            67,109
            
            $
            35,050Money
                market
            
            
            1,175,225
            
            
            376,226
            
            
            228,710NOW
                accounts
            
            
            723,834
            
            
            385,852
            
            
            153,313Time,
                $100,000 or more
            
            
            1,491,363
            
            
            738,638
            
            
            427,116Other
                time
            
            
            820,142
            
            
            460,266
            
            
            351,048$
            4,306,344
            
            $
            2,028,091
            
            $
            1,195,237





**7.**
            **BORROWING
                ARRANGEMENTS**





Lines
      of Credit





The
      Bank
      had unsecured lines of credit with two correspondent banks which, in the
      aggregate, amounted to $13,000,000 and $4,000,000 at December 31, 2006 and
      2005,
      respectively. There were no borrowings outstanding under either of these
      borrowing arrangements as of December 31, 2006 and 2005.





Federal
      Home Loan Bank Advances





At
        December 31, 2006 and 2005 the Bank could borrow up to 49% of pledged real
        estate mortgage loans from the Federal Home Loan Bank of San Francisco
        (FHLB).  As of December 31, 2006 and 2005, the Bank had pledged loans
        with total carrying values of $55,260,000 and $25,697,000,
        respectively.  At December 31, 2006 borrowings were comprised of
        $17,600,000 in short-term (one day) adjustable rate debt with a weighted
        average
        interest rate of 5.25%, and $8,500,000 of long-term fixed rate debt with
        a
        weighted average interest rate and maturity of 4.33% and 3.1 years,
        respectively. At December 31, 2005, the Company had no short-term debt and
        long-term debt totaling $9,100,000 with a weighted average interest rate
        and
        maturity of 4.14% and 4.0 years, respectively.


63
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      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**7.**
            **BORROWING
                ARRANGEMENTS**(Continued)





Federal
      Home Loan Bank Advances (continued)





As
      of
      December 31, 2006 and 2005, outstanding long-term advances from the Federal
      Home
      Loan Bank (FHLB) consisted of the following:


2006
              
              2005Amount
              
              Rate
              
              Maturity
                  Date
              
              Amount
              
              Rate
              
              Maturity
                  Date$
              -
              
              
              -
              
              
              -
              
              $
              200,000
              
              
              2.20
              %
              
              March
                  6, 2006-
              
              
              -
              
              
              -
              
              
              200,000
              
              
              2.82
              %
              
              October
                  23, 2006200,000
              
              
              2.27
              %
              
              March
                  26, 2007
              
              
              200,000
              
              
              2.27
              %
              
              March
                  26, 2007900,000
              
              
              3.08
              %
              
              March
                  6, 2008
              
              
              900,000
              
              
              3.08
              %
              
              March
                  6, 20081,600,000
              
              
              2.67
              %
              
              May
                  27,2008
              
              
              1,600,000
              
              
              2.67
              %
              
              May
                  27, 2008250,000
              
              
              3.71
              %
              
              October
                  22, 2008
              
              
              250,000
              
              
              3.71
              %
              
              October
                  22, 2008900,000
              
              
              3.94
              %
              
              April
                  27, 2009
              
              
              900,000
              
              
              3.94
              %
              
              April
                  27, 2009400,000
              
              
              4.51
              %
              
              May
                  12, 2009
              
              
              400,000
              
              
              4.51
              %
              
              May
                  12, 2009978,361
              
              
              7.41
              %
              
              June
                  22, 2010
              
              
              1,001,268
              
              
              7.41
              %
              
              June
                  22, 2010100,000
              
              
              5.09
              %
              
              May
                  12, 2011
              
              
              100,000
              
              
              5.09
              %
              
              May
                  12, 2011969,277
              
              
              4.01
              %
              
              December
                  6, 2011
              
              
              1,138,352
              
              
              4.01
              %
              
              December
                  6, 20111,250,000
              
              
              4.44
              %
              
              December
                  6, 2011
              
              
              1,250,000
              
              
              4.44
              %
              
              December
                  6, 20111,000,000
              
              
              6.02
              %
              
              January
                  2, 2012
              
              
              1,000,000
              
              
              6.02
              %
              
              January
                  2, 2012$
              8,547,638
              
              
              
              
              
              
              
              $
              9,139,620





Future
      principal payments of outstanding FHLB advances are as follows:





Year
                EndingDecember 31,2007
            
            $
            401,5892008
            
            
            2,961,7022009
            
            
            1,522,3462010
            
            
            1,100,3512011
            
            
            311,648Thereafter
            
            
            2,250,002$
            8,547,638


64
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      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**8.**
            **JUNIOR
                SUBORDINATED DEFERRABLE INTEREST
                DEBENTURES**





Valley
      Commerce Trust I is a Delaware business trust formed by the Company with capital
      of $93,000 for the sole purpose of issuing trust preferred securities fully
      and
      unconditionally guaranteed by the Company. During the second quarter of 2003,
      Valley Commerce Trust I (the "Trust") issued 3,000 Floating Rate Capital Trust
      Pass-Through Securities ("Trust Preferred Securities"), with a liquidation
      value
      of $1,000 per security, for gross proceeds of $3,000,000. The entire proceeds
      of
      the issuance were invested by the Trust in $3,093,000 of Floating Rate Junior
      Subordinated Deferrable Interest Debentures (the "Subordinated Debentures")
      issued by the Company, with identical maturity, repricing and payment terms
      as
      the Trust Preferred Securities. The Subordinated Debentures represent the sole
      assets of the Trust. The Subordinated Debentures mature on April 7, 2033, bear
      a
      current interest rate of 8.67% (based on 3-month LIBOR plus 3.30%), with
      repricing and payments due quarterly. The Subordinated Debentures are redeemable
      by the Company, subject to receipt by the Company of prior approval from the
      Federal Reserve Board of Governors, on any January 7, April 7, July 7 or October
      7 on or after April 7, 2008. The redemption price is par plus accrued interest,
      except in the case of redemption under a special event which is defined in
      the
      debenture. The Trust Preferred Securities are subject to mandatory redemption
      to
      the extent of any early redemption of the junior subordinated debentures and
      upon maturity of the junior subordinated debentures on April 7,
      2033.





Holders
      of the Trust Preferred Securities are entitled to a cumulative cash distribution
      on the liquidation amount of $1,000 per security at an initial rate per annum
      of
      4.59%. For each successive period beginning on January 7, April 7, July 7 or
      October 7 of each year, the rate will be adjusted to equal the 3-month LIBOR
      plus 3.30% provided, however, that prior to July 7, 2008, such annual rate
      does
      not exceed 12.50%. As of December 31, 2006, the rate was 8.67%. The Trust has
      the option to defer payment of the distributions for a period of up to five
      years, as long as the Company is not in default on the payment of interest
      on
      the junior subordinated debentures. The Trust Preferred Securities were sold
      and
      issued in private transactions pursuant to an exemption from registration under
      the Securities Act of 1933, as amended. The Company has guaranteed, on a
      subordinated basis, distributions and other payments due on the Trust Preferred
      Securities.




