**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **ý****QUARTERLY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------------------------------------------------------------|
|                                                                                                        |   |
|                                                                                                        | **For  the Quarterly Period Ended September 30, 2003** |
|                                                                                                        |   |
| **o****TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |
|                                                                                                        |   |
|                                                                                                        | **Commission  File No. 0-31525** |

 

| **COMMUNITY  VALLEY BANCORP**                                                         |
|---------------------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                               |
|                                                                                  |   |   |
| **California**                                                                        |   | **68-0479553** |
| (State or other  jurisdiction of  incorporation or organization)                      |   | (IRS Employer ID  Number) |
|                                                                                  |   |   |
| **2041  Forest Avenue, Chico, California**                                            |   | **95928** |
| (Address of  principal executive offices)                                             |   | (Zip code) |
|                                                                                  |   |   |
| **(530)  899-2344**                                                                   |
| (Registrant’s  telephone number,  including area code)                           |
|                                                                                  |   |   |
| **not  applicable**                                                                   |
| (Former name,  former address and former fiscal year, if changed  since last report.) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes  ý    No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12-b-2)

 

Yes  o    No  ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

 

No par value Common Stock— 2,712,380 shares outstanding at October 31, 2003.

 

 

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PART 1-FINANCIALINFORMATION

Item 1. FINANCIALSTATEMENTS

 

COMMUNITY VALLEY BANCORP

CONSOLIDATEDBALANCE SHEET (Unaudited)

 
| **(In  thousands, except number of shares)**                                                                                                                                                |   | **September 30,   2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|---------|-----------------------------|--------|
|                                                                                                                                                                                        |   |                               |    |                        |   |
| **ASSETS**                                                                                                                                                                                  |   |                               |    |                        |   |
|                                                                                                                                                                                        |   |                               |    |                        |   |
| Cash  and due from banks                                                                                                                                                                    |   | $                                  | 17,215  |                        | $      | 15,621 |   |
| Federal  funds sold                                                                                                                                                                         |   | 44,905                             |    | 57,410                      |   |
| Interest-bearing  deposits in banks                                                                                                                                                         |   | 7,727                              |    | 4,061                       |   |
| Investment  securities (market value of $3,177 at September 30, 2003 and $3,373 at  December 31, 2002)                                                                            |   | 3,182                              |    | 3,387                       |   |
| Loans  held for sale                                                                                                                                                                        |   | 5,660                              |    | 7,912                       |   |
| Loans,  less allowance for loan losses of $3,473 at September 30, 2003 and  $3,007 at December 31, 2002                                                                           |   | 267,450                            |    | 229,699                     |   |
| Bank  premises and equipment, net                                                                                                                                                           |   | 7,625                              |    | 6,653                       |   |
| Accrued  interest receivable and other assets                                                                                                                                               |   | 24,441                             |    | 12,492                      |   |
|                                                                                                                                                                                        |   | $                                  | 378,205 |                        | $      | 337,235 |   |
|                                                                                                                                                                                        |   |                               |    |                        |   |
| LIABILITIES  AND  SHAREHOLDERS’ EQUITY                                                                                                                                            |   |                               |    |                        |   |
|                                                                                                                                                                                        |   |                               |    |                        |   |
| Deposits:                                                                                                                                                                                   |   |                               |    |                        |   |
| Non-interest  bearing                                                                                                                                                                       |   | $                                  | 66,047  |                        | $      | 62,889 |   |
| Interest  bearing                                                                                                                                                                           |   | 270,737                            |    | 235,092                     |   |
| Total  deposits                                                                                                                                                                             |   | 336,784                            |    | 297,981                     |   |
|                                                                                                                                                                                        |   |                               |    |                        |   |
| Employee  stock ownership plan note payable                                                                                                                                                 |   | 824                           |    | 732                         |   |
| Mandatorily  redeemable cumulative trust preferred securities of subsidiary grantor trust                                                                                                   |   | 8,000                              |    | 8,000                       |   |
|                                                                                                                                                                                        |   |                               |    |                        |   |
| Accrued  interest payable and other liabilities                                                                                                                                             |   | 4,138                              |    | 5,141                       |   |
|                                                                                                                                                                                        |   |                               |    |                        |   |
| Total  liabilities                                                                                                                                                                          |   | 349,746                            |    | 311,854                     |   |
|                                                                                                                                                                                        |   |                               |    |                        |   |
| Commitments  and contingencies                                                                                                                                                              |   |                               |    |                        |   |
|                                                                                                                                                                                        |   |                               |    |                        |   |
| Shareholders’  equity:                                                                                                                                                                 |   |                               |    |                        |   |
| Common  stock — no par value; 20,000,000 shares authorized; issued and outstanding —  2,711,230 shares at September 30, 2003 and 2,685,351 shares at  December 31, 2002 |   | 7,124                              |    | 6,660                       |   |
| Unearned  ESOP shares (68,327 shares at September 30, 2003 and 65,437 shares at  December 31, 2002, at cost)                                                                      |   | (1,006                             | )       | (852                        | )      |
|                                                                                                                                                                                        |   |                               |    |                        |   |
| Retained  earnings                                                                                                                                                                          |   | 22,336                             |    | 19,559                      |   |
|                                                                                                                                                                                        |   |                               |    |                        |   |
| Accumulated  other comprehensive income                                                                                                                                                     |   | 5                                  |    | 14                          |   |
|                                                                                                                                                                                        |   |                               |    |                        |   |
| Total  shareholders’ equity                                                                                                                                                            |   | 28,459                             |    | 25,381                      |   |
|                                                                                                                                                                                        |   | $                                  | 378,205 |                        | $      | 337,235 |   |

 

See Notes to UnauditedConsolidated Financial Statements

 

2

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COMMUNITY VALLEYBANCORP

CONSOLIDATED STATEMENT OFINCOME(Unaudited)

 
|                                                             |   | **For the  periods ended September 30,** |       |
|------------------------------------------------------------------|--------|-----------------------------------------------|------------|
|                                                             |   | **Three  months**                             | ** ** | **Nine  Months** | ** ** |
| **(In thousands, except per  share data)**                       |   | **2003**                                      | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                             |   |                                          | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Interest  income:                                                |   |                                          |       |   |   |   |   |   |   |
| Interest  and fees on loans                                      |   | $                                             | 5,308      |   | $ | 4,702 |   | $ | 14,953 |   | $ | 13,096 |   |
| Interest  on Federal funds sold                                  |   | 152                                           |       | 127 |   | 533 |   | 415 |   |
| Interest  on deposits in banks                                   |   | 55                                            |       | 22 |   | 145 |   | 46 |   |
| Interest  and dividends on investment securities:                |   |                                          |       |   |   |   |   |   |   |
| Taxable                                                          |   | 9                                             |       | 23 |   | 70 |   | 77 |   |
| Exempt from  Federal income taxes                                |   | 0                                             |       | 17 |   | 38 |   | 54 |   |
| Dividends                                                        |   | 1                                             |       | 0 |   | 1 |   | 1 |   |
|                                                             |   |                                          |       |   |   |   |   |   |   |
| Total  interest income                                           |   | 5,525                                         |       | 4,891 |   | 15,740 |   | 13,687 |   |
|                                                             |   |                                          |       |   |   |   |   |   |   |
| Interest  expense:                                               |   |                                          |       |   |   |   |   |   |   |
| Interest  on deposits                                            |   | 964                                           |       | 1,107 |   | 2,996 |   | 3,594 |   |
| Interest  on long-term debt                                      |   | 111                                           |       | 11 |   | 361 |   | 31 |   |
| Total  interest expense                                          |   | 1,075                                         |       | 1,118 |   | 3,357 |   | 3,625 |   |
|                                                             |   |                                          |       |   |   |   |   |   |   |
| Net  interest income                                             |   | 4,449                                         |       | 3,773 |   | 12,383 |   | 10,062 |   |
|                                                             |   |                                          |       |   |   |   |   |   |   |
| Provision  for loan losses                                       |   | 210                                           |       | 150 |   | 480 |   | 403 |   |
| Net  interest income after provision for loan losses             |   | 4,239                                         |       | 3,623 |   | 11,903 |   | 9,659 |   |
|                                                             |   |                                          |       |   |   |   |   |   |   |
| Non-interest  income                                             |   | 1,519                                         |       | 1,300 |   | 4,085 |   | 4,615 |   |
|                                                             |   |                                          |       |   |   |   |   |   |   |
| Non-interest  expense:                                           |   |                                          |       |   |   |   |   |   |   |
| Salaries  and employee benefits                                  |   | 2,005                                         |       | 1,532 |   | 5,891 |   | 4,355 |   |
| Occupancy                                                        |   | 236                                           |       | 174 |   | 612 |   | 480 |   |
| Furniture  and equipment                                         |   | 284                                           |       | 231 |   | 757 |   | 642 |   |
| Other  expense                                                   |   | 910                                           |       | 841 |   | 2,726 |   | 3,788 |   |
| Total  non-interest expense                                      |   | 3,435                                         |       | 2,778 |   | 9,986 |   | 9,265 |   |
|                                                             |   |                                          |       |   |   |   |   |   |   |
| Income  before provision for income taxes                        |   | 2,323                                         |       | 2,145 |   | 6,002 |   | 5,009 |   |
|                                                             |   |                                          |       |   |   |   |   |   |   |
| Provision  for income taxes                                      |   | 889                                           |       | 853 |   | 2,415 |   | 1,492 |   |
|                                                             |   |                                          |       |   |   |   |   |   |   |
| Net  income                                                      |   | $                                             | 1,434      |   | $ | 1,292 |   | $ | 3,587 |   | $ | 3,517 |   |
|                                                             |   |                                          |       |   |   |   |   |   |   |
| Basic  earnings per share                                        |   | $                                             | .54        |   | $ | .50 |   | $ | 1.36 |   | $ | 1.36 |   |
| Diluted  earnings per share                                      |   | $                                             | .52        |   | $ | .47 |   | $ | 1.29 |   | $ | 1.29 |   |
|                                                             |   |                                          |       |   |   |   |   |   |   |
| Cash  dividends per share of issued and outstanding common stock |   | $                                             | .10        |   | $ | .075 |   | $ | .10 |   | $ | .075 |   |

