UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
  FORM
10-Q
  (Mark
One)
 
 ý
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,
  2008
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE TRANSITION PERIOD
FROM TO
  COMMISSION FILE
NUMBER:000-51949
  VALLEY
COMMERCE BANCORP
 (Exact
name of small business issuer as specified 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)(559)
      622-9000
                (Issuer’s
      telephone number)
  Indicated
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes 
ý  
No  
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      Accelerated Filer
               ̈
              Accelerated
      Filer
               ̈Non-Accelerated
      Filer
               ̈
              Smaller
      Reporting Company
              ý
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes  o   No  ý
 
 The
number of shares outstanding of the issuer’s Common Stock was 2,343,748 as of
May 12, 2008.
  
 
  INDEX
  PART I - FINANCIAL INFORMATION
              3ITEM 1 - FINANCIAL STATEMENTS
              4ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS  OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS
              14ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK
              23ITEM 4 – CONTROLS AND PROCEDURES
              24PART II - OTHER INFORMATION
              25ITEM 1 LEGAL PROCEEDINGS
              25ITEM 1A RISK FACTORS
              25ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
              25ITEM 3 DEFAULTS UPON SENIOR SECURITIES
              25ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
              25ITEM 5 OTHER INFORMATION
              25ITEM 6 EXHIBITS
              26SIGNATURES
              27EXHIBIT INDEX
              28
 
 2
 Index
  PART
I
   Forward-Looking
Information
  Certain
matters discussed in this Quarterly Report on Form 10-Q including, but not
limited to, those described in Item 2 - 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; (12)
changes in laws and regulations; (13) recently issued accounting pronouncements;
(14) government policies, regulations, and their enforcement
including  Bank Secrecy Act-related matters, taxing statutes and
regulations; (15) restrictions on dividends that our subsidiaries are allowed to
pay to us; (16) the ability to satisfy requirements related to the
Sarbanes-Oxley Act and other regulation on internal control; and (17)
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 Quarterly Report on Form 10-Q 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
Quarterly Report on Form 10-Q.  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.
  3
 Index
  PART
1 – FINANCIAL INFORMATION
 ITEM
1 – FINANCIAL STATEMENTS
 
 VALLEY
COMMERCE BANCORP
 CONDENSED
CONSOLIDATED BALANCE SHEET
 (UNAUDITED)
  March
      31,
              
              
              December
      31,2008
              
              
              2007AssetsCash
      and due from banks
              
              $
              10,319,745
              
              
              $
              9,297,346Federal
      funds sold
              
              
              5,000,000
              
              
              
              -Total
      cash and cash equivalents
              
              
              15,319,745
              
              
              
              9,297,346Available-for-sale
      investment securities, at fair value
              
              
              49,963,000
              
              
              
              56,615,000Loans,
      less allowance for loan losses of $2,146,035 at March 31, 2008 and
      $1,757,591 at December 31, 2007 (Note 3)
              
              
              210,672,859
              
              
              
              199,514,271Bank
      premises and equipment, net
              
              
              3,176,310
              
              
              
              3,037,063Cash
      surrender value of bank-owned life insurance
              
              
              6,246,864
              
              
              
              6,184,531Accrued
      interest receivable and other assets
              
              
              4,447,787
              
              
              
              4,432,665Total
      assets
              
              $
              289,826,565
              
              
              $
              279,080,876Liabilities and
      Shareholders’ EquityDeposits:Non-interest
      bearing
              
              $
              64,347,897
              
              
              $
              66,992,568Interest
      bearing
              
              
              164,818,506
              
              
              
              148,393,500Total
      deposits
              
              
              229,166,403
              
              
              
              215,386,068Accrued
      interest payable and other liabilities
              
              
              2,312,105
              
              
              
              1,778,548Short-term
      debt
              
              
              19,163,000
              
              
              
              21,804,000Long-term
      debt
              
              
              7,194,091
              
              
              
              8,146,049Junior
      subordinated deferrable interest debentures
              
              
              3,093,000
              
              
              
              3,093,000Total
      liabilities
              
              
              260,928,599
              
              
              
              250,207,665Commitments
      and contingencies (Note 4)Shareholders’
      equity (Note 5 and 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
      – 2,343,748 shares at March 31, 2008 and 2,396,435 shares at December 31,
      2007
              
              
              23,015,207
              
              
              
              23,511,066Retained
      earnings
              
              
              5,453,440
              
              
              
              5,423,324Accumulated
      other comprehensive income (loss), net of taxes (Note
    7)
              
              
              429,319
              
              
              
              (61,179
              )Total
      shareholders’ equity
              
              
              28,897,966
              
              
              
              28,873,211Total
      liabilities and shareholders’ equity
              
              $
              289,826,565
              
              
              $
              279,080,876
 
 
 See notes
to unaudited condensed consolidated financial statements.
  4
 Index
  VALLEY COMMERCE
BANCORP
 CONDENSED
CONSOLIDATED STATEMENT OF INCOME
 (UNAUDITED)
 
  For
      the Three MonthsEnded March 31,2008
              
              
              2007Interest
      Income:Interest
      and fees on loans
              
              $
              3,847,216
              
              
              $
              3,840,724Interest
      on investment securities:Taxable
              
              
              405,665
              
              
              
              424,843Exempt
      from Federal income taxes
              
              
              195,552
              
              
              
              190,535Interest
      on Federal funds sold
              
              
              593
              
              
              
              334Total
      interest income
              
              
              4,449,026
              
              
              
              4,456,436Interest
      Expense:Interest
      on deposits
              
              
              1,206,376
              
              
              
              1,427,905Interest
      on short-term borrowings
              
              
              137,127
              
              
              
              177,377Interest
      on long-term borrowings
              
              
              86,790
              
              
              
              91,421Interest
      on junior subordinated deferrable interest debentures
              
              
              59,681
              
              
              
              66,972Total
      interest expense
              
              
              1,489,974
              
              
              
              1,763,675Net
      interest income before provision for loan losses
              
              
              2,959,052
              
              
              
              2,692,761Provision
      for Loan Losses
              
              
              400,000
              
              
              
              -Net
      interest income after provision for loan losses
              
              
              2,559,052
              
              
              
              2,692,761Non-Interest
      Income:Service
      charges
              
              
              170,450
              
              
              
              138,527Mortgage
      loan brokerage fees
              
              
              8,080
              
              
              
              23,770Earnings
      on cash surrender value of life insurance policies
              
              
              65,754
              
              
              
              63,778Other
              
              
              46,794
              
              
              
              64,973Total
      non-interest income
              
              
              291,078
              
              
              
              291,048Non-Interest
      Expense:Salaries
      and employee benefits
              
              
              1,283,269
              
              
              
              1,250,182Occupancy
      and equipment
              
              
              285,992
              
              
              
              245,967Other
              
              
              706,186
              
              
              
              615,648Total
      non-interest expense
              
              
              2,275,447
              
              
              
              2,111,797Income
      before provision for income taxes
              
              
              574,683
              
              
              
              872,012Provision
      for Income Taxes
              
              
              157,000
              
              
              
              279,000Net
      income
              
              $
              417,683
              
              
              $
              593,012Basic
      earnings per share (Note 6)
              
              $
              0.18
              
              
              $
              0.25Diluted
      earnings per share (Note 6)
              
              $
              0.17
              
              
              $
              0.24
 
 
 See notes
to unaudited condensed consolidated financial statements.
  5
 Index
  VALLEY
COMMERCE BANCORP
 CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
 (UNAUDITED)
 