The
      unamortized deferred costs related to the junior subordinated debentures, which
      are included in other assets on the consolidated balance sheet, at December
      31,
      2006, 2005, and 2004 were $21,000, $39,000, and $57,000 respectively, and the
      amortization for each of the three years ended December 31, 2006 was $18,000.


65
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          of Contents*


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      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)




**9.**
            **COMMITMENTS
                AND CONTINGENCIES**




Leases




The
      Company leases its Fresno and Visalia branch offices, its Tulare loan production
      office, and its administrative office under noncancelable operating leases
      which
      expire in October 2007, November 2009, January 2007, and June 2008,
      respectively. The Visalia branch office lease contains two options to renew
      the
      lease for five year periods. Future minimum lease payments are as
      follows:




Year
                                      EndingDecember
                                      31,2007
                                  
                                  $
                                  314,9162008
                                  
                                  
                                  253,4882009
                                  
                                  
                                  195,6802010
                                  
                                  
                                  72,4802011
                                  
                                  
                                  72,480Thereafter
                                  
                                  
                                  518,640$
                                  1,427,684





Rental
      expense included in occupancy and equipment expense totaled $293,504, $250,968,
      and $223,953 for the years ended December 31, 2006, 2005 and 2004,
      respectively.




Federal
      Reserve Requirements




Banks
      are
      required to maintain reserves with the Federal Reserve Bank equal to a
      percentage of their reservable deposits. The average amount of such reserve
      balances required at December 31, 2006 was $2,351,000.




Financial
      Instruments With Off-Balance-Sheet Risk




The
      Company is a party to financial instruments with off-balance-sheet risk in
      the
      normal course of business in order to meet the financing needs of its customers.
      These financial instruments include commitments to extend credit and letters
      of
      credit. These instruments involve, to varying degrees, elements of credit and
      interest rate risk in excess of the amount recognized on the consolidated
      balance sheet.





The
      Company's exposure to credit loss in the event of nonperformance by the other
      party for commitments to extend credit and letters of credit is represented
      by
      the contractual amount of those instruments. The Company uses the same credit
      policies in making commitments and letters of credit as it does for loans
      included on the consolidated balance sheet.


66
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          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**9.**
            **COMMITMENTS
                AND CONTINGENCIES**(Continued)




Financial
      Instruments With Off-Balance-Sheet Risk (Continued)




The
      following financial instruments represent off-balance-sheet credit
      risk:





December
                31,2006
            
            2005Commitments
                to extend credit
            
            $
            44,128,000
            
            $
            46,708,000Standby
                letters of credit
            
            $
            1,169,000
            
            $
            1,646,000





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 some of the commitments are expected to expire without being
      drawn upon, the total commitment amounts do not necessarily represent future
      cash requirements. The Bank evaluates each customer's creditworthiness on a
      case-by-case basis. The amount of collateral obtained, if deemed necessary
      by
      the Company upon extension of credit, is based on management's credit evaluation
      of the borrower. Collateral held varies, but may include real property, bank
      deposits, debt or equity securities or business assets.





Standby
        letters of credit are conditional commitments written to guarantee the
        performance of a customer to a third party.  These guarantees are
        primarily related to the purchases of inventory by commercial customers and
        are
        typically short-term in nature.  Credit risk is similar to that
        involved in extending loan commitments to customers and, accordingly, evaluation
        and collateral requirements similar to those for loan commitments are
        used.  The fair value of the liability related to the Company’s
        stand-by-letters of credit, which represents the fees received for issuing
        the
        guarantee, was not considered significant at December 31, 2006 or
        2005.  The Company recognizes these fees as revenue over the term of
        the commitment or when the commitment is used.


At
      December 31, 2006, consumer loan commitments represent approximately 6% of
      total
      commitments and are generally unsecured. Commercial loan commitments represent
      approximately 46% of total commitments and are generally secured by various
      assets of the borrower. Real estate loan commitments represent the remaining
      48%
      of total commitments and are generally secured by property with a loan-to-value
      ratio not to exceed 80%.





Significant
      Concentrations of Credit Risk





The
      Company grants real estate mortgage, real estate construction, commercial,
      agricultural and consumer loans to customers throughout the cities of Visalia,
      Tulare, Fresno, Woodlake and Tipton, California.





Although
      the Company has a diversified loan portfolio, a substantial portion of its
      portfolio is secured by commercial and residential real estate. However,
      personal and business income represent the primary source of repayment for
      a
      majority of these loans.


67
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          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**9.**
            **COMMITMENTS
                AND CONTINGENCIES**(Continued)





Contingencies





The
      Company is subject to legal proceedings and claims which arise in the ordinary
      course of business. In the opinion of management, the amount of ultimate
      liability with respect to such actions will not materially affect the financial
      position or results of operations of the Company.





**10.**
            **SHAREHOLDERS'
                EQUITY**





Dividend
      Restrictions





The
      Company's ability to pay cash dividends is dependent on dividends paid to it
      by
      the Bank and limited by California corporation law. Under California law, the
      holders of common stock of the Company are entitled to receive dividends when
      and as declared by the Board of Directors, out of funds legally available,
      subject to certain restrictions. The California general corporation law
      prohibits the Company from paying dividends on its common stock unless: (i)
      its
      retained earnings, immediately prior to the dividend payment, equals or exceeds
      the amount of the dividend or (ii) immediately after giving effect to the
      dividend, the sum of the Company's assets (exclusive of goodwill and deferred
      charges) would be at least equal to 125% of its liabilities (not including
      deferred taxes, deferred income and other deferred liabilities) and the current
      assets of the Company would be at least equal to its current liabilities, or,
      if
      the average of its earnings before taxes on income and before interest expense
      for the two preceding fiscal years was less than the average of its interest
      expense for the two preceding fiscal years, at least equal to 125% of its
      current liabilities.





Dividends
      from the Bank to the Company are restricted under California law to the lesser
      of the Bank's retained earnings or the Bank's net income for the latest three
      fiscal years, less dividends previously declared during that period, or, with
      the approval of the Department of Financial Institutions, to the greater of
      the
      retained earnings of the Bank, the net income of the Bank for its last fiscal
      year, or the net income of the Bank for its current fiscal year. As of December
      31, 2006, the maximum amount available for dividend distribution under this
      restriction was approximately $5,530,000. In addition, the Company's ability
      to
      pay dividends is subject to certain covenants contained in the indentures
      relating to the Trust Preferred Securities issued by the business trust (see
      Note 8).