 

See Notes to UnauditedConsolidated Financial Statements

 

3

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COMMUNITY VALLEY BANCORP

 

CONSOLIDATED STATEMENT OFCHANGES IN SHAREHOLDERS’ EQUITY

 

(Unaudited)

 

(In thousands exceptnumber of shares)

 
|                                                             |   | **Common  Stock** |   | **Unearned  ESOP  Shares** |       | **Retained  Earnings** |       | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Total  Shareholders’  Equity** |   | **Comprehensive  Income** |   |
|------------------------------------------------------------------|--------|-------------------|--------|----------------------------|------------|------------------------|------------|------------------------------------------------------|--------|---------------------------------------|--------|---------------------------|--------|
|                                                             |   | **Shares**        |   | **Amount**                 | ** ** | ** **             | ** ** |                                                 |   | ** **                            |
|                                                             |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Balance, January 1, 2002                                    |   | 2,648,389         |   | $                          | 6,131      |                   | $          | (902                                                 | )      | $                                     | 15,592 |                      |   |   | $ | 20,821 |   |   |   |
|                                                             |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Comprehensive  income (Note 3):                                  |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Net  income                                                      |   |              |   |                       |       |                   |       | 4,849                                                |   |                                  |   | 4,849                     |   | $ | 4,849 |   |
| Other  comprehensive income, net of tax                          |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Unrealized gain  in available-for-sale investment securities     |   |              |   |                       |       |                   |       | $                                                    | 14     |                                  | 14     |                      |   |   | 14 |   |
|                                                             |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Total  comprehensive income                                      |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   | $ | 4,863 |   |
|                                                             |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Exercise  of stock options and related tax benefit               |   | 36,962            |   | 426                        |       |                   |       |                                                 |   |                                  |   | 426                       |   |   |   |
|                                                             |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Earned  ESOP shares                                              |   |              |   | 108                        |       | 50                     |       |                                                 |   |                                  |   | 158                       |   |   |   |
| Cash  dividends- $.33 per share                                  |   |              |   |                       |       |                   |       | (882                                                 | )      |                                  |   | (882                      | )      |   |   |
| Cash  in lieu of fractional shares in four-for-three stock split |   |              |   | (5                         | )          |                   |       |                                                 |   |                                  |   | (5                        | )      |   |   |
|                                                             |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Balance,  December 31, 2002                                 |   | 2,685,351         |   | 6,660                      |       | (852                   | )          | 19,559                                               |   | 14                                    |   | 25,381                    |   |   |   |
|                                                             |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Comprehensive  income (Note 3):                                  |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Net  income                                                      |   |              |   |                       |       |                   |       | 3,587                                                |   |                                  |   | 3,587                     |   | $ | 3,587 |   |
| Other  comprehensive loss, net of tax:                           |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Unrealized  loss on available-for-sale investment securities     |   |              |   |                       |       |                   |       |                                                 |   | (9                                    | )      | (9                        | )      | (9 | ) |
|                                                             |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Total  comprehensive income                                      |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   | $ | 3,578 |   |
|                                                             |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Exercise  of stock options and related tax benefit               |   | 25,879            |   | 379                        |       |                   |       |                                                 |   |                                  |   | 379                       |   |   |   |
| Earned  ESOP shares                                              |   |              |   | 85                         |       | 32                     |       |                                                 |   |                                  |   | 117                       |   |   |   |
| Shares  acquired by ESOP                                         |   |              |   |                       |       | (186                   | )          |                                                 |   |                                  |   | (186                      | )      |   |   |
| Cash  dividends declared $.30 per share                          |   |              |   |                       |       |                   |       | (810                                                 | )      |                                  |   | (810                      | )      |   |   |
|                                                             |   |              |   |                       |       |                   |       |                                                 |   |                                  |   |                      |   |   |   |
| Balance,  September 30, 2003                                |   | 2,711,230         |   | $                          | 7,124      |                   | $          | (1,006                                               | )      | $                                     | 22,336 |                      | $      | 5 |   | $ | 28,459 |   |   |   |
|                                                                  |        |                   |        |                            |            |                        |            |                                                      |        |                                       |        |                           |        |  |  |  |  |  |  |  |  |

 

See Notes to UnauditedConsolidated Financial Statements

 

4

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COMMUNITY VALLEYBANCORP

CONSOLIDATEDSTATEMENT OF CASH FLOWS(Unaudited**)**

 
| **(In thousands)**                                                                 |   |     |   |     |   |
|------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| **For the nine months ended  September 30,**                                  |   | **2003** |   | **2002** |   |
|                                                                               |   |     |   |     |   |
| Cash  flows from operating activities:                                             |   |     |   |     |   |
| Net  income                                                                        |   | $        | 3,587  |     | $      | 3,517 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |     |   |     |   |
| Provision  for loan losses                                                         |   | 480      |   | 403      |   |
| Deferred  loan origination costs, net                                              |   | 224      |   | 5        |   |
| Depreciation  and amortization                                                     |   | 671      |   | 576      |   |
| Net  decrease in loans held for sale                                               |   | 2,252    |   | 1,567    |   |
| (Increase)  decrease in cash surrender value of life insurance                     |   | (166     | )      | 53       |   |
| Gain  on disposition of Bank premises and equipment                                |   | (3       | )      | (160     | )      |
| Loss  on sale of other real estate                                                 |   |     |   | 13       |   |
|                                                                               |   |     |   |     |   |
| Non-cash  compensation expense associated with the ESOP                            |   | 116      |   | 119      |   |
| Increase  in accrued interest receivable and other assets                          |   | 47       |   | (986     | )      |
| Decrease  in accrued interest payable and other liabilities                        |   | (1,005   | )      | (538     | )      |
|                                                                               |   |     |   |     |   |
| Net  cash used in operating activities                                             |   | 6,203    |   | 4,569    |   |
|                                                                               |   |     |   |     |   |
| Cash  flows from investing activities:                                             |   |     |   |     |   |
|                                                                               |   |     |   |     |   |
| Increase  in interest-bearing deposits in banks                                    |   | (3,666   | )      | (2,080   | )      |
| Proceeds  from called held-to-maturity investment securities                       |   | 2,200    |   | 462      |   |
| Purchase  of held-to-maturity investment securities                                |   | (2,030   | )      | (250     | )      |
| Purchases  of bank premises and equipment                                          |   | (1,857   | )      | (3,665   | )      |
| Proceeds  from sale of bank premises and equipment                                 |   | 155      |   | 2,151    |   |
| Life  insurance purchased                                                          |   | (1,608   | )      |     |   |
| Investment  in ATM program                                                         |   | (9,989   | )      |     |   |
| Net  increase in loans                                                             |   | (38,454  | )      | (27,380  | )      |
|                                                                               |   |     |   |     |   |
| Net  cash used in investing activities                                             |   | (55,249  | )      | (30,762  | )      |
|                                                                               |   |     |   |     |   |
| Cash  flows from financing activities:                                             |   |     |   |     |   |
|                                                                               |   |     |   |     |   |
| Net  increase in demand, interest-bearing and savings deposits                     |   | 36,254   |   | 42,083   |   |
| Net  increase (decrease) in time deposits                                          |   | 2,549    |   | (17,739  | )      |
| Proceeds  from ESOP loan                                                           |   | 186      |   |     |   |
| Repayment  of ESOP loan                                                            |   | (94      | )      | (89      | )      |
| Purchase  of unearned ESOP shares                                                  |   | (186     | )      |     |   |
| Payment  of cash dividends                                                         |   | (810     | )      | (600     | )      |
| Exercise  of stock options                                                         |   | 236      |   | 219      |   |
| Cash  paid for fractional shares                                                   |   |     |   | (5       | )      |
|                                                                               |   |     |   |     |   |
| Net  cash provided by financing activities                                         |   | 38,135   |   | 23,869   |   |
|                                                                               |   |     |   |     |   |
| Decrease  in cash and cash equivalents                                             |   | (10,912  | )      | (2,324   | )      |
|                                                                               |   |     |   |     |   |
| Cash  and cash equivalents at beginning of year                                    |   | 73,031   |   | 49,672   |   |
|                                                                               |   |     |   |     |   |
| Cash  and cash equivalents at end of period                                        |   | $        | 62,120 |     | $      | 47,348 |   |

 

See Notes to Unaudited ConsolidatedFinancial Statements

 

5

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**CommunityValley Bancorp and Subsidiaries**

 

NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS

 

1.   BASIS OF PRESENTATION

 

In May 2002, shareholders of Butte Community Bank(the “Bank”) approved a plan of reorganization and merger whereby the Bankbecame a wholly owned subsidiary of a newly formed bank holding company,Community Valley Bancorp.  Managementexpects that the holding company structure will facilitate growth within thebanking field and in areas related to banking, either by the creation of newsubsidiaries or the acquisition of existing companies and banks.

 

The accompanying unaudited consolidated financialstatements of Community Valley Bancorp and subsidiaries (the “Company”) havebeen prepared in accordance with accounting principles generally accepted inthe United States of America for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  In the opinion of management, alladjustments (which consist solely of normal recurring accruals) considerednecessary for a fair presentation of the results for the interim periodspresented have been included.  Theseinterim consolidated financial statements should be read in conjunction withthe financial statements and related notes contained in the Company’s 2002Annual Report to Shareholders on Form 10-K.