 For
      the Three MonthsEnded
      March 31,2008
              
              
              2007Cash
      Flows from Operating Activities:Net
      income
              
              $
              417,683
              
              
              $
              593,012Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
              
              
              400,000
              
              
              
              -Decrease
      in deferred loan origination fees, net
              
              
              (2,196
              )
              
              
              (11,528
              )Depreciation
              
              
              103,803
              
              
              
              72,506Amortization
      of intangibles
              
              
              7,718
              
              
              
              15,635Loss
      on disposition of premises and equipment
              
              
              -
              
              
              
              1,255Dividends
      on Federal Home Loan Bank stock
              
              
              (22,200
              )
              
              
              (26,600
              )(Accretion
      of discounts) amortization of  premiums on investment
      securities, net
              
              
              (20,338
              )
              
              
              169Increase
      in cash surrender value of bank owned life insurance
              
              
              (62,333
              )
              
              
              (61,288
              )Stock-based
      compensation expense
              
              
              18,633
              
              
              
              7,670Increase
      in accrued interest receivable and other assets
              
              
              (30,597
              )
              
              
              (345,813
              )Increase
      in accrued interest payable and other liabilities
              
              
              270,145
              
              
              
              187,846Net
      cash provided by operating activities
              
              
              1,080,318
              
              
              
              432,864Cash
      Flows from Investing Activities:Proceeds
      from matured and called available-for-sale investment
      securities
              
              
              6,500,000
              
              
              
              1,615,000Proceeds
      from principal repayments from available-for-sale mortgage-backed
      securities
              
              
              854,090
              
              
              
              536,298Redemption
      of Federal Home Loan Bank Stock, net
              
              
              -
              
              
              
              369,900Net
      increase in loans
              
              
              (11,556,392
              )
              
              
              (6,189,554
              )Purchase
      of premises and equipment
              
              
              (243,050
              )
              
              
              (188,701
              )Net
      cash used in investing activities
              
              
              (4,445,352
              )
              
              
              (3,857,057
              )
 
 Continued
on next page.
  6
 Index
  VALLEY
COMMERCE BANCORP
 CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
 (UNAUDITED)
 (Continued)
 
 For
      the Three MonthsEnded
      March 31,2008
              
              
              2007Cash
      Flows from Financing Activities:Net
      increase (decrease) in noninterest-bearing and interest-bearing
      deposits
              
              $
              5,455,831
              
              
              $
              (1,916,451
              )Net
      increase in time deposits
              
              
              8,324,503
              
              
              
              4,070,279Proceeds
      from exercised stock options
              
              
              4,175
              
              
              
              13,000Cash
      paid to repurchase common stock
              
              
              (804,118
              )
              
              
              -Net
      decrease in short-term borrowings
              
              
              (2,641,000
              )
              
              
              (3,879,000
              )Payments
      on long-term advances
              
              
              (951,958
              )
              
              
              (249,478
              )Net
      cash provided by (used in) financing activities
              
              
              9,387,433
              
              
              
              (1,961,650
              )Increase
      (decrease) in cash and cash equivalents
              
              
              6,022,399
              
              
              
              (5,385,843
              )Cash
      and Cash Equivalents at Beginning of Year
              
              
              9,297,346
              
              
              
              13,265,547Cash
      and Cash Equivalents at End of Period
              
              $
              15,319,745
              
              
              $
              7,879,704Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the period for:Interest
      expense
              
              $
              1,444,561
              
              
              $
              1,662,351Income
      taxes
              
              $
              -
              
              
              $
              400,000Non-Cash
      Investing Activities:Net
      change in unrealized gain (loss) on available-for-sale
      securities
              
              $
              490,498
              
              
              $
              100,467Non-Cash
      Financing Activities:Cumulative
      effect of adopting EITF 06-04
              
              $
              102,115See
      notes to unaudited condensed consolidated financial
      statements.
  7
 Index
  VALLEY
COMMERCE BANCORP
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 1.
              GENERAL
 
 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.
              BASIS
      OF PRESENTATION
 
 The
interim unaudited condensed consolidated financial statements of Valley Commerce
Bancorp and subsidiary have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”). These interim condensed
consolidated financial statements include the accounts of Valley Commerce
Bancorp and its wholly owned subsidiary Valley Business Bank (the “Bank”)
(collectively, the “Company”). 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.  All significant intercompany accounts and transactions have
been eliminated in consolidation.  All adjustments (consisting only of
normal recurring adjustments) which, in the opinion of Management, are necessary
for a fair presentation of Valley Commerce Bancorp’s (the “Company”)
consolidated financial position at March 31, 2008 and December 31, 2007, the
results of its operations for the three-month periods ended March 31, 2008 and
2007, and its cash flows for the three-month periods ended March 31, 2008 and
2007 have been included therein.  Certain information and footnote
disclosures normally included in the annual consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted, however the Company believes that
the disclosures made are adequate to make the information not misleading. 
These interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company’s 2007 Annual Report on Form 10-K.  The results of operations and
cash flows for the interim periods presented are not necessarily indicative of
the results for a full year.
  The
preparation of these condensed consolidated 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 periods reported. Actual results could differ from those
estimates.
 
 Management
has determined that because all of the commercial 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 single customer accounts for more than
10% of the revenues of the Company or the Bank.
  8
 Index
  3.
              LOANS
 
 Outstanding
loans are summarized below, in thousands:
 March
      31,
                2008
              
              
              December
      31,
                2007Commercial
              
              $
              48,048,053
              
              
              $
              41,823,876Real
      estate – mortgage
              
              
              112,346,233
              
              
              
              106,872,707Real
      estate – construction
              
              
              45,219,282
              
              
              
              44,896,223Agricultural
              
              
              5,130,983
              
              
              
              4,987,839Consumer
              
              
              2,375,927
              
              
              
              2,994,997213,120,478
              
              
              
              201,575,642Deferred
      loan fees,  net
              
              
              (301,584
              )
              
              
              (303,780
              )Allowance
      for loan losses
              
              
              (2,146,035
              )
              
              
              (1,757,591
              )$
              210,672,859
              
              
              $
              199,514,271
 
 4.
              COMMITMENTS
      AND CONTINGENCIES
 
 The
Company is party to claims and legal proceedings arising in the ordinary course
of business.  In the opinion of the Company’s management, the amount
of ultimate liability with respect to such proceedings will not have a material
adverse effect on the financial condition or result of operations of the Company
taken as a whole.
 
 In the
normal course of business, the Company has various outstanding commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of $53.7 million and $53.5 million and letters of credit of
$0.3 million and $0.2 million at March 31, 2008 and December 31, 2007,
respectively.
 
 At March
31, 2008, consumer loan commitments, which are generally unsecured, represent
approximately 4% of total commitments.  Agricultural loan commitments
represent approximately 3% of total commitments and are generally secured by
crops and/or real estate.  Commercial loan commitments represent
approximately 76% of total commitments and are generally secured by various
assets of the borrower.  Real estate loan commitments represent the
remaining 17% of total commitments and are generally secured by property with a
loan-to-value ratio not to exceed 80%.  In addition, the majority of
the Bank’s commitments have variable interest rates.  Total
commitments do not necessarily represent future cash
requirements.  Each loan commitment and the amount and type of
collateral obtained, if any, are evaluated on an individual
basis.  Collateral held varies, but may include real property, bank
deposits, debt or equity securities or business assets.
 
 Stand-by
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.
 