68
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          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**10.**
            **SHAREHOLDERS'
                EQUITY**(Continued)





Earnings
      Per Share





A
      reconciliation of the numerators and denominators of the basic and diluted
      earnings per share computations is as follows:





WeightedAverageNumber
                ofNet
            
            Shares
            
            Per
                ShareFor
                the Year Ended
            
            Income
            
            Outstanding
            
            AmountDecember
                31, 2006Basic
                earnings per share
            
            $
            2,955,778
            
            
            2,202,038
            
            $
            1.34Effect
                of dilutive stock options
            
            
            
            
            
            111,371Diluted
                earnings per share
            
            $
            2,955,778
            
            
            2,313,409
            
            $
            1.28December
                31, 2005Basic
                earnings per share
            
            $
            2,162,807
            
            
            2,165,803
            
            $
            1.00Effect
                of dilutive stock options
            
            
            
            
            
            127,152Diluted
                earnings per share
            
            $
            2,162,807
            
            
            2,292,955
            
            $
            0.94December
                31, 2004Basic
                earnings per share
            
            $
            1,629,247
            
            
            1,512,402
            
            $
            1.08Effect
                of dilutive stock options
            
            
            
            
            
            102,555Diluted
                earnings per share
            
            $
            1,629,247
            
            
            1,614,957
            
            $
            1.01





Shares
      of
      common stock issuable under stock options for which the exercise prices are
      greater than the average market prices are not included in the computation
      of
      diluted earnings per share due to their antidilutive effect. There were no
      options excluded from the computation of diluted earnings per share for the
      years ended December 31, 2006, 2005 and 2004.


69
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          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**10.**
            **SHAREHOLDERS'
                EQUITY**(Continued)




Stock-Based
        Compensation
  The
        Valley Commerce Bancorp Amended and Restated Stock Option Plan ("Plan") was
        established in 1997.  Under the plan, 339,967 shares of common stock
        are reserved for issuance to employees and directors under incentive and
        nonstatutory agreements as of December 31, 2006.  The plans require
        that the option price may not be less than the fair market value of the stock
        at
        the date the option is granted, and that the stock must be paid in full at
        the
        time the option is exercised.  Payment in full for the option price
        must be made in cash or with Company common stock previously acquired by
        the
        optionee and held by the optionee for a period of at least six
        months.  The plans do not provide for the settlement of awards in cash
        and new shares are issued upon option exercise.  The options expire on
        dates determined by the Board of Directors, but not later than ten years
        from
        the date of grant.  Upon grant, options vest ratably over a one to
        five year period.  A summary of the activity within the Plan
        follows:
 
 **For
                                                the Year Ended December  31, 2006****Shares**
                                            
                                            
                                            **Weighted**
                                              **Average**
                                              **Exercise**
                                              **Price**
                                            
                                            **Weighted**
                                              **Average**
                                              **Remaining**
                                              **Contractual**
                                              **Term**
                                            
                                            **Aggregate**
                                              **Intrinsic**
                                              **Value****Incentive:**Options
                                                outstanding at January 1, 2005
                                            
                                            
                                            36,475
                                            
                                            
                                            $
                                            8.59Options
                                                granted
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Options
                                                exercised
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Options
                                                cancelled
                                            
                                            
                                            (747
                                            )
                                            
                                            
                                            12.09Options
                                                outstanding at December 31, 2005
                                            
                                            
                                            35,728
                                            
                                            
                                            
                                            8.59Options
                                                granted
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Options
                                                exercised
                                            
                                            
                                            (1,542
                                            )
                                            
                                            
                                            7.39Options
                                                cancelled
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Options
                                                outstanding at December 31, 2006
                                            
                                            
                                            34,186
                                            
                                            
                                            
                                            8.59
                                            
                                            6.30
                                                years
                                            
                                            $
                                            395,834Options
                                                vested or expected to vest atDecember
                                                31, 2006
                                            
                                            
                                            30,707
                                            
                                            
                                            
                                            8.60
                                            
                                            6.30
                                                years
                                            
                                            $
                                            264,029Options
                                                exercisable at December 31, 2006
                                            
                                            
                                            27,672
                                            
                                            
                                            
                                            7.90
                                            
                                            6.30
                                                years
                                            
                                            $
                                            339,555**Nonstatutory:**Options
                                                outstanding at January 1, 2005
                                            
                                            
                                            203,751
                                            
                                            
                                            $
                                            7.84Options
                                                granted
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Options
                                                exercised
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Options
                                                cancelled
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Options
                                                outstanding at December 31, 2005
                                            
                                            
                                            203,751
                                            
                                            
                                            
                                            7.84Options
                                                granted
                                            
                                            
                                            10,000
                                            
                                            
                                            
                                            19.50Options
                                                exercised
                                            
                                            
                                            (22,596
                                            )
                                            
                                            
                                            6.33Options
                                                cancelled
                                            
                                            
                                            (992
                                            )
                                            
                                            
                                            7.42Options
                                                outstanding at December 31, 2006
                                            
                                            
                                            190,163
                                            
                                            
                                            
                                            7.84
                                            
                                            5.17
                                                years
                                            
                                            $
                                            2,345,526Options
                                                vested or expected to vest atDecember
                                                31, 2006
                                            
                                            
                                            190,163
                                            
                                            
                                            
                                            7.84
                                            
                                            5.17
                                                years
                                            
                                            $
                                            2,345,526Options
                                                exercisable at December 31, 2006
                                            
                                            
                                            170,920
                                            
                                            
                                            
                                            7.04
                                            
                                            5.17
                                                years
                                            
                                            $
                                            2,244,365




70
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      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)




The
      aggregate intrinsic value is calculated as the difference between the exercise
      price of the underlying awards and the quoted price of the Company’s common
      stock for options that were in-the-money at December 31, 2006.  There
      were 24,138 options exercised during the year ended December 31,
      2006.  The total intrinsic value of options exercised during the years
      ended December 31, 2006, 2005, and 2004 was $331,737, $0 and $0,
      respectively.  The total fair value of shares vested during the years
      ended December 31, 2006, 2005, and 2004 was $330,886, $290,549 and $410,742,
      respectively.  The total tax benefit of the non-qualified options
      exercised in 2006 was $125,828.