 

In December 2002, the Company issued to CVB TrustI, a wholly-owned subsidiary of the Company, subordinated deferrable interestdebentures due December 31, 2032. Simultaneously, CVB Trust I issued 8,000 floating rate capitalsecurities, with liquidation values of $1,000 per security, for gross proceedsof $8,000,000.  The subordinateddebentures represent the sole assets of CVB Trust I.  The subordinated debentures are redeemableby the Company, subject to the receipt by the Company of prior approval fromthe Federal Reserve Bank (FRB), if then required under applicable capitalguidelines or policies of the FRB.  TheCompany may redeem the subordinated debentures on any December 31st on orafter December 31, 2007.  Theredemption price shall be par plus accrued and unpaid interest, except in thecase of redemption under a special event which is defined in the debenture.  The floating rate capital securities aresubject to mandatory redemption to the extent of any early redemption of thesubordinated debentures and upon maturity of the subordinated debentures onDecember 31, 2032. Holders of the securities are entitled to cumulativecash distributions on the liquidation amount of $1,000 per security.  Interest rates on the capital securities anddebentures are computed on a 360-day basis. The stated interest rate is the three-month London Interbank OfferedRate (LIBOR) plus 3.3%, with a maximum rate of 12.5% annually, adjustablequarterly.

 

The consolidated financial statements include theaccounts of the Company and its wholly owned bank subsidiary, Butte CommunityBank, and CVB Trust I. All significant inter-company balances and transactionshave been eliminated in consolidation. The results of operations for the three and nine month periods endedSeptember 30, 2003 may not necessarily be indicative of the operatingresults for the full year 2003.

 

2.  EARNINGS PER SHARE COMPUTATION

 

Basic earnings per share are computed by dividing netincome by the weighted average common shares outstanding for the period(2,638,966 and 2,630,857 shares for the three and nine month periods endedSeptember 30, 2003 and 2,597,669 and 2,588,611 shares for the three andnine month periods ended September 30, 2002).  Diluted earnings per share reflect the potential dilution thatcould occur if outstanding stock options were exercised using the treasurystock method.   Diluted earnings pershare is computed by dividing net income by the weighted average common sharesoutstanding for the period plus the dilutive effect of options (145,684 and142,233 shares for the three and nine month periods ended September 30,2003 and 145,710 and 135,616 shares

 

6

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for the three and  nine month periods ended September 30,2002).  Earnings per share areretroactively adjusted for stock splits and dividends for all periodspresented.

 

3. COMPREHENSIVE INCOME

 

Comprehensive income isreported in addition to net income for all periods presented.  Comprehensive income is made up of netincome plus other comprehensive income or loss.  Other comprehensive income or loss, net of taxes, is comprised ofchanges in unrealized gains or losses, net of taxes, on available-for-salesecurities, adjusted for the effect of realized gains or losses onavailable-for-sale securities, net of taxes. Comprehensive income in the third quarter totaled $5,000.

 

## **4. STOCK –BASED COMPENSATION**

## ** **

The Company issues stock options under threestock-based compensation plans, the Community Valley Bancorp 1991, 1997 and2000 Stock Option Plans.  The Companyaccounts for these plans under the recognition and measurement principles ofAPB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related Interpretations.  Nostock-based compensation cost is reflected in net income, as all optionsgranted under these plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant.  In accordance with Financial Accounting Standards Board (“FASB”)No. 148, *Accounting for Stock-BasedCompensation – Transition and Disclosure, an Amendment of FASB No. 123,*the following table illustrates the effect on net income and earnings per shareas if the Company had applied the fair value recognition provisions of FASBStatement No. 123, *Accounting for Stock-Based Compensation*,to stock-based employee compensation.

 

Pro forma adjustments tothe Company’s consolidated net earnings and earnings per share are disclosedduring the periods in which the options become vested.

 
|                                                                                                                                     |   | **Three  Months Ended**      |      |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                                                                                     |   | **September 30,  2003** |      | **September 30,  2002** |   |
| Net earnings as reported (in  thousands)                                                                                                 |   | $                            | 1,434,410 |   | $ | 1,291,914 |   |
| Deduct: Total stock-based  compensation expense determined under the fair value based method for all  awards, net of related tax effects |   | (65,434                      | )         | (68,467 | ) |
|                                                                                                                                     |   |                         |      |   |   |
| Pro forma net income                                                                                                                     |   | $                            | 1,368,976 |   | $ | 1,223,447 |   |
|                                                                                                                                     |   |                         |      |   |   |
| Basic earnings per share -  as reported                                                                                                  |   | $                            | 0.54      |   | $ | 0.50 |   |
|                                                                                                                                     |   |                         |      |   |   |
| Basic earnings per share -  pro forma                                                                                                    |   | $                            | 0.52      |   | $ | 0.47 |   |
|                                                                                                                                     |   |                         |      |   |   |
| Diluted earnings per share -  as reported                                                                                                |   | $                            | 0.52      |   | $ | 0.47 |   |
|                                                                                                                                     |   |                         |      |   |   |
| Diluted earnings per share -  pro forma                                                                                                  |   | $                            | 0.50      |   | $ | 0.46 |   |

 

7

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|                                                                                                                                     |   | **Nine  Months Ended**       |      |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                                                                                     |   | **September 30,  2003** |      | **September 30,  2002** |   |
|                                                                                                                                     |   |                         |      |   |   |
| Net earnings as reported (in  thousands)                                                                                                 |   | $                            | 3,587,894 |   | $ | 3,517,463 |   |
| Deduct: Total stock-based  compensation expense determined under the fair value based method for all  awards, net of related tax effects |   | (194,458                     | )         | (205,400 | ) |
|                                                                                                                                     |   |                         |      |   |   |
| Pro forma net income                                                                                                                     |   | $                            | 3,393,436 |   | $ | 3,312,063 |   |
|                                                                                                                                     |   |                         |      |   |   |
| Basic earnings per share -  as reported                                                                                                  |   | $                            | 1.36      |   | $ | 1.36 |   |
|                                                                                                                                     |   |                         |      |   |   |
| Basic earnings per share -  pro forma                                                                                                    |   | $                            | 1.29      |   | $ | 1.28 |   |
|                                                                                                                                     |   |                         |      |   |   |
| Diluted earnings per share -  as reported                                                                                                |   | $                            | 1.29      |   | $ | 1.29 |   |
|                                                                                                                                     |   |                         |      |   |   |
| Diluted earnings per share -  pro forma                                                                                                  |   | $                            | 1.24      |   | $ | 1.24 |   |

 

## **5. STOCK REPURCHASE PLAN**

## ** **

## **In June 2003, the Board ofDirectors approved a plan to repurchase up to $3,000,000 (or approximately 120,000shares) of the outstanding common stock of the Company.  Repurchases may be made from time to time onthe open market or through privately negotiated transactions.  The timing of purchases and the exact numberof shares to be purchased will depend on market conditions.  To date, the Company has not repurchased anyshares under this plan.**

## ** **

## **6.**  ACCOUNTINGPRONOUNCEMENTS

## ** **

In November 2002,the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*(FIN 45). FIN 45 requires that a liability for the fair value of an obligationfor guarantees issued or modified after December 31, 2002 be recorded inthe financial statements of the guarantor. Guarantees existing before theimplementation of FIN 45 are required to be disclosed in financial statementsissued after December 15, 2002. While the Company has various guaranteesincluded in contracts in the normal course of business, primarily in the formof indemnities, these guarantees would only result in immaterial increases infuture costs, and do not represent significant commitments or contingentliabilities of the indebtedness of others.

 

In January 2003, theFASB issued Interpretation No. 46, *Consolidationof Variable Interest Entities* (FIN 46), which requires theconsolidation of variable interest entities, as defined. FIN 46 is currentlyapplicable to variable interest entities created after January 31, 2003.In October 2003, the FASB agreed to defer the effective date of

 

8

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FIN 46 for variableinterests held by public companies in all entities that were acquired prior toFebruary 1, 2003. This deferral is to allow time for certainimplementation issues to be addressed through the issuance of a potentialmodification to the interpretation. The deferral revised the effective date forconsolidation of these entities to the period ended December 31, 2003 forcalendar year end companies. Based on the current rules, the Company does notbelieve that the implementation of the interpretation will have a materialimpact on the Company’s financial position or results of operations.

 

In December 2002,the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 148,  *Accountingfor Stock-Based Compensation—Transition and Disclosure—an amendment of SFASStatement No. 123*.  ThisStatement amends SFAS No. 123, *Accountingfor Stock-Based Compensation*, to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFASNo. 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results.  The transition guidance and annualdisclosure provisions of SFAS No. 148 are effective for fiscal yearsending after December 15, 2002. The interim disclosure provisions are effective for financial reportingcontaining financial statements for interim periods beginning afterDecember 15, 2002.  Because theCompany accounts for the compensation cost associated with its stock optionplan under the intrinsic value method, the alternative methods of transitionwill not apply to the Company.  Theadditional disclosure requirements of the Statement are included in these consolidatedfinancial statements.  In management’sopinion, the adoption of this Statement did not have a material impact on theCompany’s consolidated financial position or results of operations.

 

On April 30, 2003,the FASB issued SFAS No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*.  This Statement amends and clarifies theaccounting for derivative instruments by providing guidance related tocircumstances under which a contract with a net investment meets thecharacteristics of a derivative as discussed in SFAS No. 133.  The Statement also clarifies when aderivative contains a financing component.  The Statement is intended to result in more consistent reporting forderivative contracts and must be applied prospectively for contracts enteredinto or modified after June 30, 2003, except for hedging relationshipsdesignated after June 30, 2003.  In management’s opinion, adoption of this Statement did not have amaterial impact on the Company’s consolidated financial position or results ofoperations.