 5.
              STOCK-BASED
      COMPENSATION
 
 On May
15, 2007, the Company’s shareholders approved the Valley Commerce Bancorp 2007
Equity Incentive Plan (“Incentive Plan”).  The Incentive Plan provides
for awards of stock options, restricted stock awards, qualified
performance-based awards and stock grants.  Under the plan, 122,007
shares of common stock are reserved for issuance to employees and directors
under incentive and nonstatutory agreements.  The purpose of the
Incentive Plan is to promote the long-term success of the Company and the
creation of shareholder value.  The Board of Directors believes that
the availability of stock options and other forms of stock awards will be a key
factor in the ability of the Company to attract and retain qualified
individuals.
 
 The prior
plan, the Valley Commerce Bancorp Amended and Restated 1997 Stock Option Plan
(“Prior Plan”) was established in 1997 and expired on February 17,
2007.
  9
 Index
  During
the three-month periods ended March 31, 2008 and March 31, 2007, no options were
granted by the Company to its officers or directors. Compensation costs related
to stock options recognized in operating results under SFAS No. 123R was $18,633
and $7,670 in the three months ended March 31, 2007 and 2008,
respectively.  Compensation expense is recognized over the vesting
period on a straight line accounting basis.
 
 SFAS
123(R) requires the cash flows resulting from the tax benefits resulting from
tax deductions in excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as a cash flow from financing in the
statement of cash flows.  The excess tax benefits for the three months
ended March 31, 2008 and 2007 were $2,113 and $2,153, respectively.
 
 The
following table summarizes information about stock option activity for the three
months ended March 31, 2008:
  For the Three Months Ended March 31,
      2008Shares
                
                
                Weighted Average Exercise
    Price
                
                Weighted Average Remaining Contractual
      Term
                
                Aggregate Intrinsic ValueIncentive:Options
      outstanding at January 1, 2008
                
                
                71,874
                
                
                $
                11.58Options
      granted
                
                
                -
                
                
                
                -Options
      exercised
                
                
                (345
                )
                
                
                11.52Options
      cancelled
                
                
                (2,589
                )
                
                
                14.40Options
      outstanding at March 31, 2008
                
                
                68,940
                
                
                
                11.47
                
                7.38
      years
                
                $
                790,742Options
      vested or expected to vest atMarch 31, 2008
                
                
                31,516
                
                
                
                7.01
                
                5.33
      years
                
                
                211,053Options
      exercisable at March 31, 2008
                
                
                29,662
                
                
                
                7.79
                
                4.32
      years
                
                $
                258,742Nonstatutory:Options
      outstanding at January 1, 2008
                
                
                103,985
                
                
                $
                9.10Options
      granted
                
                
                -
                
                
                
                -Options
      exercised
                
                
                -
                
                
                
                -Options
      cancelled
                
                
                -
                
                
                
                -Options
      outstanding at March 31, 2008
                
                
                103,985
                
                
                
                9.10
                
                4.00
      years
                
                $
                627,170
                (1)Options
      vested or expected to vest atMarch 31, 2008
                
                
                103,431
                
                
                
                7.95
                
                3.93
      years
                
                
                188,532Options
      exercisable at March 31, 2008
                
                
                97,685
                
                
                
                8.49
                
                3.93
      years
                
                $
                627,170
                (1)
 (1)  10,500
options with a weighted average exercise price of $18.58 are excluded from
intrinsic value from table above because the exercise price is greater than the
stock price at March 31, 2008.
 
 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 March 31, 2008.  There
were 345 and 1,823 options exercised during the quarters ended March 31, 2008
and 2007, respectively.  The total intrinsic value, which is the
amount by which the stock price exceeded the exercise price of the options on
the date of exercise, of options exercised during the quarter ended March 31,
2008 and 2007 was $1,100 and $24,000, respectively.  During the three months ended March 31,
2008, the amount of cash received from the exercise of stock options was
$3,975.The total fair value of shares vested during the
quarters ended March 31, 2008 and 2007 was $90,495 and $119,244,
respectively.
 
 Management
estimates expected forfeitures and recognizes compensation costs only for those
equity awards expected to vest.  As of March 31, 2008, there was
$220,000 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the Plan.  The
cost is expected to be realized over a weighted average period of 4.75 years and
will be adjusted for subsequent changes in estimated forfeitures.
  10
 Index
  6.
              EARNINGS
      PER SHARE
  Basic
earnings per share are computed by dividing net income by the weighted average
common shares outstanding for the period.  Diluted earnings per share
reflect the potential dilution that could occur if outstanding stock options
were exercised.  Diluted earnings per share are computed by dividing
net income by the weighted average common shares outstanding for the period plus
the dilutive effect of options.  Earnings per share computations have
been retroactively adjusted to reflect the stock dividend paid to shareholders
of record on June 6, 2007.
 
 For
      the Three MonthsEnded
      March 31,2008
              
              
              2007Earnings
      Per Share:Basic
      earnings per share
              
              $
              0.18
              
              
              $
              0.25Diluted
      earnings per share
              
              $
              0.17
              
              
              $
              0.24Weighted
      Average Number of Shares Outstanding:Basic
      shares
              
              
              2,375,027
              
              
              
              2,327,107Diluted
      shares
              
              
              2,415,276
              
              
              
              2,437,895
 
 There
were 10,500 options excluded from the computation of diluted earnings per share
for the 2008 period as they were identified as antidilutive.  There
were no options excluded for the 2007 period.
  7.
              COMPREHENSIVE
      INCOME
 
 Comprehensive
income includes net income and other comprehensive income.  The
Company's only source of other comprehensive income is derived from unrealized
gains and losses on investment securities available for sale.  The
Company's comprehensive income was as follows:
 
 For
      the Three Months EndedMarch
      31,
              
              
              March
      31,2008
              
              
              2007Net
      income
              
              $
              417,683
              
              
              $
              593,012Other
      comprehensive income:Unrealized
      holding gains on available-for-sale investment securities, net of
      tax
              
              
              490,498
              
              
              
              55,009Total comprehensive
      income
              
              $
              908,181
              
              
              $
              648,021
 
 8.
              INCOME
      TAXES
 
 The
Company files its income taxes on a consolidated basis with its
subsidiaries.  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 amounts 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 condensed consolidated balance sheet, net deferred tax assets are included
in accrued interest receivable and other assets.
 
 When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained.  The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority.
  11
 Index
  The
portion of the benefits associated with tax positions taken that exceeds the
amount measured as described above is reflected as a liability for unrecognized
tax benefits in the accompanying condensed consolidated balance sheet along with
any associated interest and penalties that would be payable to the taxing
authorities upon examination. The Company recognizes accrued interest and
penalties, if any, related to unrecognized tax benefits as a component of tax
expense in the condensed consolidated statements of income. There have been no
significant changes to unrecognized tax benefits or accrued interest and
penalties for the quarter ended March 31, 2008.
 