There
      were 10,000 non-statutory options granted in 2006 and no options granted in
      2005.  The Company bases the fair value of the options granted on the
      date of grant using a Black-Scholes option pricing model that uses assumptions
      based on expected option life and the level of estimated forfeitures, expected
      stock volatility, risk free interest rate, and dividend yield.  The
      Company uses historical data to estimate expected option life.  Stock
      volatility is based on the historical volatility of the Company’s
      stock.  The risk-free rate is based on the U. S. Treasury yield curve
      for the periods within the contractual life of the options in effect at the
      time
      of grant.















71
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            of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**10.**
            **SHAREHOLDERS'
                EQUITY**(Continued)





Regulatory
      Capital





The
      Company and the Bank are subject to certain regulatory capital requirements
      administered by the Board of Governors of the Federal Reserve System and the
      Federal Deposit Insurance Corporation (FDIC). Failure to meet these minimum
      capital requirements can initiate certain mandatory, and possibly additional
      discretionary, actions by regulators that, if undertaken, could have a direct
      material effect on the Company's consolidated financial statements. Under
      capital adequacy guidelines and the regulatory framework for prompt corrective
      action, the Bank must meet specific capital guidelines that involve quantitative
      measures of the Bank's assets, liabilities and certain off-balance-sheet items
      as calculated under regulatory accounting practices. The Company's and the
      Bank's capital amounts and classification are also subject to qualitative
      judgments by the regulators about components, risk weightings and other
      factors.





Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company and the Bank to maintain minimum amounts and ratios of total and Tier
      1
      capital to risk-weighted assets and of Tier 1 capital to average assets. Each
      of
      these components is defined in the regulations. Management believes that the
      Company and the Bank met all their capital adequacy requirements as of December
      31, 2006 and 2005.


72
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          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**10.**
            **SHAREHOLDERS'
                EQUITY**(Continued)





Regulatory
      Capital (Continued)





In
      addition, the most recent notification from the FDIC categorized the Bank as
      well capitalized under the regulatory framework for prompt corrective action.
      To
      be categorized as well capitalized, the Bank must maintain minimum total
      risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth
      below. There are no conditions or events since that notification that management
      believes have changed the Bank's category.





December
                31,2006
            
            2005Amount
            
            Ratio
            
            Amount
            
            RatioLeverage
                RatioValley
                Commerce Bancorp and Subsidiary
            
            $
            28,654,000
            
            
            11.1
            %
            $
            25,322,000
            
            
            11.5
            %Minimum
                regulatory requirement
            
            $
            11,462,000
            
            
            4.0
            %
            $
            10,129,000
            
            
            4.0
            %Valley
                Business Bank
            
            $
            28,336,000
            
            
            11.0
            %
            $
            24,927,000
            
            
            11.3
            %Minimum
                requirement for "Well-Capitalized" institution
            
            $
            14,168,000
            
            
            5.0
            %
            $
            12,464,000
            
            
            5.0
            %Minimum
                regulatory requirement
            
            $
            11,334,000
            
            
            4.0
            %
            $
            9,971,000
            
            
            4.0
            %Tier
                1 Risk-Based Capital RatioValley
                Commerce Bancorp and Subsidiary
            
            $
            28,654,000
            
            
            13.5
            %
            $
            25,322,000
            
            
            14.8
            %Minimum
                regulatory requirement
            
            $
            8,500,000
            
            
            4.0
            %
            $
            6,836,000
            
            
            4.0
            %Valley
                Business Bank
            
            $
            28,336,000
            
            
            13.4
            %
            $
            24,927,000
            
            
            14.6
            %Minimum
                requirement for "Well-Capitalized" institution
            
            $
            12,738,000
            
            
            6.0
            %
            $
            10,242,000
            
            
            6.0
            %Minimum
                regulatory requirement
            
            $
            8,492,000
            
            
            4.0
            %
            $
            6,828,000
            
            
            4.0
            %Total
                Risk-Based Capital RatioValley
                Commerce Bancorp and Subsidiary
            
            $
            30,399,000
            
            
            14.3
            %
            $
            27,088,000
            
            
            15.9
            %Minimum
                regulatory requirement
            
            $
            17,000,000
            
            
            8.0
            %
            $
            13,672,000
            
            
            8.0
            %Valley
                Business Bank
            
            $
            30,081,000
            
            
            14.2
            %
            $
            26,693,000
            
            
            15.6
            %Minimum
                requirement for "Well-Capitalized" institution
            
            $
            21,230,000
            
            
            10.0
            %
            $
            17,070,000
            
            
            10.0
            %Minimum
                regulatory requirement
            
            $
            16,984,000
            
            
            8.0
            %
            $
            13,656,000
            
            
            8.0
            %


73
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**10.**
            **SHAREHOLDERS'
                EQUITY******(Continued)




Sale
      of Stock




On
      December 23, 2004, the Company completed the registration process for 650,000
      shares of common stock. On that date, the Company sold 350,750 shares of common
      stock at $13 per share. Net proceeds of $3,749,233 (after underwriting
      discounts, commissions and other costs) were received by the Company. In January
      2005, the 299,250 remaining newly registered shares were sold directly by the
      Company for net proceeds of $3,880,321.




**11.**
            **OTHER
                EXPENSES**





Other
      expenses consisted of the following:


Year
                Ended December 31,2006
            
            2005
            
            2004Data
                processing
            
            $
            459,981
            
            $
            422,158
            
            $
            408,483Operations
            
            
            454,229
            
            
            414,485
            
            
            366,460Professional
                and legal
            
            
            330,101
            
            
            310,928
            
            
            223,594Promotional
            
            
            268,374
            
            
            258,360
            
            
            192,977Telephone
                and postal
            
            
            205,804
            
            
            171,117
            
            
            130,834Supplies
            
            
            180,384
            
            
            236,859
            
            
            137,220Assessment
                and insurance
            
            
            114,270
            
            
            124,506
            
            
            130,854Amortization
                expense
            
            
            62,538
            
            
            62,538
            
            
            62,538Other
                expenses
            
            
            426,249
            
            
            274,908
            
            
            223,092$
            2,501,930
            
            $
            2,275,859
            
            $
            1,876,052




74
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**12.**
            **INCOME
                TAXES**





The
      provision for income taxes for the years ended December 31, 2006 and 2005
      consisted of the following:





Federal
            
            State
            
            Total2006Current
            
            $
            1,107,000
            
            $
            467,000
            
            $
            1,574,000Deferred
            
            
            (6,000
            )
            
            8,000
            
            
            2,000Provision
                for income taxes
            
            $
            1,101,000
            
            $
            475,000
            
            $
            1,576,0002005Current
            
            $
            1,188,000
            
            $
            403,000
            
            $
            1,618,000Deferred
            
            
            (195,000
            )
            