 

In May 2003, the FASB issued SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*.  This Statementestablishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial instrument that is within its scope as a liability (or an asset insome circumstances).  This Statement iseffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003, except for mandatorily redeemable financialinstruments of nonpublic entities.   For mandatorily redeemable financial instruments of a nonpublic entity,this Statement shall be effective for existing or new contracts for fiscalperiods beginning after December 15, 2003.  The Company adopted the provisions of this Statement onJuly 1, 2003 and, in management’s opinion, adoption of this Statement didnot have a material effect on the Company’s consolidated financial position orresults of operations.

 

9

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**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS OF COMMUNITY VALLEY BANCORP**

 

The following is Community Valley Bancorp’s (the“Company”) management’s discussion and analysis of the significant changes inbalance sheet accounts for September 30, 2003 and December 31, 2002and income and expense accounts for the three and nine month periods endedSeptember 30, 2003 and 2002. The discussion is designed to provide abetter understanding of significant trends related to the Company’s financialcondition, results of operations, liquidity, capital resources and interestrate sensitivity.

 

In addition to thehistorical information contained herein, this report on Form 10-Q containscertain forward-looking statements.  Thereader of this report should understand that all such forward-lookingstatements are subject to various uncertainties and risks that could affecttheir outcome.   The Company’s actualresults could differ materially from those suggested by such forward-lookingstatements.  Factors that could cause orcontribute to such differences include, but are not limited to, variances inthe actual versus projected growth in assets, return on assets, loan losses,expenses, rates charged on loans and earned on securities investments, ratespaid on deposits, competition effects, fee and other noninterest income earned,general economic conditions, nationally, regionally and in the operating marketareas of the Company and its subsidiaries, changes in the regulatoryenvironment, changes in business conditions and inflation, changes insecurities markets, data processing problems, a decline in real estatevalues in the Company’s market area,  the effects of terrorism, including theevents of September 11, 2001 and thereafter, and the conduct of the war onterrorism by the United States and its allies, as well as other factors. This entire report should beread putting such forward-looking statements in context.

 

## **GeneralDevelopment of Business**

## ** **

The Company is a bank holding company registered underthe Bank Holding Company Act of 1956, as amended. The Company was incorporatedunder the laws of the State of California in 2002.  As a bank holding company, the Company is authorized to engage inthe activities permitted under the Bank Holding Company Act of 1956, as amended,and regulations thereunder.** **Itsprincipal office is located at 2041 Forest Avenue, Chico, California 95928 andits telephone number is (530) 899-2344.

 

The Company owns 100% of the issued and outstandingcommon shares of Butte Community Bank and CVB Trust I.  Butte Community Bank was incorporated andcommenced business in Paradise and Oroville, California in 1990.  Butte Community Bank operates eight fullservice offices within its primary service areas of Butte and Sutter Counties.  The Bank also maintains Loan ProductionOffices in Roseville and Redding. Butte Community Bank’s primary business isserving the commercial banking needs of small to mid-sized businesses andconsumers within those counties.  ButteCommunity Bank accepts checking and savings deposits, offers money marketdeposit accounts and certificates of deposit, makes secured and unsecuredcommercial, secured real estate, and other installment and term loans andoffers other customary banking services.

 

**Overview**

 

The Company recorded net income of $1,434,000 for thequarter ended September 30, 2003, which was an 11% increase from the$1,292,000 reported for the same period of 2002.  Diluted earnings per share for the third quarter of 2003 were$0.52, compared to the $0.47 recorded in the third quarter of 2002.  The annualized return on average equity(ROAE) and the return on average assets (ROA) for the third quarter of 2003were 17.80% and 1.34%, respectively, as compared to 20.75% and 1.70%,respectively, for the same period in 2002. Net income for the nine months ended September 30, 2003 was$3,587,000 (up 2.0%) compared to the $3,517,000 recorded in the first ninemonths of 2002.   Total assets of theCompany increased by $40,970,000 or (12.1%) from December 31, 2002 to$378,205,000 at September 30, 2003. Net loans totaled $267,450,000, up $37,751,000 (16.4%) from the endingbalances on December 31, 2002. Deposit balances at September 30, 2003 totaled $336,784,000, up$38,803,000 (13%) from December 31, 2002.

 

10

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Table One below providesa summary of the components of net income for the periods indicated:

 

**Table One:  Componentsof Net Income**

 
|                                                             |   | **Three  months ended  September 30,** | ** ** | **Nine  months ended  September 30,** | ** ** |
|------------------------------------------------------------------|--------|---------------------------------------------|------------|--------------------------------------------|------------|
| **(In thousands, except percentages)**                           |   | **2003**                                    | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                             |   |                                        |       |                                       |       |   |   |   |   |
| Net  interest income                                             |   | $                                           | 4,449      |                                       | $          | 3,773 |   | $ | 12,383 |   | $ | 10,062 |   |
| Provision  for loan losses                                       |   | (210                                        | )          | (150                                       | )          | (480 | ) | (403 | ) |
| Non-interest  income                                             |   | 1,519                                       |       | 1,300                                      |       | 4,085 |   | 4,615 |   |
| Non-interest  expense                                            |   | (3,435                                      | )          | (2,778                                     | )          | (9,986 | ) | (9,265 | ) |
| Provision  for income taxes                                      |   | (889                                        | )          | (853                                       | )          | (2,415 | ) | (1,492 | ) |
|                                                             |   |                                        |       |                                       |       |   |   |   |   |
| Net  income                                                      |   | $                                           | 1,434      |                                       | $          | 1,292 |   | $ | 3,587 |   | $ | 3,517 |   |
|                                                             |   |                                        |       |                                       |       |   |   |   |   |
| Average  total assets (In millions)                              |   | $                                           | 381.1      |                                       | $          | 286.2 |   | $ | 363.2 |   | $ | 276.4 |   |
| Net  income (annualized) as a percentage of average total assets |   | 1.51                                        | %          | 1.79                                       | %          | 1.32 | % | 1.70 | % |

 

**Results of Operations**

 

## **Net InterestIncome and Net Interest Margin**

 

Net interest income represents the excess of interestand fees earned on interest earning assets (loans, securities, federal fundssold and investments in time deposits) over the interest paid on deposits andborrowed funds.  Net interest margin isnet interest income expressed as a percentage of average earning assets.

 

The Company’s net interest margin was 5.21% for thethree months ended September 30, 2003 and 5.13% for the nine months endedSeptember 30, 2003.  Net interestincome increased $676,000 (17.9%) for the third quarter of 2003 compared to thesame period in 2002.  Net interestincome increased $2,321,000 (23.9%) for the nine months endedSeptember 30, 2003 over the same period in 2002.   The primary reason for this increase was the loan growth and theresulting interest income and fees associated with that growth together withthe decrease in the interest rates paid on deposits.

 

Interest expense was$43,000 (3.8%) lower in the third quarter of 2003 versus the prior year period.The average balances of interest bearing liabilities were $67,276,000 (32.3%)higher in the third quarter of 2003 versus the same quarter in 2002. Eventhough the interest bearing balances increased, rates paid on these liabilitiesdecreased 59 basis points on a quarter over quarter basis.     Interest expense was $268,000 (7.4%)lower in the nine month period ended September 30, 2003 versus the prior yearperiod.  The average balances ofinterest bearing liabilities were $58,095,000 (28.3%) higher in the nine-monthperiod ended September 30, 2003 versus the same period in 2002.  Rates paid on interest bearing liabilitiesdecreased 65 basis points on a year over year basis.

 

The reason for thisdecrease was the change in the mix of the deposits away from higher interestrate certificates of deposit to lower rate demand deposits and the loweraverage cost of certificates of deposit as higher cost deposits were re-pricedin a lower rate environment.

 

Table Two, Analysis ofNet Interest Margin on Earning Assets, and Table Three, Analysis of Volume andRate Changes on Net Interest Income and Expenses, are provided to enable thereader to understand the components and past trends of the Company’s interestincome and expense.  Table Two providesan analysis of net interest margin

 

11

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on earning assets settingforth average assets, liabilities and shareholders’ equity; interest incomeearned and interest expense paid and average rates earned and paid; and the netinterest margin on earning assets.

 