 10.
              STOCK
      REPURCHASE
  In
October 2007, the Board of Directors approved a plan to incrementally repurchase
up to an aggregate of $3,000,000 of the Company’s common stock.  The
program commenced in November of 2007 and will continue for a period of twelve
months thereafter, subject to earlier termination at the Company’s
discretion.  The number, price and timing of the repurchase shall be
at the Company’s sole discretion and the plan may be re-evaluated depending on
market conditions, liquidity needs or other factors.  The Board, based
on such re-evaluations, may suspend, terminate, modify or cancel the plan at any
time without notice.  During the quarter ended March 31, 2008, the
Company repurchased 53,032 shares for a total cost of $804,118 or an average
price of $15.16 per share.  Since the plan adoption the Company has
repurchased 80,472 shares for a total cost of $1,185,927 at an average price of
$14.73 per share.
  11.
              FAIR
      VALUE MEASUREMENT
 
 On
January 1, 2008, the Company adopted Financial Accounting Standards Board (FASB)
Statement No. 157 (SFAS 157), Fair Value
Measurements.  SFAS 157 defines fair value, establishes a
framework for measuring fair value under GAAP and expands disclosures about fair
value measurements.  There was no cumulative effect adjustment to
beginning retained earnings recorded upon adoption and no impact on the
financial statements in the first quarter of 2008.
 
 The
following table presents information about the Company’s assets and liabilities
measured at fair value on a recurring basis as of March 31, 2008, and
indicates the fair value hierarchy of the valuation techniques utilized by the
Company to determine such fair value. In general, fair values determined by
Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company has the ability to access. Fair
values determined by Level 2 inputs utilize inputs other than quoted prices
included in Level 1 that are observable for the asset or liability, either
directly or indirectly.  Level 2 inputs include quoted prices for
similar assets and liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability, such as interest rates
and yield curves that are observable at commonly quoted intervals. Level 3
inputs are unobservable inputs for the asset or liability, and includes
situations where there is little, if any, market activity for the asset or
liability. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, the level in the
fair value hierarchy within which the fair value measurement in its entirety
falls has been determined based on the lowest level input that is significant to
the fair value measurement in its entirety. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment, and considers factors specific to the asset or
liability.
 
 Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
 
 Fair
      Value Measurementsat March 31, 2008,
      Using(in
      thousands)
              
              Fair Value
                March 31, 2008
              
              Quoted
      Prices in
                Active
      Markets for
                Identical
      Assets
                (Level
      1)
              
              Other
                Observable
                Inputs
                (Level
      2)
              
              Significant
                Unobservable
                Inputs
                (Level
      3)Assets:Available-for-sale
      investment securities
              
              $
              49,963
              
              
              
              —
              
              
              $
              49,963
              
              
              
              —
 
 The fair
value of securities available for sale equals quoted market price, if
available.  If quoted market prices are not available, fair value is
determined using quoted market prices for similar securities.  Changes
in fair market value are recorded in other comprehensive income.
 
 12
 Index
  Financial
assets and liabilities measured at fair value on a non-recurring basis are
summarized below:
 
 Fair
      Value Measurements at March 31, 2008, Using(in
      thousands)
                
                Fair
      Value
                  March 31, 2008
                
                
                Quoted
      Prices in
                  Active
      Markets for
                  Identical
      Assets
                  (Level
      1)
                
                
                Other
                  Observable
                  Inputs
                  (Level
      2)
                
                
                Significant
                  Unobservable
                  Inputs
                  (Level
      3)Assets:Impaired
      loans
                
                $
                339,000
                
                
                
                —
                
                
                $
                339,000
                
                
                
                —
 
 Impaired
loans allocated to the Allowance for Loan Losses are measured at fair value on a
nonrecurring basis. Any fair value adjustments are recorded in the period
incurred as provision for credit losses expense on the Consolidated Statements
of Income.  Impaired loans, which are measured for impairment using
the fair value of the collateral for collateral dependent loans, had outstanding
principal balances of $402,000 at March 31, 2008, with a valuation allowance of
$63,000 at March 31, 2008. Declines in the fair value of collateral on impaired
loans and the therefore the increase in specific allocations of the allowance
for loan losses, were $63,000 during the three months ended March 31,
2008.
  13
 Index
  ITEM
2 – MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
  The
following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and related notes appearing in Item
1, Financial Statements ,in this Quarterly Report on Form 10-Q and the
consolidated financial statements and notes thereto included in Valley Commerce
Bancorp’s Annual Report filed on Form 10-K for the year ended December 31,
2007.
 
 Overview
  Valley
Commerce Bancorp (the Company) is the holding company for Valley Business Bank
(the Bank), a California state chartered bank.  The Company’s principal
business is to provide financial services through its banking subsidiary in its
primary market areas of Tulare and Fresno Counties in California.  The
Company derives its income primarily from interest and fees 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 interest paid on
deposits and borrowings and general operating expenses, consisting primarily of
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.
  The
Company earned net income of $418,000 or $0.17 per diluted share, for the
quarter ended March 31, 2008, compared to $593,000, or $0.24 per diluted share,
for the quarter ended March 31, 2007.  The annualized quarterly return
on average assets for the 2008 and 2007 periods was 0.60% and 0.93%,
respectively.  The annualized quarterly return on average
shareholders’ equity for the 2008 and 2007 periods was 5.76% and 9.35%,
respectively.  The decrease in earnings was primarily due to $400,000
added to the Company’s loan loss reserves compared to no addition in the first
quarter of 2007.
  At March
31, 2008, the Company’s total assets were $289.8 million, representing an
increase of $27.1 million or 10% compared to March 31, 2007.  Total
loans, net of the allowance for loan losses, were $210.7 million at March 31,
2008, representing an increase of $22.1 million or 12% compared to March 31,
2007.  Total deposits were $229.2 million at March 31, 2008,
representing an increase of $19.4 million or 9% compared to March 31,
2007.  Comparing March 31, 2008 and December 31, 2007 balances, total
assets increased by $10.7 million or 4%, total net loans increased by $11.2
million or 6%, and total deposits increased by $13.8 million or 6%.
  At March
31, 2008, the Company’s leverage ratio was 11.2% while its tier 1 risk-based
capital ratio and total risk-based capital ratio were 13.1% and 14.0%,
respectively.  At December 31, 2007, the Company’s leverage ratio was
11.5% while its tier 1 risk-based capital ratio and total risk-based capital
ratio were 13.8% and 14.6%, respectively.  The leverage, tier 1
risk-based capital and total risk-based capital ratios at March 31, 2007 were
11.4%, 13.5% and 14.3%, respectively.  The Company’s capital ratios
declined between March 31, 2008 and March 31, 2007 as a result of stock
repurchases made under a stock repurchase plan implemented in November 2007 and
asset growth during that period.  These factors were offset by capital
additions from earnings and exercise of stock options.
  Critical
Accounting Policies
  There
have been no changes to the Company’s critical accounting policies from those
discussed in the Company’s 2007 Annual Report to Shareholders’ on Form
10-K.
  14
 Index
  Results
of Operations for the Three Months Ended March 31, 2008 and 2007
  Net
Interest Income
  The
following table presents the Company’s average balance sheet, including weighted
average yields and rates on a taxable-equivalent basis, for the three-month
periods indicated:
 
 Average balances and weighted average yields and
      costsThree
      months ended March 31,2008
              
              
              2007Interest
              
              
              Average
              
              
              
              
              
              Interest
              
              
              AverageAverage
              
              
              income/
              
              
              Yield/
              
              
              Average
              
              
              income/
              
              
              Yield/(dollars
      in thousands)
              
              Balance
              
              
              Expense
              
              
              Cost
              
              
              Balance
              
              
              Expense
              
              
              costASSETSFederal
      funds sold
              
              $
              94
              
              
              $
              1
              
              
              
              2.56
              %
              
              $
              26
              
              
              $
              -
              
              
              
              0.00
              %Available-for-sale
      investment securities:Taxable
              
              
              34,029
              
              
              
              405
              
              
              