            (56,000
            )
            
            (251,000
            )Provision
                for income taxes
            
            $
            993,000
            
            $
            374,000
            
            $
            1,367,0002004Current
            
            $
            767,000
            
            $
            302,000
            
            $
            1,069,000Deferred
            
            
            (31,000
            )
            
            (11,000
            )
            
            (42,000
            )Provision
                for income taxes
            
            $
            736,000
            
            $
            291,000
            
            $
            1,027,000




75
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**12.**
            **INCOME
                TAXES**(Continued)





Deferred
      tax assets (liabilities) consisted of the following:





December
                                            31,2006
                                        
                                        
                                        2005Deferred
                                            tax assets:Allowance
                                            for loan losses
                                        
                                        $
                                        740,000
                                        
                                        
                                        $
                                        751,000Unrealized
                                            loss on available-for-sale investment
                                            securities
                                        
                                        
                                        156,000
                                        
                                        
                                        
                                        345,000Deferred
                                            compensation
                                        
                                        
                                        356,000
                                        
                                        
                                        
                                        259,000Intangible
                                            assets
                                        
                                        
                                        82,000
                                        
                                        
                                        
                                        83,000Future
                                            benefit of state income tax deduction
                                        
                                        
                                        73,000
                                        
                                        
                                        
                                        66,000Total
                                            deferred tax assets
                                        
                                        
                                        1,407,000
                                        
                                        
                                        
                                        1,504,000Deferred
                                            tax liabilities:Bank
                                            premises and equipment
                                        
                                        
                                        (74,000
                                        )
                                        
                                        
                                        (94,000
                                        )Loan
                                            costs
                                        
                                        
                                        (197,000
                                        )
                                        
                                        
                                        (94,000
                                        )Other
                                        
                                        
                                        (36,000
                                        )
                                        
                                        
                                        (25,000
                                        )Total
                                            deferred tax liabilities
                                        
                                        
                                        (307,000
                                        )
                                        
                                        
                                        (213,000
                                        )Net
                                            deferred tax assets
                                        
                                        $
                                        1,100,000
                                        
                                        
                                        $
                                        1,291,000





The
      Company believes that it is more likely than not that it will realize the above
      deferred tax assets in future periods; therefore, no valuation allowance has
      been provided against its deferred tax assets.





The
      provision for income taxes differs from amounts computed by applying the
      statutory Federal income tax rate to operating income before income taxes.
      The
      items comprising these differences consisted of the following:





Year
                                              Ended December 31,2006
                                          
                                          
                                          2005
                                          
                                          
                                          2004Rate
                                          
                                          
                                          Rate
                                          
                                          
                                          RateFederal
                                              income tax expense, at statutory rate
                                          
                                          
                                          34.0
                                          %
                                          
                                          
                                          34.0
                                          %
                                          
                                          
                                          34.0
                                          %State
                                              franchise tax, net of Federal tax effect
                                          
                                          
                                          7.2
                                          %
                                          
                                          
                                          7.2
                                          %
                                          
                                          
                                          7.2
                                          %Interest
                                              on obligations of states and political
                                              subdivisions
                                          
                                          
                                          (4.8
                                          )%
                                          
                                          
                                          (2.7
                                          )%
                                          
                                          
                                          (1.6
                                          )%Other
                                          
                                          
                                          (1.6
                                          )%
                                          
                                          
                                          0.2
                                          %
                                          
                                          
                                          (0.9
                                          )%Total
                                              income tax expense
                                          
                                          
                                          34.8
                                          %
                                          
                                          
                                          38.7
                                          %
                                          
                                          
                                          38.7
                                          %


76
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**13.**
            **RELATED
                PARTY TRANSACTIONS**





During
      the normal course of business, the Company enters into transactions with related
      parties, including executive officers and directors. These transactions include
      borrowings from the Company with substantially the same terms, including rates
      and collateral, as loans to unrelated parties. The following is a summary of
      the
      aggregate activity involving related party borrowers during 2006:





Balance,
                January 1, 2006
            
            $
            4,045,120Disbursements
            
            
            6,235,153Amounts
                repaid
            
            
            (5,920,491
            )Balance,
                December 31, 2006
            
            $
            4,359,782Undisbursed
                commitments to related parties, December 31, 2006
            
            $
            1,991,702





**14.**
            **EMPLOYEE
                BENEFIT PLANS**




Employee
      Retirement Plan




The
      Company adopted the Valley Business Bank 401(k) Profit Sharing Plan, effective
      January 1, 1997. All employees that work 30 or more hours per week with
      more than 3 months of service are eligible to participate in the plan. Eligible
      employees may elect to make tax deferred contributions of their salary up to
      the
      maximum amount allowed by law. The Company matched 70% of the employees’
contributions, applicable to contributions of up to 6% of the employees' annual
      salary beginning in April 2006. Prior to that the Company had matched 50% of
      the
      employees’ contributions, applicable to contributions of up to 6% of the
      employees annual salary. Company contributions vest at a rate of 20% annually.
      Bank contributions for the years ended December 31, 2006, 2005, and 2004 totaled
      $89,000, $47,000, and $35,000 respectively.




Salary
      Continuation and Retirement Plans




Salary
      continuation plans are in place for three executives. Under these plans, the
      executives will receive monthly payments after retirement until death. These
      benefits are substantially equivalent to those available under split-dollar
      life
      insurance policies purchased by the Bank on the lives of the executives. In
      addition, the estimated present value of these future benefits is accrued over
      the period from the effective dates of the plans until the participants'
      expected retirement dates. The expense recognized under these plans for the
      years ended December 31, 2006, 2005, and 2004 totaled $184,807, $195,232
      and $150,657, respectively. Income earned on these policies, net of expenses,
      totaled $108,034, $103,851, and $98,625 for the years ended December 31,
      2006, 2005 and 2004, respectively.


77
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**14.**
            **EMPLOYEE
                BENEFIT PLANS**(continued)





In
        connection with these agreements, the Bank purchased single premium life
        insurance policies with cash surrender values totaling $5,943,563 and $2,781,169
        at December 31, 2006 and 2005, respectively.  Income earned on
        these policies, net of expenses, totaled $153,394, $103,851 and $98,625 for
        the
        years ended December 31, 2006, 2005 and 2004, respectively.  Income
        earned on these policies is not subject to Federal and State income
        tax.





**15.**
            **COMPREHENSIVE
                INCOME**





Comprehensive
      income is reported in addition to net income for all periods presented.
      Comprehensive income is a more inclusive financial reporting methodology that
      includes disclosure of other comprehensive income (loss) that historically
      has
      not been recognized in the calculation of net income. The unrealized gains
      and
      losses on the Company's available-for-sale investment securities are included
      in
      other comprehensive income (loss). Total comprehensive income and the components
      of accumulated other comprehensive income (loss) are presented in the
      consolidated statement of changes in shareholders’ equity.