**Table Two:  Analysisof Net Interest Margin on Earning Assets (Unaudited)**

 
| **Three Months Ended September 30,**        |   | **2003**         |    | **2002**     |   |
|--------------------------------------------------|--------|------------------|---------|--------------|--------|
| **(In thousands, except percentages)**           |   | **Avg  Balance** |    | **Interest** |   | **Avg  Yield (4)** |   | **Avg  Balance** |   | **Interest** |   | **Avg  Yield (4)** |   |
| **Assets:**                                      |   |             |    |         |   |   |   |   |   |   |   |   |   |
| Earning  assets                                  |   |             |    |         |   |   |   |   |   |   |   |   |   |
| Loans  (1)                                       |   | $                | 268,306 |         | $      | 5,308 |   | 7.85 | % | $ | 224,182 |   | $ | 4,702 |   | 8.32 | % |
| Taxable  investment securities                   |   | 2,061            |    | 9            |   | 1.73 | % | 1,224 |   | 17 |   | 5.51 | % |
| Tax-exempt  investment securities (2)            |   | 817              |    | 0            |   | 0 | % | 1,855 |   | 23 |   | 4.92 | % |
| Federal  funds sold                              |   | 60,593           |    | 152          |   | 1.00 | % | 29,828 |   | 127 |   | 1.69 | % |
| Investments  in time deposits                    |   | 7,298            |    | 55           |   | 2.99 | % | 1,758 |   | 22 |   | 4.96 | % |
| Total  earning assets                            |   | 339,075          |    | 5,524        |   | 6.46 | % | 258,847 |   | 4,891 |   | 7.50 | % |
| Cash  & due from banks                       |   | 17,151           |    |         |   |   |   | 13,270 |   |   |   |   |   |
| Other  assets                                    |   | 24,883           |    |         |   |   |   | 14,076 |   |   |   |   |   |
|                                             |   | $                | 381,109 |         |   |   |   |   | $ | 286,193 |   |   |   |   |   |
|                                             |   |             |    |         |   |   |   |   |   |   |   |   |   |
| **Liabilities  & Shareholders’ Equity** |   |             |    |         |   |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities:                   |   |             |    |         |   |   |   |   |   |   |   |   |   |
| NOW  & MMDA                                  |   | $                | 157,307 |         | 348    |   | .88 | % | $ | 108,873 |   | 398 |   | 1.45 | % |
| Savings                                          |   | 23,392           |    | 28           |   | .47 | % | 19,098 |   | 47 |   | .98 | % |
| Time  deposits                                   |   | 86,644           |    | 588          |   | 2.69 | % | 80,093 |   | 662 |   | 3.29 | % |
| Other  borrowings                                |   | 8,772            |    | 111          |   | 5.02 | % | 775 |   | 11 |   | 5.65 | % |
| Total  interest bearing liabilities              |   | 276,115          |    | 1,075        |   | 1.54 | % | 208,839 |   | 1,118 |   | 2.13 | % |
| Demand  deposits                                 |   | 70,082           |    |         |   |   |   | 49,635 |   |   |   |   |   |
| Other  liabilities                               |   | 6,922            |    |         |   |   |   | 3,895 |   |   |   |   |   |
| Total  liabilities                               |   | 353,119          |    |         |   |   |   | 262,369 |   |   |   |   |   |
| Shareholders’  equity                       |   | 27,990           |    |         |   |   |   | 23,824 |   |   |   |   |   |
|                                             |   | $                | 381,109 |         |   |   |   |   | $ | 286,193 |   |   |   |   |   |
| Net  interest income & margin (3)            |   |             |    | $            | 4,449  |   | 5.21 | % |   |   | $ | 3,773 |   | 5.80 | % |

 

----

(1)           Loan interest includesloan fees of $497,000 and $665,000 during the three months endedSeptember 30, 2003 and September 30, 2002, respectively.

(2)           Does not includetaxable-equivalent adjustments that primarily relate to income on certainsecurities that are exempt from federal income taxes.

(3)           Net interest margin iscomputed by dividing net interest income by total average earning assets.

(4)           Average yield iscalculated based on actual days in quarter (92 for September 30, 2003 andSeptember 30, 2002) and annualized to actual days in year (365 for 2003and 2002).

 

12

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| **Nine Months Ended September 30,**         |   | **2003**         |    | **2002**     |   |
|--------------------------------------------------|--------|------------------|---------|--------------|--------|
| **(In thousands, except percentages)**           |   | **Avg  Balance** |    | **Interest** |   | **Avg  Yield (4)** |   | **Avg  Balance** |   | **Interest** |   | **Avg  Yield (4)** |   |
| **Assets:**                                      |   |             |    |         |   |   |   |   |   |   |   |   |   |
| Earning  assets                                  |   |             |    |         |   |   |   |   |   |   |   |   |   |
| Loans  (1)                                       |   | $                | 250,711 |         | $      | 14,953 |   | 7.97 | % | $ | 213,296 |   | $ | 13,096 |   | 8.21 | % |
| Taxable  investment securities                   |   | 2,047            |    | 71           |   | 4.64 | % | 1,166 |   | 53 |   | 6.08 | % |
| Tax-exempt  investment securities (2)            |   | 957              |    | 38           |   | 5.31 | % | 2,008 |   | 77 |   | 5.13 | % |
| Federal  funds sold                              |   | 63,206           |    | 533          |   | 1.13 | % | 32,372 |   | 415 |   | 1.71 | % |
| Investments  in time deposits                    |   | 5,918            |    | 145          |   | 3.28 | % | 1,118 |   | 46 |   | 5.50 | % |
| Total  earning assets                            |   | 322,839          |    | 15,740       |   | 6.52 | % | 249,960 |   | 13,687 |   | 7.32 | % |
| Cash  & due from banks                       |   | 15,715           |    |         |   |   |   | 12,673 |   |   |   |   |   |
| Other  assets                                    |   | 20,605           |    |         |   |   |   | 13,642 |   |   |   |   |   |
|                                             |   | $                | 363,159 |         |   |   |   |   | $ | 276,275 |   |   |   |   |   |
|                                             |   |             |    |         |   |   |   |   |   |   |   |   |   |
| **Liabilities  & Shareholders’ Equity** |   |             |    |         |   |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities:                   |   |             |    |         |   |   |   |   |   |   |   |   |   |
| NOW  & MMDA                                  |   | $                | 146,492 |         | 1,075  |   | .98 | % | $ | 96,679 |   | 948 |   | 1.31 | % |
| Savings                                          |   | 21,620           |    | 91           |   | .56 | % | 18,668 |   | 137 |   | .98 | % |
| Time  deposits                                   |   | 86,281           |    | 1,830        |   | 2.84 | % | 88,948 |   | 2,509 |   | 3.77 | % |
| Other  borrowings                                |   | 8,772            |    | 361          |   | 5.50 | % | 775 |   | 31 |   | 5.35 | % |
| Total  interest bearing liabilities              |   | 263,165          |    | 3,357        |   | 1.71 | % | 205,070 |   | 3,625 |   | 2.36 | % |
| Demand  deposits                                 |   | 65,447           |    |         |   |   |   | 44,866 |   |   |   |   |   |
| Other  liabilities                               |   | 7,554            |    |         |   |   |   | 3,671 |   |   |   |   |   |
| Total  liabilities                               |   | 336,166          |    |         |   |   |   | 253,607 |   |   |   |   |   |
| Shareholders’  equity                       |   | 26,993           |    |         |   |   |   | 22,668 |   |   |   |   |   |
|                                             |   | $                | 363,159 |         |   |   |   |   | $ | 276,275 |   |   |   |   |   |
| Net  interest income & margin (3)            |   |             |    | $            | 12,383 |   | 5.13 | % |   |   | $ | 9,992 |   | 5.38 | % |
|                                                  |        |                  |         |              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)           Loan interest includesloan fees of $1,414,000 and $1,543,000 during the nine months endedSeptember 30, 2003 and September 30, 2002, respectively.

(2)           Does not includetaxable-equivalent adjustments that primarily relate to income on certainsecurities that is exempt from federal income taxes.

(3)           Net interest margin iscomputed by dividing net interest income by total average earning assets.

(4)           Average yield iscalculated based on actual days in period (273 for September 30, 2003 andSeptember 30, 2002) and annualized to actual days in year (365 for 2003and 2002).

 

13

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Table Three sets forth a summary of the changes ininterest income and interest expense from changes in average asset andliability balances (volume) and changes in average interest rates.  On a quarter over quarter basis for theperiod ended September 30, 2003, net interest income has increased$676,000 over the same time period in 2002. Interest income from earning assets has increased by $633,000. Changesin the volume of earning assets, primarily loans, have resulted in an increasein interest income of $1,112,000 while interest income from changes in rateshas decreased by $479,000.  Interestexpense for the third quarter of 2003 was $43,000 less than the same timeperiod in 2002.  Changes in the volumeof interest bearing liabilities, both the increase in balances of demanddeposits, as well as the addition of interest expense related to the trustpreferred securities, have resulted in a net increase of interest expense of$353,000.  Decreases in average ratespaid, primarily on certificates of deposit and demand deposits, have resultedin an interest expense reduction of $396,000.  On a year-to-date basis through September 30, 2003, net interestincome has increased $2,321,000 over the same time period in 2002.  Interest income from earning assets hasincreased by $2,053,000.  Changes in thevolume of earning assets, primarily loans, have resulted in an increase ininterest income of $2,879,000 while interest income from changes in rates hasdecreased by $756,000.  Interest expensefor the nine month period was $268,000 less than the same time period in2002.  Changes in the volume of interestbearing liabilities, primarily the increase in balances of demand deposits, aswell as the addition of interest expense related to the trust preferred securities,have resulted in a net increase of interest expense of $755,000.  Decreases in average rates paid, primarilyon certificates of deposit and demand deposits have resulted in an interestexpense reduction of $1,023,000.

 

**TableThree:  Analysis of Volume and RateChanges on Net Interest Income and Expenses (Unaudited)**

(In thousands) ThreeMonths Ended September 30, 2003 over 2002

Increase (decrease) dueto change in:

 
|                                  |   | **Volume** |   | **Rate (3)** |   | **Net Change** |   |
|---------------------------------------|--------|------------|--------|--------------|--------|----------------|--------|
| Interest-earning assets:              |   |       |   |         |   |           |   |
| Net loans (1)                         |   | $          | 915    |         | $      | (309           | )      | $ | 606 |   |
| Taxable  investment securities        |   | 11         |   | (19          | )      | (8             | )      |
| Tax  exempt investment securities (2) |   | (13        | )      | (10          | )      | (23            | )      |
| Federal  funds sold                   |   | 130        |   | (105         | )      | 25             |   |
| Investment  in time deposits          |   | 69         |   | (36          | )      | 33             |   |
| Total                                 |   | 1,112      |   | (479         | )      | 633            |   |
|                                  |   |       |   |         |   |           |   |
| Interest-bearing  liabilities:        |   |       |   |         |   |           |   |
| Demand  deposits                      |   | 176        |   | (226         | )      | (50            | )      |
| Savings  deposits                     |   | 10         |   | (29          | )      | (19            | )      |
| Time  deposits                        |   | 54         |   | (128         | )      | (74            | )      |
| Other  borrowings                     |   | 113        |   | (13          | )      | 100            |   |
| Total                                 |   | 353        |   | (396         | )      | (43            | )      |
| Interest  differential                |   | $          | 759    |         | $      | (83            | )      | $ | 676 |   |

 

----

(1)           The average balance ofnon-accruing loans is immaterial as a percentage of total loans and, as such,has been included in net loans.