              4.83
              %
              
              
              35,981
              
              
              
              425
              
              
              
              4.79
              %Exempt
      from Federal income taxes (1)
              
              
              19,306
              
              
              
              196
              
              
              
              6.24
              %
              
              
              18,930
              
              
              
              191
              
              
              
              6.20
              %Total
      securities (1)
              
              
              53,335
              
              
              
              601
              
              
              
              5.34
              %
              
              
              54,911
              
              
              
              616
              
              
              
              5.28
              %Loans
      (2) (3)
              
              
              207,276
              
              
              
              3,847
              
              
              
              7.53
              %
              
              
              184,485
              
              
              
              3,841
              
              
              
              8.46
              %Total
      interest-earning assets (1)
              
              
              260,705
              
              
              
              4,449
              
              
              
              7.02
              %
              
              
              239,422
              
              
              
              4,457
              
              
              
              7.72
              %Noninterest-earning
      assets, net of allowance for loan losses
              
              
              19,661
              
              
              
              
              
              
              
              
              
              
              
              17,955Total
      assets
              
              $
              280,366
              
              
              
              
              
              
              
              
              
              
              $
              257,377LIABILITIES
      AND SHAREHOLDERS’ EQUITYDeposits:Other
      interest-bearing
              
              $
              94,035
              
              
              $
              521
              
              
              
              2.25
              %
              
              $
              74,711
              
              
              $
              552
              
              
              
              3.00
              %Time
      deposits less than $100,000
              
              
              18,027
              
              
              
              179
              
              
              
              4.03
              %
              
              
              21,554
              
              
              
              254
              
              
              
              4.78
              %Time
      deposits $100,000 or more
              
              
              44,788
              
              
              
              506
              
              
              
              4.58
              %
              
              
              49,851
              
              
              
              622
              
              
              
              5.06
              %Total
      interest-bearing deposits
              
              
              156,850
              
              
              
              1,206
              
              
              
              3.12
              %
              
              
              146,116
              
              
              
              1,428
              
              
              
              3.96
              %Short-term
      debt
              
              
              18,282
              
              
              
              137
              
              
              
              3.04
              %
              
              
              13,430
              
              
              
              177
              
              
              
              5.34
              %Long-term
      debt
              
              
              7,859
              
              
              
              87
              
              
              
              4.49
              %
              
              
              8,506
              
              
              
              92
              
              
              
              4.39
              %Junior
      subordinated deferrable interest debentures
              
              
              3,093
              
              
              
              60
              
              
              
              7.87
              %
              
              
              3,093
              
              
              
              67
              
              
              
              8.79
              %Total
      interest-bearing liabilities
              
              
              186,084
              
              
              
              1,490
              
              
              
              3.25
              %
              
              
              171,145
              
              
              
              1,764
              
              
              
              4.18
              %Noninterest-bearing
      deposits
              
              
              63,057
              
              
              
              
              
              
              
              
              
              
              
              58,900Other
      liabilities
              
              
              2,050
              
              
              
              
              
              
              
              
              
              
              
              1,614Total
      liabilities
              
              
              251,191
              
              
              
              
              
              
              
              
              
              
              
              231,659Shareholders’
      equity
              
              
              29,175
              
              
              
              
              
              
              
              
              
              
              
              25,718Total
      liabilities and shareholders’ equity
              
              $
              280,366
              
              
              
              
              
              
              
              
              
              
              $
              257,237Net
      interest income and margin (1)
              
              
              
              
              
              $
              2,959
              
              
              
              4.76
              %
              
              
              
              
              
              $
              2,693
              
              
              
              4.73
              %
  (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 periods
      presented.
 (3)
                Interest
      income on loans includes amortized loan fees, net of costs, of $142 and
      $69 for 2008 and 2007,
respectively.
  15
 Index
  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 three-month
periods ended March 31, 2008 and 2007.
  
 Changes in net interest income due to changes in
      volumes and rates2008
      period vs 2007 perioddue
      to change in:Average
              
              
              AverageVolume
              
              
              Rate
      (1)
              
              
              Total(In
      thousands)Increase
      (decrease) in interest income:Federal
      funds sold
              
              $
              -
              
              
              $
              1
              
              
              $
              1Investment
      securitiesTaxable
              
              
              (23
              )
              
              
              3
              
              
              
              (20
              )Exempt
      from Federal income taxes
              
              
              6
              
              
              
              (1
              )
              
              
              5Total
      Securities
              
              
              (17
              )
              
              
              2
              
              
              
              (15
              )Loans
              
              
              478
              
              
              
              (472
              )
              
              
              6Total
      interest income
              
              $
              461
              
              
              $
              (469
              )
              
              $
              (8
              )(Decrease)
      increase in interest expense:Other
      interest bearing deposits
              
              
              144
              
              
              
              (175
              )
              
              
              (31
              )Time
      deposits less than $100,000
              
              
              (42
              )
              
              
              (33
              )
              
              
              (75
              )Time
      deposits $100,000 or more
              
              
              (64
              )
              
              
              (52
              )
              
              
              (116
              )Total
      interest-bearing deposits
              
              
              38
              
              
              
              (260
              )
              
              
              (222
              )Short-term
      debt
              
              
              64
              
              
              
              (104
              )
              
              
              (40
              )Long-term
      debt
              
              
              (7
              )
              
              
              2
              
              
              
              (5
              )Junior
      subordinated deferrable interest debentures
              
              
              -
              
              
              
              (7
              )
              
              
              (7
              )Total
      interest expense
              
              
              95
              
              
              
              (369
              )
              
              
              (274
              )(Increase)
      decrease in net interest income
              
              $
              366
              
              
              $
              (100
              )
              
              $
              266
  (1)
                Factors
      contributing to both changes in rate and volume have been attributed to
      changes in rates.
  Total
interest income for the three-month periods ended March 31, 2008 and 2007 was
$4.5 million in each period.  The weighted average taxable-equivalent
yield on total interest-earning assets was 7.02% in the 2008 period compared to
7.72% in the 2007 period, a reduction of 70 basis points.  The
decrease was due to declining yields on loans.  Despite a $22.8
million or 12% increase in average loans, the Company’s interest income from
loans increased by only $6,000 due to the average yield decreasing from 8.46% in
the 2007 period to 7.53% in the 2008 period, a change of 93 basis
points.   This primarily reflected the impact of Fed funds rate
decreases totaling 300 basis points occurring in the period from September 2007
to March 2008 and its impact on the variable priced portion of the Company’s
loan portfolio.  In addition, there was a slight decrease in
investment securities income as average available-for-sale securities decreased
by $1.6 million or 3%, due primarily to called and matured
securities.
  Total
interest expense for the three-month period ended March 31, 2008 was $1.5
million, a decrease of $274,000 or 16% from the same period in
2007.  The average rate paid on interest-bearing liabilities was 3.25%
in the 2008 period compared to 4.18% in the 2007 period, a reduction of 93 basis
points.  Average total interest-bearing liabilities in the 2008 period
increased by $14.9 million or 9% compared to the 2007 period.  This
included an increase in interest bearing deposits of $19.3 million or
26%.  This increase, along with an increase of $4.2 million or 7% in
non-interest bearing deposits, was due to local deposit
growth.  Average time deposits decreased by $8.6 million or 12% in the
2008 period mostly due to the maturation of $6.9 million of brokered deposits in
December 2007.  Additional brokered deposits totaling $7.1 million
were acquired in late March 2008 and did not significantly affect the quarterly
average.
  16
 Index
  Due to
the factors described in the preceding paragraphs, net interest income increased
to $3.0 million for the 2008 period compared to $2.7 million for the 2007
period.   Changes in the volumes of interest earning assets and
interest bearing liabilities caused the Company’s net interest income to
increase by $366,000, while changes in interest rates on these same accounts
caused net interest income to decrease by $100,000.
  The
Company’s net interest margin on a taxable equivalent basis increased 3 bps from
4.73% during the three months ended March 31, 2007 to 4.76% during the three
months ended March 31, 2008.  The Company maintained its net interest
margin despite Fed funds rate decreases totaling 300 basis points during the
period September 2007 to March 2008.  This was attributable both to
loan growth and to management’s efforts to mitigate the impact of falling
interest rates.  These efforts included adding assets earning fixed
interest rates to the balance sheet, utilizing variable priced borrowing lines
available from the Federal Home Loan Bank, and aggressively lowering deposit
rates.
  Provision
for Loan Losses
  The
provision for loan losses, which is included in operations to support
management’s
estimate of 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.  A $400,000 loan loss provision was recorded
during the first quarter of 2008.  Comparatively, no loan loss
provision was recorded during the first quarter of 2007.  Management
determined the first quarter provision for loan loss after consideration of
current economic conditions, including a significant decline in real estate
values in the Bank’s primary markets.  See the sections below titled
“Allowance for Loan Losses.”
  Non-Interest
Income
  Non-interest
income for the three-month periods ended March 31, 2008 and 2007 totaled
$291,000 for both periods.  The components of non-interest income
during each period were as follows:
 