At
      December 31, 2006, 2005 and 2004, the Company held securities classified as
      available-for-sale which had unrealized losses as follows:





TaxBefore
            
            Benefit
            
            AfterTax
            
            (Expense)
            
            TaxFor
                the Year Ended December 31, 2006Other
                comprehensive loss:Unrealized
                holding losses
            
            $
            405,337
            
            $
            (169,943
            )
            $
            235,394Reclassification
                adjustment for losses included in net income
            
            
            (52,737
            )
            
            19,012
            
            
            (33,725
            )Total
                other comprehensive loss
            
            $
            458,074
            
            $
            (188,955
            )
            $
            269,119For
                the Year Ended December 31, 2005Other
                comprehensive loss:Unrealized
                holding losses
            
            $
            (810,296
            )
            $
            314,073
            
            $
            (496,223
            )Reclassification
                adjustment for losses included in net income
            
            
            (48,494
            )
            
            18,780
            
            
            (29,714
            )Total
                other comprehensive loss
            
            $
            (761,802
            )
            $
            295,293
            
            $
            (466,509
            )




78
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**15.**
            **COMPREHENSIVE
                INCOME**(continued)





Before
            
            Tax
                Benefit
            
            AfterTax
            
            (Expense)
            
            TaxFor
                the Year Ended December 31, 2004Other
                comprehensive loss:Unrealized
                holding losses
            
            $
            (90,427
            )
            $
            34,981
            
            $
            (55,446
            )Reclassification
                adjustment for gains included in net income
            
            
            7,390
            
            
            (2,846
            )
            
            4,544Total
                other comprehensive loss
            
            $
            (97,817
            )
            $
            37,827
            
            $
            (59,990
            )





**16.**
            **DISCLOSURES
                ABOUT FAIR VALUE OF FINANCIAL
                INSTRUMENTS**





Estimated
      fair values are disclosed for financial instruments for which it is practicable
      to estimate fair value. These estimates are made at a specific point in time
      based on relevant market data and information about the financial instruments.
      These estimates do not reflect any premium or discount that could result from
      offering the Company's entire holdings of a particular financial instrument
      for
      sale at one time, nor do they attempt to estimate the value of anticipated
      future business related to the instruments. In addition, the tax ramifications
      related to the realization of unrealized gains and losses can have a significant
      effect on fair value estimates and have not been considered in any of these
      estimates.





Because
      no market exists for a significant portion of the Company's financial
      instruments, fair value estimates are based on judgments regarding current
      economic conditions, risk characteristics of various financial instruments
      and
      other factors. These estimates are subjective in nature and involve
      uncertainties and matters of significant judgment and therefore cannot be
      determined with precision. Changes in assumptions could significantly affect
      the
      fair values presented.





The
      following methods and assumptions were used by management to estimate the fair
      value of its financial instruments at December 31, 2006 and 2005:





Cash
      and cash equivalents :
      For
      cash and cash equivalents, the carrying amount is estimated to be fair
      value.





Investment
      securities :
      For
      investment securities, fair values are based on quoted market prices, where
      available. If quoted market prices are not available, fair values are estimated
      using quoted market prices for similar securities and indications of value
      provided by brokers.





Loans :
      For
      variable-rate loans that reprice frequently with no significant change in credit
      risk, fair values are based on carrying values. The fair values for other loans
      are estimated using discounted cash flow analyses, using interest rates
      currently being offered at each reporting date for loans with similar terms
      to
      borrowers of comparable creditworthiness. The carrying amount of accrued
      interest receivable approximates its fair value.





Cash
      surrender value of Bank-owned life insurance :
      The
      fair values of life insurance policies are based on current cash surrender
      values at each reporting date provided by the insurers.





Federal
      Home Loan Bank stock: For
      Federal Home Loan Bank stock, cost approximates fair value.


79
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**16.**
            **DISCLOSURES
                ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS**(continued)





Deposits :
      The
      fair values for demand deposits are, by definition, equal to the amount payable
      on demand at the reporting date represented by their carrying amount. Fair
      values for fixed-rate certificates of deposit are estimated using a discounted
      cash flow analysis using interest rates offered at each reporting date by the
      Bank for certificates with similar remaining maturities. The carrying amount
      of
      accrued interest payable approximates its fair value.





Long-term
      debt :
      The
      fair values of fixed-rate borrowings are estimated by discounting their future
      cash flows using rates at each reporting date for similar instruments. The
      fair
      values of variable rate borrowings are based on carrying value.





Junior
      subordinated deferrable interest debentures :
      The
      fair value of junior subordinated deferrable interest debentures was determined
      based on the current market value for the like kind instruments of a similar
      maturity and structure.





Commitments
      to extend credit :
      Commitments to extend credit are primarily for variable rate loans and standby
      letters of credit. For these commitments, there is no difference between the
      committed amounts and their fair values. Commitments to fund fixed rate loans
      and standby letters of credit are at rates which approximate fair value at
      each
      reporting date. The fair value of the commitments at each reporting date were
      not significant and not included in the accompanying table.