 

(2)           Does not includetaxable-equivalent adjustments that primarily relate to income on certainsecurities that is exempt from federal income taxes.

(3)           The rate/volumevariance has been included in the rate variance.

 

14

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(In thousands) NineMonths Ended September 30, 2003 over 2002

Increase (decrease) dueto change in:

 
|                                  |   | **Volume** |   | **Rate (3)** |   | **Net Change** |   |
|---------------------------------------|--------|------------|--------|--------------|--------|----------------|--------|
| Interest-earning assets:              |   |       |   |         |   |           |   |
| Net loans (1)                         |   | $          | 2,220  |         | $      | (363)          |   | $ | 1,857 |   |
| Taxable  investment securities        |   | 39         |   | (20          | )      | 19             |   |
| Tax  exempt investment securities (2) |   | (43        | )      | 3            |   | (40            | )      |
| Federal  funds sold                   |   | 395        |   | (277         | )      | 118            |   |
| Investment  in time deposits          |   | 197        |   | (98          | )      | 99             |   |
| Total                                 |   | 2,808      |   | (755         | )      | 2,053          |   |
|                                  |   |       |   |         |   |           |   |
| Interest-bearing  liabilities:        |   |       |   |         |   |           |   |
| Demand  deposits                      |   | 488        |   | (361         | )      | 127            |   |
| Savings  deposits                     |   | 22         |   | (68          | )      | (46            | )      |
| Time  deposits                        |   | (75        | )      | (604         | )      | (679           | )      |
| Other  borrowings                     |   | 320        |   | 10           |   | 330            |   |
| Total                                 |   | 755        |   | (1,023       | )      | (268           | )      |
| Interest  differential                |   | $          | 2,053  |         | $      | 268            |   | $ | 2,321 |   |

 

----

(1)           The average balance ofnon-accruing loans is immaterial as a percentage of total loans and, as such,has been included in net loans.

 

(2)           Does not includetaxable-equivalent adjustments that primarily relate to income on certainsecurities that is exempt from federal income taxes.

(3)           The rate/volumevariance has been included in the rate variance.

 

15

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## **Non-interestIncome**

 

Table Four below provides a summary of the componentsof non-interest income for the periods indicated (dollars in thousands)(percent of assets annualized):

 

**Table Four:  Components of Noninterest Income (Unaudited)**

 

ThreeMonths Ended September 30,

 
|                                      |   | **2003** |   | **% of Avg.  Assets** |   | **2002** |   | **% of Avg.  Assets** |   |
|-------------------------------------------|--------|----------|--------|-----------------------|--------|----------|--------|-----------------------|--------|
|                                      |   |     |   |                  |   |     |   |                  |   |
| Service  charges on deposit accounts      |   | $        | 415    |                  | .44    |     | $      | 264                   |   | .37 |   |
| Loan  servicing fees                      |   | 240      |   | .26                   |   | 110      |   | .15                   |   |
| Fees  — non-deposit investment sales |   | 70       |   | .07                   |   | 6        |   | .01                   |   |
| Merchant  fee income                      |   | 64       |   | .07                   |   | 97       |   | .14                   |   |
| Gain  on the sale of loans                |   | 460      |   | .49                   |   | 517      |   | .72                   |   |
| Other                                     |   | 270      |   | .29                   |   | 306      |   | .43                   |   |
|                                      |   |     |   |                  |   |     |   |                  |   |
| Total  non-interest income                |   | $        | 1,519  |                  | 1.62   |     | $      | 1,300                 |   | 1.82 |   |

## ** **

 

Nine Months Ended September 30,

 
|                                      |   | **2003** |   | **% of Avg.  Assets** |   | **2002** |   | **% of Avg.  Assets** |   |
|-------------------------------------------|--------|----------|--------|-----------------------|--------|----------|--------|-----------------------|--------|
|                                      |   |     |   |                  |   |     |   |                  |   |
| Service  charges on deposit accounts      |   | $        | 937    |                  | .35    |     | $      | 759                   |   | .37 |   |
| Loan  servicing fees                      |   | 558      |   | .21                   |   | 273      |   | .13                   |   |
| Fees  — non-deposit investment sales |   | 150      |   | .06                   |   | 92       |   | .04                   |   |
| Merchant  fee income                      |   | 215      |   | .08                   |   | 231      |   | .11                   |   |
| Gain  on the sale of loans                |   | 1,226    |   | .46                   |   | 1,084    |   | .52                   |   |
| Other                                     |   | 999      |   | .37                   |   | 2,176    |   | 1.08                  |   |
|                                      |   |     |   |                  |   |     |   |                  |   |
| Total  non-interest income                |   | $        | 4,085  |                  | 1.53   |     | $      | 4,615                 |   | 2.25 |   |

 

16

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## **Non-interest income was up $219,000(16.8%) to $1,519,000 for the three months ended September 30, 2003 ascompared to $1,300,000 for the three months ended September 30, 2002.    Increases in non-interest income wererealized in fees from service charges (up 57%), loan servicing fees (up 118%),and fees from alternative investment sales (up 1,066%).  The increase in service charge income wasthe result of additional deposit accounts opened during the third quarter andthe introduction of an overdraft privilege deposit product in August thathas added a new source of recurring non-interest income.  The loan servicing income increased as aresult of more loans being sold on the secondary market through FNMA (FannieMae) as many customers of the Company took advantage of low levels in mortgagefinancing rates.  Servicing fee increaseswere also realized in SBA (Small Business Administration) and FHMA (FarmersHome Administration) through their USDA (United States Department ofAgriculture) Business and Industry program. The Company retains the servicing of loans sold through these programs,which generates fee income.  Feesresulting from the sales of non-deposit investment products also increasedsubstantially on a quarter over quarter basis as the public has regained someconfidence in the equities market.   TheCompany is always looking for new sources of non-interest income.  In September management became aware ofa program being offered through one of the correspondent banks the Company hasa relationship with which allows independent banks to participate in thesyndication of cash balances into non-bank ATM’s located throughout the countryon a year-round basis.  Companies thatown these ATM’s such as American Express and a host of others, traditionallyuse higher cost balance sheet debt sources to finance this cash commitment.  This program allows for the replacement ofthis cash with participant bank money. Our correspondent bank acts as an agent for independent banks by placingeach bank’s liquidity into the vaults of specific ATM’s.  At all times, title to the cash is retainedby the participating bank.  This programprovides fee income equal to the Federal Funds Target Rate plus 50 basispoints.  The Company has committed $10million to this program.  Since thesefunds are no longer considered to be cash in the bank for balance sheetpurposes, they are classified in other assets.**

## ** **

For the nine months endedSeptember 30, 2003, non-interest income was down $530,000 (11.5%) to$4,085,000 as compared to the $4,615,000 total for the nine months endedSeptember 30, 2002.   The majorreason for the decrease in non-interest income for this period can beattributed to the tax-free net proceeds from key man insurance policies theBank received in March 2002 as a result of the death of the Company’sChief Operating Officer.  All of theother components of the non-interest income showed gains with the exception ofmerchant fee income which was (down 7%). Increases were realized in service charges on deposit accounts (up 23%),loan servicing fees (up 104%), non-deposit investment sales fee income (up63%), and gain on sale of loans (up 13%).

 

**Non-interest Expense**

 

Non-interestexpense increased $657,000 (23.7%) to $3,435,000 in the third quarter of 2003versus $2,778,000 in the third quarter of 2002.  Salary and employee benefits increased $473,000 (30.9%) resultingfrom normal cost of living raises, commissions paid to Butte Community Bank’sReal Estate Loan agents and staffing additions made during the year as theCompany continues to grow and implement the new technology acquired during theyear.  Benefit costs and employer taxesincreased commensurate with the salaries.   On a quarter over quarter basis, occupancy expenses were higher by$62,000 (35.6%).  This increase in costsis associated with the opening of the North Paradise office, the move of theMagalia office into the Holiday Quality Foods market, and the opening of aCentral Services facility which houses the Auditing Department, BusinessDevelopment, Government Lending, Security, Marketing and Non-Deposit Investmentpersonnel, and is related to building depreciation, utilities, janitorialservices and property taxes.   Fixedasset expense was $284,000 in the third quarter of 2003 compared to $231,000 inthe same period of 2002, representing a 23% increase.   Other expenses increased $69,000 (8%) in the third quarter of2003 versus the third quarter of 2002.

 

Non-interestexpense for the nine month period ended September 30, 2003 was $9,986,000versus $9,265,000 for the same period in 2002. Salaries and benefits increased by $1,536,000 (35.3%) due to cost ofliving raises, added benefit costs and employer taxes associated with thestaffing additions made during the year as

 

18

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the Company continues togrow and implement the new technology acquired during the year.  On a year over year basis, full timeequivalent employees increased by 31.  Occupancy expense was up $132,000 (27%) from the first nine months of2002 to the first nine months of 2003. Fixed asset expense was up 115,000 (18%).  A portion of this increase relates to technology upgrades made toour core banking system such as the digital image processing system introducedin the first quarter of this year.  Aswith the quarter-to-quarter comparison, much of the increase in premise expenseis related to the opening of the new North Paradise office, the move of theMagalia office to the Holiday Quality Foods market and the opening of theCentral Services facility discussed above. Other expenses decreased by $1,062,000 (28%).   As discussed in the non-interest income section, most of thisdecrease was attributable to the accelerated accrual of salary continuationplan benefits, in March 2002, associated with the death of the Company’sChief Operating Officer that will be subsequently paid to his beneficiary.