 
 Non-interest incomeQuarter
      ended March 31,
              
              
              Increase
                (Decrease)(in
      thousands)
              
              2008
              
              
              2007Service
      charges on deposit accounts
              
              $
              170
              
              
              $
              138
              
              
              $
              32Mortgage
      loan brokerage fees
              
              
              8
              
              
              
              24
              
              
              
              (16
              )Earnings
      on cash surrender value of life insurance policies
              
              
              66
              
              
              
              64
              
              
              
              2Other
              
              
              47
              
              
              
              65
              
              
              
              (18
              )Total
      non-interest income
              
              $
              291
              
              
              $
              291
              
              
              $
              0
  Service
charges on deposit accounts increased $32,000 due to a $11,000 increase in
account analysis charges and a $20,000 increase in non-sufficient funds and
overdraft charges.  Mortgage loan brokerage fees decreased by $16,000
due to a slowing real estate market.  Within the other category, FHLB
dividend income decreased $15,000 due to lower FHLB stock holdings in the 2008
period.
  Non-Interest
Expense
  Non-interest
expense was $2.3 million in the first quarter of 2008 compared to $2.1 million
in the first quarter of 2007, an increase of $163,000 or 8%, due to costs
associated with regulatory compliance and the Company’s growth
initiatives.  Professional fees and legal costs increased by $40,000
primarily due to compliance with Sarbanes-Oxley
legislation.  Assessment and insurance increased by $29,000 as Federal
Deposit Insurance Corporation assessments increased by $25,000 or 328% due to
higher assessment rates imposed in mid-2007.  Salaries and benefits
increased by $33,000 due primarily to salary adjustments for existing
employees.  Occupancy and equipment expense increased by $40,000
primarily due to the relocation of the Fresno branch to a larger leased facility
in the latter part of 2007.
  17
 Index
  The
following table describes the components of non-interest expense for the
three-month periods ended March 31, 2008 and 2007:
  
 Non-interest expenseQuarter
      ended March 31,
              
              
              Increase
                (Decrease)(in
      thousands)
              
              2008
              
              
              2007Salaries
      and employee benefits
              
              $
              1,283
              
              
              $
              1,250
              
              
              $
              33Occupancy
      and equipment
              
              
              286
              
              
              
              246
              
              
              
              40Data
      processing
              
              
              129
              
              
              
              113
              
              
              
              16Operations
              
              
              127
              
              
              
              112
              
              
              
              15Professional
      and legal
              
              
              128
              
              
              
              88
              
              
              
              40Advertising
      and business development
              
              
              54
              
              
              
              62
              
              
              
              (8
              )Telephone
      and postal
              
              
              51
              
              
              
              49
              
              
              
              2Supplies
              
              
              36
              
              
              
              41
              
              
              
              (5
              )Assessment
      and insurance
              
              
              62
              
              
              
              33
              
              
              
              29Amortization
      expense
              
              
              8
              
              
              
              15
              
              
              
              (7
              )Other
      expenses
              
              
              111
              
              
              
              103
              
              
              
              8Total
      noninterest expense
              
              $
              2,275
              
              
              $
              2,112
              
              
              $
              163
   Provision
for Income Taxes
  The
provision for income taxes for the three-month periods ended March 31, 2008 and
2007 was $157,000 and $279,000, respectively.  The effective tax rate
for these periods was 27.3%, and 32.2%, respectively.  The decrease in
effective tax rate was primarily due to lower pretax income in the 2008 period
which magnified the impact of permanent tax differences in the computation of
the effective tax rate.
 
 Financial
Condition
  Fair
Value
  Effective January 1, 2008,
we adopted SFAS No. 157, Fair Value
Measurements, which requires enhanced disclosures about financial
instruments carried at fair value. SFAS No. 157 establishes a hierarchical
disclosure framework associated with the level of observable pricing scenarios
utilized in measuring financial instruments at fair value. The degree of
judgment utilized in measuring the fair value of financial instruments generally
correlates to the level of the observable pricing scenario. Financial
instruments with readily available active quoted prices or for which fair value
can be measured from actively quoted prices generally will have a higher degree
of observable pricing and a lesser degree of judgment utilized in measuring fair
value. Conversely, financial instruments rarely traded or not quoted will
generally have little or no observable pricing and a higher degree of judgment
utilized in measuring fair value. Observable pricing scenarios are impacted by a
number of factors, including the type of financial instrument, whether the
financial instrument is new to the market and not yet established and the
characteristics specific to the transaction. See Note 11 of theNotes to Condensed Consolidated Financial
Statements for additional information about the financial instruments
carried at fair value.
  Investment
Securities
  All
existing investment securities are classified as available-for-sale
securities.  In classifying its investments as available-for-sale, the
Company reports securities at fair value, with unrealized gains and losses
excluded from earnings and reported, net of taxes, as accumulated other
comprehensive income or loss within shareholders’ equity.
  18
 Index
  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
      saleMarch
      31, 2008(in
      thousands)
              
              Amortized
      Cost
              
              
              Gross
                Unrealized
      Gain
              
              
              Gross
                Unrealized
      Loss
              
              
              Fair
                ValueU.S.
      government  agencies
              
              $
              11,548
              
              
              $
              319
              
              
              $
              -
              
              
              $
              11,867Mortgage-backed
      securities
              
              
              16,015
              
              
              
              403
              
              
              
              (2
              )
              
              
              16,416Municipal
      securities
              
              
              19,309
              
              
              
              109
              
              
              
              (197
              )
              
              
              19,221Corporate
      debt securities
              
              
              2,500
              
              
              
              29
              
              
              
              (70
              )
              
              
              2,459Total
              
              $
              49,372
              
              
              $
              860
              
              
              $
              (269
              )
              
              $
              49,963
 
 
 December
      31, 2007(in
      thousands)
              