December
                31, 2006
            
            December
                31, 2005Carrying
            
            Fair
            
            Carrying
            
            FairAmount
            
            Value
            
            Amount
            
            ValueFinancial
                assets:Cash
                and cash equivalents
            
            $
            13,265,547
            
            $
            13,265,547
            
            $
            17,733,285
            
            $
            17,733,285Federal
                funds sold
            
            
            -
            
            
            -
            
            
            1,885,000
            
            
            1,885,000Available-for-sale
                investment securities
            
            
            55,298,000
            
            
            55,298,000
            
            
            50,391,000
            
            
            50,391,000Loans,
                net
            
            
            182,331,506
            
            
            184,830,865
            
            
            149,990,614
            
            
            150,113,000Cash
                surrender value of life insurance policies
            
            
            5,934,563
            
            
            5,934,563
            
            
            2,781,169
            
            
            2,781,169Accrued
                interest receivable
            
            
            1,437,161
            
            
            1,437,161
            
            
            1,233,324
            
            
            1,233,324FHLB
                stock
            
            
            1,825,900
            
            
            1,825,900
            
            
            1,056,900
            
            
            1,056,900Financial
                liabilities:Deposits
            
            
            207,576,169
            
            
            207,667,170
            
            
            192,581,114
            
            
            191,771,000Short-term
                debt
            
            
            17,600,000
            
            
            17,600,000
            
            
            -
            
            
            -Long-term
                debt
            
            
            8,547,638
            
            
            8,215,627
            
            
            9,139,620
            
            
            8,969,000Junior
                subordinated deferrable interest debentures
            
            
            3,093,000
            
            
            3,093,000
            
            
            3,093,000
            
            
            3,093,000Accrued
                interest payable
            
            
            284,942
            
            
            284,942
            
            
            196,607
            
            
            196,607




80
 *Table
          of Contents*


**VALLEY
      COMMERCE BANCORP AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Continued)


**17.**
            **PARENT
                ONLY FINANCIAL STATEMENTS**




**CONDENSED
      BALANCE SHEET**


**December
      31, 2006 and 2005**




2006
            
            2005**ASSETS**Cash
                and due from banks
            
            $
            113,078
            
            $
            251,698Investment
                in bank subsidiary
            
            
            28,129,997
            
            
            24,505,188Other
                assets
            
            
            402,302
            
            
            353,656$
            28,645,377
            
            $
            25,110,542**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Other
                liabilities
            
            $
            104,278
            
            $
            108,285Junior
                subordinated debentures due to subsidiary grantor trust
            
            
            3,093,000
            
            
            3,093,000Total
                liabilities
            
            
            3,197,278
            
            
            3,201,285Shareholders'
                equity:Common
                stock
            
            
            20,683,720
            
            
            18,332,290Retained
                earnings
            
            
            5,040,381
            
            
            4,122,088Accumulated
                other comprehensive loss, net of taxes
            
            
            (276,002
            )
            
            (545,121
            )Total
                shareholders' equity
            
            
            25,448,099
            
            
            21,909,257$
            28,645,377
            
            $
            25,110,542




81
 *Table
          of Contents*


**17.**
            **PARENT
                ONLY FINANCIAL STATEMENTS**(Continued)





**STATEMENT
      OF INCOME**





**For
      the Years Ended December 31, 2006, 2005 and 2004**





2006
            
            2005
            
            2004Income:Dividends
                declared by bank subsidiary
            
            
            
            
            
            
            
            $
            460,000Earnings
                  from investment in Valley CommerceTrust I
            
            $
            7,917
            
            $
            6,279
            
            
            4,509Total
                income
            
            
            7,917
            
            
            6,279
            
            
            464,509Expenses:Interest
                on junior subordinated deferrable interest debentures
            
            
            263,310
            
            
            208,787
            
            
            149,974Other
                expenses
            
            
            390,647
            
            
            292,941
            
            
            160,451Total
                expenses
            
            
            653,957
            
            
            501,728
            
            
            310,425(Loss)
                income before equity in undistributed income of
                subsidiary
            
            
            (646,040
            )
            
            (495,449
            )
            
            154,084Equity
                in undistributed income of subsidiary
            
            
            3,335,818
            
            
            2,454,256
            
            
            1,327,163Income
                before income taxes
            
            
            2,689,778
            
            
            1,958,807
            
            
            1,481,247Income
                tax benefit
            
            
            266,000
            
            
            204,000
            
            
            148,000Net
                income
            
            $
            2,955,778
            
            $
            2,162,807
            
            $
            1,629,247




82
 *Table
          of Contents*


**17.**
            **PARENT
                ONLY FINANCIAL STATEMENTS**(Continued)





**STATEMENT
      OF CASH FLOWS**





**For
      the Years Ended December 31, 2006, 2005 and 2004**





2006
            
            2005
            
            2004Cash
                flows from operating activities:Net
                income
            
            $
            2,955,778
            
            $
            2,162,807
            
            $
            1,629,247Adjustments
                to reconcile net income to net cash provided by operating
                activities:Undistributed
                net income of subsidiary
            
            
            (3,335,818
            )
            
            (2,454,256
            )
            
            (1,327,163
            )Stock-based
                compensation expense
            
            
            18,847
            
            
            -
            
            
            -Tax
                benefits on stock-based compensation
            
            
            (125,828
            )
            
            -
            
            
            -Decrease
                in other assets
            
            
            77,182
            
            
            10,536
            
            
            (130,203
            )Decrease
                in other liabilities
            
            
            (4,007
            )
            
            (67,128
            )
            
            142,533Net
                cash (used in) provided by operating activities
            
            
            (413,846
            )
            
            (348,041
            )
            
            314,414Cash
                flows from investing activities:Investment
                in bank subsidiary
            
            
            -
            
            
            (7,500,000
            )
            
            -Cash
                flows from financing activities:Cash
                paid for fractional shares
            
            
            (5,004
            )
            
            -
            
            
            (5,726
            )Proceeds
                from the exercise of stock options
            
            
            154,402
            
            
            -Tax
                benefits from stock-based compensation
            
            
            125,828
            
            
            -Net
                proceeds from sale of common stock
            
            
            -
            
            
            3,880,321
            
            
            3,749,233Net
                cash provided by financing activities
            
            
            275,226
            
            
            3,880,321
            
            
            3,743,507(Decrease)
                increase in cash and cash equivalents
            
            
            (138,620
            )
            
            (3,967,720
            )
            
            4,057,921Cash
                and cash equivalents at beginning of year
            
            
            251,698
            
            
            4,219,418
            
            
            161,497Cash
                and cash equivalents at end of year
            
            $
            113,078
            
            $
            251,698
            
            $
            4,219,418




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**ITEM
      9 - CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND
      FINANCIAL DISCLOSURE**




There
      is
      no information required to be disclosed under this Item.




**ITEM
      9A - CONTROLS AND PROCEDURES**




**Disclosure
      controls and procedures**




The
      Company carried out an evaluation, under the supervision and with the
      participation of the Company’s management, including the Company’s Chief
      Executive Officer and Chief Financial Officer, of the effectiveness, as of
      December 31, 2006, of the design and operation of the Company’s disclosure
      controls and procedures pursuant to Rule 15d-15 of the Exchange Act. Based
      upon
      that evaluation, the Company’s principal executive and financial officers
      concluded that the Company’s disclosure controls and procedures were effective,
      as of December 31, 2006, in timely providing them with material information
      relating to the Company, as required to be disclosed by the Company in the
      reports that it files or submits under the Exchange Act, within the time periods
      specified in the Securities and Exchange Commission’s rules and
      forms.




**Changes
      in internal controls**




There
      was
      no change in the Company’s internal control over financial reporting identified
      in connection with the evaluation required by Rule 15d-15 that occurred during
      the year ended December 31, 2006 that has materially affected or is reasonably
      likely to materially affect, the Company’s internal control over financial
      reporting.




**ITEM
      9B - OTHER INFORMATION**




There
      is
      no information required to be disclosed under this Item.