 

## **Provision for LoanLosses**

## ** **

The Company provided $210,000 for loan losses for thethird quarter of 2003 as compared to $150,000 for the third quarter of2002.  Net loan losses for the threemonths ended September 30, 2003 were $14,000 as compared to $13,000 inrecoveries for the three months ended September 30, 2002.   For the first nine months of 2003, theCompany made provisions for loan losses of $480,000.   This compares to the provision for loan losses of $403,000 forthe first nine months of 2002.  Theincrease in the provision for loan losses in both periods is primarily relatedto the growth in loans.

 

**Provision for Income Taxes**

 

The effective tax rate for the third quarter and firstnine months of 2003 was 38.3% and 40.2%, versus 39.8% and 29.8%, for the sameperiod in 2002.  The lower effective taxrate for the first nine months of 2002 was attributable to the tax-free netproceeds from key man insurance policies received as the result of the death ofone of the Company’s executives.

 

**Balance Sheet Analysis**

 

The Company’s total assets were $378,205,000 atSeptember 30, 2003 as compared to $337,235,000 at December 31, 2002,representing an increase of 12%.  Theaverage balance of total assets for the nine months ended September 30,2003 was $363,159,000, which represents an increase of $86,884,000 (31%) overthe $276,275,000 during the nine-month period ended September 30, 2002.

 

## **Loans**

## ** **

The Company concentrates its lending activities in thefollowing principal areas: 1) commercial; 2) real estate; 3) residential realestate and real estate construction (both commercial and residential); 4)agriculture; and 5) consumer loans. Commercial and residential real estate loans are generally secured byimproved property, with original maturities of 3-10 years.  At September 30, 2003, these principalareas accounted for approximately 20%, 29%, 33%, 10% and 8%, respectively, ofthe Company’s loan portfolio.    The mixat December 31, 2002 was 21%, 35%, 28%, 8% and 8%.  These changes are consistent with theCompany’s history of increased real estate construction activity during thesummer months.  Continuing strongeconomic activity in the Company’s market area, new borrowers developed throughthe Company’s marketing efforts and credit extensions expanded to existingborrowers, offset by normal loan pay-downs and payoffs, resulted in netincreases in loan balances for commercial loans ($5,636,000 or 11.6%), realestate construction ($24,910,000 or 38.6%) agricultural loans ($7,765,000 or41%),and consumer ($2,681,000 or 13.9%) and a decrease in residential realestate ($2,552,000 or 3.2%).  Table Fivebelow summarizes the composition of the loan portfolio as of September 30,2003 and December 31, 2002.

 

19

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**Table Five: Loan Portfolio Composition (Unaudited)**

** **
| **(In thousands)**         |   | **September   30,  2003** |    | **December 31,  2002** |   |
|----------------------------|--------|--------------------------------|---------|-----------------------------|--------|
| Commercial                 |   | $                              | 54,297  |                        | $      | 48,661 |   |
| Real  estate:              |   |                           |    |                        |   |
| Mortgage                   |   | 79,505                         |    | 82,057                      |   |
| Construction               |   | 89,475                         |    | 64,565                      |   |
|                       |   |                           |    |                        |   |
| Agriculture                |   | 26,700                         |    | 18,935                      |   |
| Consumer                   |   | 22,006                         |    | 19,325                      |   |
| Total  loans               |   | 271,983                        |    | 233,543                     |   |
| Allowance  for loan losses |   | (3,473                         | )       | (3,007                      | )      |
| Deferred  loan fees, net   |   | (1,060                         | )       | (837                        | )      |
| Total  net loans           |   | $                              | 267,450 |                        | $      | 229,699 |   |

 

The majority ofthe Company’s loans are direct loans made to individuals and localbusinesses.  The Company reliessubstantially on local promotional activity and personal contacts by bankofficers, directors and employees to compete with other financialinstitutions.  The Company makes loansto borrowers whose applications include a sound purpose and a viable primaryrepayment source, generally supported by a secondary source of repayment.

 

Commercial loansconsist of credit lines for operating needs, loans for equipment purchases,working capital, and various other business loan products.  Consumer loans include a range oftraditional consumer loan products such as personal lines of credit and loansto finance purchases of autos, boats, recreational vehicles, mobile homes and variousother consumer items.  Constructionloans are generally composed of commitments to customers within the Company’sservice area for construction of both commercial properties and custom andsemi-custom single-family residences. Other real estate loans consist primarily of loans secured by firsttrust deeds on commercial and residential properties typically with maturitiesfrom 3 to 10 years and original loan to value ratios generally from 65% to80%.  Agriculture loans consistprimarily of crop loans to farmers of peaches, prunes, walnuts, andalmonds.  In general, except in the caseof loans with SBA or FMHA guarantees, the Company does not make long-termmortgage loans; however, Butte Community Bank has a residential lendingdivision to assist customers in securing most forms of longer termsingle-family mortgage financing which compliments the single familyconstruction loans the Bank makes. These construction loans typically peak in volume during the late springand summer months when the weather is conducive to building.  This construction activity has been cyclicaland anticipated by management over the past several years.

 

## **Risk Elements**

## ** **

The Companyassesses and manages credit risk on an ongoing basis through a total creditculture that emphasizes excellent credit quality, extensive internal monitoringand established formal lending policies. Additionally, the Company contracts with an outside loan reviewconsultant to periodically review the existing loan portfolio.  Management believes its ability to identifyand assess risk and return characteristics of the Company’s loan portfolio iscritical for profitability and growth. Management strives to continue its emphasis on credit quality in theloan approval process, active credit administration and regularmonitoring.  With this in mind,management has designed and implemented a comprehensive loan review and gradingsystem that functions to continually assess the credit risk inherent in theloan portfolio.

 

Ultimately,underlying trends in economic and business cycles may influence creditquality.  The Company’s business isconcentrated in the Butte and Sutter County Area. The economy of these twocounties is

 

20

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diversified withprofessional services, manufacturing, agriculture and real estate investmentand construction.   Special emphasis isplaced within the communities in which the Company has offices (Chico,Paradise, Magalia, Oroville and Yuba City). The Company also maintains loan production offices in the cities ofRoseville and Redding.  Single-familyresidential construction is the primary lending product from the Rosevillelocation serving the greater Sacramento area. The primary focus of the loan production office in Redding is commercialloans with an emphasis on SBA and other government loan programs.

 

The Company hassignificant extensions of credit and commitments to extend credit that aresecured by real estate.  The ultimaterepayment of these loans is generally dependent on personal or business cashflows or the sale or refinancing of the real estate.  The Company monitors the effects of current and expected marketconditions and other factors on the collectability of real estate loans.  The more significant factors management considersinvolve the following:  lease,absorption and sale rates; real estate values and rates of return; operatingexpenses; inflation; and sufficiency of collateral independent of the realestate including, in limited instances, personal guarantees.

 

In extendingcredit and commitments to borrowers, the Company generally requires collateraland/or guarantees as security.  Therepayment of such loans is expected to come from cash flow or from proceedsfrom the sale of selected assets of the borrowers.  The Company’s requirement for collateral and/or guarantees isdetermined on a case-by-case basis in connection with management’s evaluationof the creditworthiness of the borrower. Collateral held varies but may include accounts receivable, inventory,property, plant and equipment, income-producing properties, residences andother real property.  The Companysecures its collateral by perfecting its security interest in business assets,obtaining deeds of trust, or outright possession among other means.

 

## **In management’s judgment, aconcentration exists in real estate loans, which represented approximately62.1% of the Company’s loan portfolio at September 30, 2003, whichreflects a slight decrease from the 62.8% concentration level atDecember 31, 2002.  Managementbelieves the concentration to have no more than the normal risk ofcollectability; however, a substantial decline in the economy in general, or adecline in real estate values in the Company’s primary market areas inparticular, could have an adverse impact on the collectability of these loansand require an increase in the provision for loan losses which could adverselyaffect the Company’s future prospects, results of operations, profitability andstock price.  Management believes thatits lending policies and underwriting standards will tend to minimize losses inan economic downturn; however, there is no assurance that losses will not occurunder such circumstances.  The Company’sloan policies and underwriting standards include, but are not limited to, thefollowing: (1) maintaining a thorough understanding of the Company’s servicearea and originating a significant majority of its loans within that area, (2)maintaining a thorough understanding of borrowers’ knowledge, capacity, andmarket position in their field of expertise, (3) basing real estate loanapprovals not only on market demand for the project, but also on the borrowers’capacity to support the project financially in the event it does not perform toexpectations (whether sales or income performance), and (4) maintainingconforming and prudent loan to value and loan to cost ratios based onindependent outside appraisals and ongoing inspection and analysis by theCompany’s lending officers.**

## ** **

## **Nonaccrual, PastDue and Restructured Loans**

## ** **

Management generally places loans on nonaccrual statuswhen they become 90 days past due, unless the loan is well secured and in theprocess of collection.  Loans arecharged off when, in the opinion of management, collection appears unlikely.

 

Table Six below setsforth nonaccrual loans as of September 30, 2003 and December 31,2002.  There were no loans past due 90days or more and still accruing interest at September 30, 2003 orDecember 31, 2002.