              Amortized
      Cost
              
              
              Gross
                Unrealized
      Gain
              
              
              Gross
                Unrealized
      Loss
              
              
              Fair
                ValueU.S.
      government  agencies
              
              $
              17,544
              
              
              $
              80
              
              
              $
              (70
              )
              
              $
              17,554Mortgage-backed
      securities
              
              
              16,853
              
              
              
              192
              
              
              
              (85
              )
              
              
              16,960Municipal
      securities
              
              
              19,304
              
              
              
              42
              
              
              
              (227
              )
              
              
              19,119Corporate
      debt securities
              
              
              3,005
              
              
              
              1
              
              
              
              (24
              )
              
              
              2,982Total
              
              $
              56,706
              
              
              $
              315
              
              
              $
              (406
              )
              
              $
              56,615
 
  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 considers declines in the fair value of
individual securities to be temporary.
  19
 Index
  Loans
  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)
              
              March
      31, 2008
              
              
              December
      31, 2007Commercial
              
              $
              48,048
              
              
              
              23
              %
              
              $
              41,824
              
              
              
              21
              %Real
      estate – mortgage (1)
              
              
              112,346
              
              
              
              53
              
              
              
              106,873
              
              
              
              53Real
      estate – construction
              
              
              45,219
              
              
              
              21
              
              
              
              44,896
              
              
              
              22Agricultural
              
              
              5,131
              
              
              
              2
              
              
              
              4,988
              
              
              
              3Consumer
      and other
              
              
              2.376
              
              
              
              1
              
              
              
              2,995
              
              
              
              1Subtotal
              
              
              213,120
              
              
              
              100
              %
              
              
              201,576
              
              
              
              100
              %Deferred
      loan fees, net
              
              
              (301
              )
              
              
              
              
              
              
              (304
              )Allowance
      for loan losses
              
              
              (2,146
              )
              
              
              
              
              
              
              (1,758
              )Total
      loans, net
              
              $
              210,673
              
              
              
              
              
              
              $
              199,514
 
 (1)
Consists primarily of commercial mortgage loans.
  During
the three months ended March 31, 2008, loan growth occurred in the categories of
real estate-mortgage, real estate-construction and commercial.  The
growth consisted primarily of loans to local business owners, most of whom have
other loan and deposit relationships with the Company, for business expansion
purposes.
  Nonperforming
Assets.  There was $402,000 in nonperforming assets at March
31, 2008 which was comprised of one nonaccrual loan for which management has
established a specific loss reserve of $63,000.  There were no
nonperforming assets at December 31, 2007.
  Allowance
for Loan Losses
  The
Company maintains an allowance for loan losses to provide for estimated credit
losses that, as of the balance sheet date, it is probable the Company will
incur.  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 as adjusted for
current economic conditions, trends in the level and volume of past due and
classified loans, and other qualitative factors.
  The
allowance for loan losses totaled $2.15 million or 1.01% of total loans at March
31, 2008.  This compared to $1.76 million or 0.87% at December 31,
2007.   Management determined the allowance for loan losses after
consideration of current economic conditions, including a significant decline in
real estate values in the Bank’s primary markets.  The Company
recorded a $12,000 net charge-off during the first quarter of 2008 and a $6,000
net recovery during the same 2007 period.
  Management
determined the allowance for loan losses at March 31, 2008 based on its
assessment of probable loan losses from declining real estate values and
recessionary conditions.  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
      lossesThree months ended March
31,(dollars
      in thousands)
              
              2008
              
              
              2007Balance,
      beginning
              
              $
              1,758
              
              
              $
              1,746Provision
      for  loan losses
              
              
              400
              
              
              
              -Charge-offs
              
              
              (12
              )
              
              
              -Recoveries
              
              
              -
              
              
              
              6Balance,
      ending
              
              $
              2,146
              
              
              $
              1,752Net
      charge-offs (recoveries) to average loans outstanding
              
              
              0.006
              %
              
              
              (0.003
              %)Average
      loans outstanding
              
              $
              207,276
              
              
              $
              184,485Ending
      allowance to total loans outstanding
              
              
              1.01
              %
              
              
              0.92
              %
  20
 Index
  Deposits
  Total
deposits were $229.2 million as of March 31, 2008, an increase of $13.8 million
or 6% from the December 31, 2007 balance of $215.4
million.  Interest-bearing deposits and time deposits increased by
$8.1 million or 9%, and $8.3 million or 13%, respectively, during the three
month period ended March 31, 2008.  Non-interest bearing deposits
decreased by $2.6 million or 4%.  Brokered deposited included in time
deposits at March 31, 2008 and December 31, 2007 totaled $9.9 million at each
date so the increase in total deposits was due to local deposit
growth.
  Total
deposits at March 31, 2008 and December 31, 2007 are summarized in the following
table:
  
 Deposit
      Portfolio(dollars
      in thousands)
              
              March
      31, 2008
              
              
              December
      31, 2007Non-interest
      bearing
              
              $
              64,348
              
              
              
              28
              %
              
              $
              66,993
              
              
              
              31
              %Interest
      bearing
              
              
              94,377
              
              
              
              41
              
              
              
              86,277
              
              
              
              40Time
      deposits
              
              
              70,441
              
              
              
              31
              
              
              
              62,116
              
              
              
              29Total
      Deposits
              
              $
              229,166
              
              
              
              100
              %
              
              $
              215,386
              
              
              
              100
              %
 
  Federal
Home Loan Bank Borrowings
  The
Company has utilized short-term borrowings from the FHLB to fund asset growth
during periods when market conditions for growing the deposit base were
unfavorable.  At March 31, 2008, the Company had outstanding
borrowings from the Federal Home Loan Bank totaling $26.4
million.  This debt was comprised of $19.2 million of short-term,
adjustable rate debt, and $7.2 million of long-term fixed rate
debt.  At December 31, 2007, the Company had $21.8 in short-term debt
and long-term debt totaling $8.1 million.  At March 31, 2008, the
long-term weighted average borrowing rate was 4.49% and the short-term weighted
average borrowing rate was 3.04%.  The remaining principal balance of
long-term debt is scheduled to mature through January 2012.
  Junior
Subordinated Deferrable Interest Debentures
  Junior
subordinated deferrable interest debentures were issued in connection with the
Company’s issuance of trust preferred securities for gross proceeds of $3.0
million in the second quarter of 2003.  The $3.1 million balance of
junior subordinated deferrable interest debentures at March 31, 2008 was
unchanged from December 31, 2007.  The rate of interest paid on these
debentures was 7.87% at March 31, 2008 compared to 8.79% at December 31,
2007.
  Capital
Resources
  The
Company’s shareholders’ equity was $28.9 million at March 31, 2008 and December
31, 2007 as net income of $418,000 for the three months ended March 31, 2008 and
the $480,000 increase in unrealized gains net of taxes on available-for-sale
investment securities were offset by repurchases of the Company’s common
stock.  During the three months ended March 31, 2008, the Company’s
common stock repurchases reduced shareholders’ equity by $804,118.
  21
 Index
  Management
considers capital requirements as part of its strategic planning
process.  The ability to obtain capital is dependent upon the capital
markets as well as the Company’s performance.  Management regularly
evaluates sources of capital and the timing required to meet its strategic
objectives.
  The
following table summarizes the Company’s risk-based capital ratios as of March
31, 2008 and December 31, 2007:
 
 Capital and capital adequacy
      ratiosQuarter endedMarch 31, 2008
              
              
              December 31, 2007(dollars
      in thousands)
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioLeverage
      RatioValley
      Commerce Bancorp And Subsidiary
              