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**PART
      III**




**ITEM
      10 - DIRECTORS, AND EXECUTIVE OFFICERS** **AND CORPORATE GOVERNANCE**




The
      information required by Items 10 can be found in Valley Commerce Bancorp’s
      Definitive Proxy Statement pursuant to Regulation 14A under the Securities
      Exchange Act of 1934, and is by this reference incorporated herein.




**ITEM
      11- EXECUTIVE COMPENSATION**




The
      information required by Items 11 can be found in Valley Commerce Bancorp’s
      Definitive Proxy Statement pursuant to Regulation 14A under the Securities
      Exchange Act of 1934, and is by this reference incorporated herein.




**ITEM12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS**




The
      information required by Items 12 can be found in Valley Commerce Bancorp’s
      Definitive Proxy Statement pursuant to Regulation 14A under the Securities
      Exchange Act of 1934, and is by this reference incorporated herein.




**ITEM13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**




The
      information required by Items 13 can be found in Valley Commerce Bancorp’s
      Definitive Proxy Statement pursuant to Regulation 14A under the Securities
      Exchange Act of 1934, and is by this reference incorporated herein.




**ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**




The
      information required by Items 14 can be found in Valley Commerce Bancorp’s
      Definitive Proxy Statement pursuant to Regulation 14A under the Securities
      Exchange Act of 1934, and is by this reference incorporated herein.




**ITEM
      15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES**




(a)
            (1)
                Consolidated Financial Statements




Our
      audited consolidated financial statements and the Reports of Independent
      Registered Public Accounting Firm are included under Item 8, “Financial
      Statements and Supplementary Data.”




(2)
      Financial Statement Schedules




These
      schedules have been omitted because they are not required, are not applicable
      or
      have been included in our consolidated financial statements.




(3)
      Exhibits.




The
      exhibits required to be filed are listed on the “Exhibit Index” attached hereto,
      which is incorporated herein by reference.




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          of Contents*




SIGNATURES




In
      accordance with Section 13 or 15(d) of the Exchange Act, the
      registrant has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.




VALLEY
                COMMERCE BANCORPBy:
            /s/
                Donald A. GillesDonald
                A. GillesPresident
                and Chief Executive OfficerBy:
            /s/
                Roy O. EstridgeRoy
                O. EstridgeExecutive
                Vice President and Chief Financial OfficerDate:
            March
                26, 2007




**POWER
      OF ATTORNEY**




KNOW
      ALL
      MEN BY THESE PRESENTS, that each person whose signature appears below
      constitutes and appoints Donald A. Gilles or Roy O. Estridge as his true and
      lawful attorneys-in-fact and agents, with full power of substitution and
      resubstitution, for him and in his name, place and stead, in any and all
      capacities, to sign any and all amendments to this Report on Form 10-K, and
      to file the same, with all exhibits thereto, and other documents in connection
      therewith, with the Securities and Exchange Commission, granting unto said
      attorneys-in-fact and agents, and each of them, full power and authority to
      do
      and perform each and every act and thing requisite and necessary to be done
      in
      connection therewith, as fully to all intents and purposes as he might or could
      do in person, hereby ratifying and confirming all that said attorneys-in-fact
      and agents, or any of them, or their or his substitute or substitutes, may
      lawfully do or cause to be done by virtue hereof.




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In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.




**Signature**
            
            **Title**
            
            **Date**/s/
                Donald A. Gilles
            
            Director
                and Chief Executive
            
            March
                26, 2007Donald
                A. Gilles
            
            Officer
                (Principal Executive Officer)/s/
                Roy O. Estridge
            
            Chief
                Financial Officer
            
            March
                26, 2007Roy
                O. Estridge
            
            (Principal
                Financial Officer and Principal Accounting Officer)/s/
                David B. Day
            
            Director
            
            March
                26, 2007David
                B. Day/s/
                Walter A. Dwelle
            
            Chairman
                and Director
            
            March
                26, 2007Walter
                A. Dwelle/s/
                Thomas A. Gaebe
            
            Director
            
            March
                26, 2007Thomas
                A. Gaebe/s/
                Philip R. Hammond, Jr.
            
            Director
            
            March
                26, 2007Philip
                R. Hammond, Jr./s/
                Russell F. Hurley
            
            Vice
                Chairman and Director
            
            March
                26, 2007Russell
                F. Hurley/s/
                Fred P. LoBue, Jr.
            
            Secretary
                and Director
            
            March
                26, 2007Fred
                P. LoBue, Jr./s/
                Kenneth H. Macklin
            
            Director
            
            March
                26, 2007Kenneth
                H. Macklin/s/
                Barry R. Smith
            
            Director
            
            March
                26, 2007Barry
                R. Smith




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**EXHIBIT
      INDEX**




**Exhibit**
            
            **Description
                of Document**3.1
            
            Articles
                of Incorporation of the Company, as amended (1)3.2
            
            Bylaws
                of the Company (1)4.3
            
            Specimen
                Stock Certificate (2)10.1
            
            Valley
                Commerce Bancorp Amended and Restated 1997 Stock Option Plan (1,3)10.2
            
            Lease
                of premises at 200 South Court Street, Visalia (1)10.3
            
            Executive
                Supplemental Compensation Agreement with Donald A. Gilles
                (1,3)10.4
            
            Executive
                Supplemental Compensation Agreement with Roy O. Estridge
                (1,3)10.5
            
            Executive
                Supplemental Compensation Agreement with Allan W. Stone
                (1,3)10.6
            
            Valley
                Commerce Bancorp Amended and Restated 1997 Stock Option Plan (1,3)10.7
            
            Indenture
                between Valley Commerce Bancorp and Wells Fargo Bank National Association
                as Trustee, Junior Subordinated Debt Securities Due April 7, 2033
                (1)10.8
            
            Junior
                Subordinated Debt Security Due 2003 of Valley Commerce Bancorp
                (1)10.9
            
            Guaranty
                Agreement of Valley Commerce Bancorp in favor of Wells Fargo Bank
                National
                Association as Trustee (1)21
            
            Subsidiaries
                of the Company (1)24
            
            Powers
                of Attorney (included on signature pages)31
            
            Rule
                13a-14(a)/15d-14(a) Certifications32
            
            Section
                1350 Certifications


_______________________________________


(1)
            Incorporated
                by reference to the same-numbered exhibit to the Company’s Registration
                Statement on Form SB-2, filed September 9,
                2004.


(2)
            Incorporated
                by reference to the same-numbered exhibit to the Company’s Registration
                Statement on Form SB-2/A, filed October 27,
                2004.


(3)
            Management
                contract or compensatory plan or
                arrangement.






88