              $
              31,469
              
              
              
              11.2
              %
              
              $
              31,927
              
              
              
              11.5
              %Minimum
      regulatory requirement
              
              $
              11,215
              
              
              
              4.0
              %
              
              $
              11,101
              
              
              
              4.0
              %Valley
      Business Bank
              
              $
              30,985
              
              
              
              11.1
              %
              
              $
              31,538
              
              
              
              11.4
              %Minimum
      requirement for “Well- Capitalized” institution
              
              $
              14,018
              
              
              
              5.0
              %
              
              $
              13,871
              
              
              
              5.0
              %Minimum
      regulatory requirement
              
              $
              11,215
              
              
              
              4.0
              %
              
              $
              11,097
              
              
              
              4.0
              %Tier 1 Risk-Based
      Capital RatioValley
      Commerce Bancorp And Subsidiary
              
              $
              31,469
              
              
              
              13.1
              %
              
              $
              31,927
              
              
              
              13.8
              %Minimum
      regulatory requirement
              
              $
              9,609
              
              
              
              4.0
              %
              
              $
              9,233
              
              
              
              4.0
              %Valley
      Business Bank
              
              $
              30,985
              
              
              
              12.9
              %
              
              $
              31,538
              
              
              
              13.7
              %Minimum
      requirement for “Well- Capitalized” institution
              
              $
              14,413
              
              
              
              6.0
              %
              
              $
              13,844
              
              
              
              6.0
              %Minimum
      regulatory requirement
              
              $
              9,609
              
              
              
              4.0
              %
              
              $
              9,230
              
              
              
              4.0
              %Total Risk-Based
      Capital RatioValley
      Commerce Bancorp And Subsidiary
              
              $
              33,615
              
              
              
              14.0
              %
              
              $
              33,684
              
              
              
              14.6
              %Minimum
      regulatory requirement
              
              $
              19,217
              
              
              
              8.0
              %
              
              $
              18,465
              
              
              
              8.0
              %Valley
      Business Bank
              
              $
              33,131
              
              
              
              13.8
              %
              
              $
              33,296
              
              
              
              14.4
              %Minimum
      requirement for “Well- Capitalized” institution
              
              $
              24,022
              
              
              
              10.0
              %
              
              $
              23,074
              
              
              
              10.0
              %Minimum
      regulatory requirement
              
              $
              19,217
              
              
              
              8.0
              %
              
              $
              18,459
              
              
              
              8.0
              %
  At March
31, 2008 and December 31, 2007, 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.
  Trust
preferred securities are included in Tier 1 capital, subject to regulatory
limitation.  At March 31, 2008, and December 31, 2007, $3.0 million of
trust preferred securities was included in Tier 1 capital.
  Liquidity
 
 Liquidity
is the ability to provide funds to meet customers’ needs and to fund operations
in a timely and cost effective manner. The Company has adopted measures to
ensure that the risk of loss due to inadequate liquidity remains at a low
level.  In particular, the Company adheres to a liquidity contingency
plan that requires management to take immediate specific actions if it appears
liquidity targets identified in Company policy may not otherwise be fully
achieved.
  22
 Index
  The
Company’s sources of liquidity include short-term borrowing arrangements with
the FHLB and correspondent banks, available-for-sale securities, and amounts in
the Federal funds sold and cash and due from banks accounts on the balance
sheet.  Management constantly monitors its liquidity position in
relation to anticipated loan funding needs, branch expansions and other asset
acquisitions, deposit fluctuations, embedded options, off-balance sheet
arrangements and other factors that are likely to have a material effect on the
Company’s liquidity.
  ITEM 3 – QUANTITATIVE AND
QUALITATIVEDISCLOSURESABOUT MARKET RISK
 
 Not applicable.
  23
 Index
  ITEM
4 – CONTROLS AND PROCEDURES
 
 (a)
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
  Based on
their evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q, the Company’s principal executive officer and principal financial
officer have concluded that the Company’s disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the “Exchange Act”)) are effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and
forms.
 
 (b)
CHANGES IN INTERNAL CONTROLS
  There was
no change in the Company’s internal control over financial reporting identified
in connection with the evaluation described in paragraph (a) above that occurred
during the Company’s last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  24
 Index
  PART II – OTHER INFORMATION
 
 
 ITEM
1 – LEGAL PROCEEDINGS
 
 From time
to time, the Company is a party to claims and legal proceedings arising in the
ordinary course of business.  In the opinion of the Company’s
management, the amount of ultimate liability with respect to such proceedings
will not have a material adverse effect on the financial condition or results of
operations of the Company.
 
 
 ITEM 1A – RISK
FACTORS
 
 In
addition to the other information set forth in this report, the factors
discussed in Part I “Item 1A—Risk Factors” in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007 could materially
affect its business, financial condition or future results. The risks described
in the Company’s Annual Report on Form 10-K are not the only risks facing the
Company. Additional risks and uncertainties not currently known or currently
deemed to be immaterial also may materially adversely affect the Company’s
business, financial condition and/or operating results.
 
 
 ITEM
2 – CHANGESIN SECURITIES AND USE OF PROCEEDS
 
 A summary
of the repurchase activity for the quarter ending March 31, 2008
follows:
 
 Period
              
              Total
                number
      of
                shares
                purchased
              
              
              Average
                price
      paid
                per
      share
              
              
              Total
      number of
                shares
      purchased as
                part
      of publicly
                announced
      plans or
                programs
              
              
              Approximate
      dollar value
                of
      shares that may yet be
                purchased
      under the plans
                or
      programs1/1/08
      – 1/31/08
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              2,618,1912/1/08
      – 2/29/08
              
              
              46,366
              
              
              $
              15.17
              
              
              
              46,366
              
              
              
              1,914,6903/1/08
      – 3/31/08
              
              
              6,666
              
              
              
              15.06
              
              
              
              6,666
              
              
              
              1,814,073Total
              
              
              53,032
              
              
              $
              15.16
              
              
              
              53,032
 
 (1)
                The
      Company approved a stock repurchase program effective November 13, 2007
      with the intent to purchase shares for an aggregate amount of
      $3,000,000.  During the quarter ended March 31, 2008, the
      Company repurchased a total of 53,032 shares at a cost of
      $804,118.
 
 (2)
                All
      share repurchases were effected in accordance with the safe harbor
      provisions of Rule 10b-18 of the Securities Exchange
  Act.
 
 
 ITEM
3 – DEFAULTS UPON SENIOR SECURITIES
 
 None.
 
 
 ITEM
4 – SUBMISSION OF MATTERSTO A VOTE OF SECURITY
HOLDERS
 
 None.
 
 
 ITEM
5 – OTHER INFORMATION
 
 None.
 
 25
 Index
 
 ITEM
6 – EXHIBITS
 
 An
Exhibit Index has been attached as part of this quarterly report and is
incorporated herein by reference.
 
 26
 Index
  SIGNATURES
  In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  
 VALLEY
      COMMERCE BANCORPDate:
      May 15, 2008
                By:
                /s/
      Donald A. GillesDonald
      A. GillesPresident
      and Chief Executive OfficerDate:
      May 15, 2008
                By:
                /s/Roy
      O. EstridgeRoy
      O. Estridge, Chief Financial
Officer
  27
 Index
  Exhibit Index
 
 
 31.1
              Rule
      13a-14(a)/15d-14(a) Certification31.2
              Rule
      13a-14(a)/15d-14(a) Certification32.1
              Section
      1350 Certifications