 

21

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**Table Six:  Non-Performing Loans (Unaudited)**

** **
| **(In thousands)**          |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-----------------------------|--------|------------------------------|--------|-----------------------------|--------|
| Nonaccrual:                 |   |                         |   |                        |   |
| Commercial                  |   | 109                          |   | 134                         |   |
| Real  estate                |   | 80                           |   | 460                         |   |
| Consumer  and other         |   | 9                            |   | —                      |   |
| Total  non-performing loans |   | $                            | 198    |                        | $      | 594 |   |
|                             |        |                              |        |                             |        |  |  |

 

At September 30, 2003, non-performing loans andleases were .07% of total loans and leases. The recorded investments in loans that were considered to be impairedtotaled seven loans with balances of $198,000 at September 30, 2003 andtwo loans with balances of $594,000 at December 31, 2002.  One of the seven impaired loans shown forSeptember 30, 2003 had a U.S. Government guarantee for 80% of the loanbalance which was $46,000.  Theremaining six loans have a very low potential for loss.  There were no loan concentrations in excessof 10% of total loans not otherwise disclosed as a category of loans as ofSeptember 30, 2003 or December 31, 2002.  Management is not aware of any potential problem loans, whichwere accruing and current at September 30, 2003, where serious doubtexists as to the ability of the borrower to comply with the present repaymentterms.

 

## **Allowance for LoanLosses Activity**

## ** **

The provision for loan losses is based uponmanagement’s evaluation of the adequacy of the existing allowance for loansoutstanding. This allowance is increased by provisions charged to expense andrecoveries and is reduced by loan charge-offs. Management determines anappropriate provision based upon the interaction of three primary factors: (1)loan portfolio growth, (2) a comprehensive grading and review formula for totalloans outstanding, and (3) estimated inherent credit risk in the portfolio.

 

Management establishes general reserve factors forloans based upon an assessment of a credit risk by loan type and loan grade.These reserve factors, which are based on historical loss information, may beadjusted for significant commercial and real estate loans that are individuallyevaluated by management for specific risk of loss.  In addition, reserve factors ranging from 0.25% to 2.50% areassigned to currently performing loans that are not otherwise graded as SpecialMention, Substandard or Doubtful.  Thesefactors are assigned based on management’s assessment of the following for eachidentified loan type: (1) inherent credit risk, (2) historical losses and, (3)where the Company has not experienced losses, historical losses experienced bypeer banks.    Finally, a residualcomponent is maintained to cover uncertainties that could affect management’sestimate of probable losses.  Thisresidual component of the allowance reflects a margin of imprecision inherentin the underlying assumptions used to estimate losses in specifically gradedloans and expected losses in the performing portfolio.

 

The Loan Committee of the Board of Directors reviewsthe adequacy of the allowance for loan losses at least quarterly to includeconsideration of the relative risks in the portfolio and current economicconditions.  The allowance is adjustedbased on that review if, in the judgment of the loan committee and management,changes are warranted.  The allowancefor loan losses totaled $3,473,000 or 1.21% of total loans atSeptember 30, 2003 and $3,007,000 or 1.29% at December 31, 2002.  Net charge-offs to average loans for thethird quarter and year to date through September 30, 2003 are $14,000.

 

22

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Table Seven belowsummarizes, for the periods indicated, the activity in the allowance for loanlosses.

 

**Table Seven: Allowance for LoanLosses (Unaudited)**

 
|                                                                             |   | **Three  Months  Ended  September 30,** |    | **Nine  Months  Ended  September 30,** |   |
|----------------------------------------------------------------------------------|--------|----------------------------------------------|---------|---------------------------------------------|--------|
| **(In thousands, except for percentages)**                                       |   | **2003**                                     |    | **2002**                                    |   | **2003** |   | **2002** |   |
|                                                                             |   |                                         |    |                                        |   |   |   |   |   |
| Average  loans outstanding                                                       |   | $                                            | 265,874 |                                        | $      | 224,182 |   | $ | 246,532 |   | $ | 211,583 |   |
|                                                                             |   |                                         |    |                                        |   |   |   |   |   |
| Allowance  for possible loan losses at beginning of period                       |   | $                                            | 3,277   |                                        | $      | 2,647 |   | $ | 3,007 |   | $ | 2,397 |   |
|                                                                             |   |                                         |    |                                        |   |   |   |   |   |
| Loans  charged off:                                                              |   |                                         |    |                                        |   |   |   |   |   |
| Commercial                                                                       |   | (14                                          | )       | —                                      |   | (14 | ) | — |   |
| Real  estate                                                                     |   | —                                       |    | —                                      |   | — |   | (4 | ) |
| Consumer                                                                         |   | —                                       |    | —                                      |   | (4 | ) | (1 | )  |
| Total                                                                            |   | (14                                          | )       |                                        |   | (18 | ) | (5 | ) |
| Recoveries  of loans previously                                                  |   |                                         |    |                                        |   |   |   |   |   |
| charged  off:                                                                    |   |                                         |    |                                        |   |   |   |   |   |
| Commercial                                                                       |   | —                                       |    | 13                                          |   | — |   | 14 |   |
| Real  estate                                                                     |   | —                                       |    | —                                      |   | — |   | — |   |
| Consumer                                                                         |   | —                                       |    | —                                      |   | 4 |   | — |   |
| Total                                                                            |   |                                         |    | 13                                          |   | 4 |   | 14 |   |
| Net  loan (charge offs) recoveries                                               |   | (14                                          | )       | 13                                          |   | (14 | ) | 9 |   |
|                                                                             |   |                                         |    |                                        |   |   |   |   |   |
| Additions  to allowance charged to operating expenses                            |   | 210                                          |    | 150                                         |   | 480 |   | 403 |   |
| Allowance  for loan losses at end of period                                      |   | $                                            | 3,473   |                                        | $      | 2,647 |   | $ | 3,473 |   | $ | 2,809 |   |
| Ratio  of net (charge-offs) recoveries to   loans outstanding               |   | (.005                                        | )%      | .02                                         | %      | (.006 | )% | .004 | % |
| Provision  for possible loan losses to average loans outstanding                 |   | .08                                          | %       | .07                                         | %      | .19 | % | .19 | % |
| Allowance  for loan  losses to loans net of  deferred fees at end of period |   | 1.28                                         | %       | 1.21                                        | %      | 1.28 | % | 1.21 | % |

 

It is the policyof management to maintain the allowance for loan losses at a level adequate forknown and inherent risks in the portfolio. Based on information currently available to analyze inherent creditrisk, including economic factors, overall credit quality, historical delinquenciesand a history of actual charge-offs, management believes that the provision forloan losses and the allowance are prudent and adequate.  The Company generally makes monthlyallocations to the allowance for loan losses. The budgeted allocation is based on estimates of loss risk and loangrowth.  Adjustments may be made basedon differences from estimated loan growth, the types of loans constituting thisgrowth, changes in risk ratings within the portfolio, and general economicconditions.  However, no prediction ofthe ultimate level of loans charged off in future years can be made with anycertainty.

 

**Other Real Estate**

 

At September 30, 2003 and December 31, 2002,the Company did not have any other real estate (“ORE”) properties.

 

23

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## **Deposits**

## ** **

At September 30, 2003, total deposits were$336,784,000 representing an increase of $38,803,000 (13%) over theDecember 31, 2002 balance of $297,981,000.  Non-interest bearing demand deposits increased $3,158,000 duringthe period from December 31, 2002 to September 30, 2003 whileinterest bearing deposits increased $35,645,000 during this same period.  The majority of the growth in interestbearing deposits was in NOW and Money Market accounts which increased $27,313,000from December 31, 2002 to September 30, 2003.

## ** **

## **Capital Resources**

## ** **

The current and projected capital position of theCompany and the impact of capital plans and long-term strategies are reviewedregularly by management. The Company’s capital position represents the level ofcapital available to support continued operations and expansion.

 

The Board of Directors of the Company authorized thepayment of a cash dividend of $.075 per share on January 28, 2002,April 25, 2002, and July 26, 2002, $.08 per share on October 25,2002, $.10 per share on January 23, 2003, $.10 per share on April 24,2003, and $.10 per share on July 25, 2003.  The payment of dividends in the future is subject to thediscretion of the Board of Directors of the Company and will depend onearnings, the financial condition of the Company and other relevantfactors.  The per share amounts havebeen retroactively restated for the Company’s 4 for 3 stock split approved bythe Board of Directors on August 20, 2002.

 

The Company and its subsidiary Bank are subject tocertain regulations issued by the Board of Governors of the Federal ReserveSystem and the FDIC which require maintenance of certain levels ofcapital.  At September 30, 2003,shareholders’ equity was $28,459,000, representing an increase of $3,078,000(12.1%) from $25,381,000 at December 31, 2002.

 

Table Eight below lists the Company and the Bankcapital ratios at September 30, 2003 and December 31, 2002, as wellas the minimum ratios required under regulatory definitions of capitaladequacy. 

 

**Table Eight:  Capital Ratios (Unaudited)**

 
| **Capital to Risk-Adjusted Assets** |   | **At  September 30,  2003** |   | **At  December  31, 2002** |   | **Minimum  Regulatory  Requirement** |   |
|-------------------------------------|--------|----------------------------------|--------|----------------------------|--------|--------------------------------------|--------|
| **Company**                         |   |                             |   |                       |   |                                 |   |
|                                |   |                             |   |                       |   |                                 |   |
| Leverage  ratio                     |   | 9.6                              | %      | 10.4                       | %      | 4.0                                  | %      |
|                                |   |                             |   |                       |   |                                 |   |
| Tier  1 Risk-Based Capital          |   | 12.1                             | %      | 12.8                       | %      | 4.0                                  | %      |
|                                |   |                             |   |                       |   |                                 |   |
| Total  Risk-Based Capital           |   | 13.2                        | %      | 14.0                       | %      | 8.0                                  | %      |
|                                |   |                             |   |                       |   |                                 |   |
| **Bank**                            |   |                             |   |                       |   |                                 |   |
|                                |   |                             |   |                       |   |                                 |   |
| Leverage  ratio                     |   | 9.2                              | %      | 7.9                        | %      | 4.0                                  | %      |
|                                |   |                             |   |                       |   |                                 |   |
| Tier  1 Risk-Based Capital          |   | 10.8                             | %      | 9.7                        | %      | 4.0                                  | %      |
|                                |   |                             |   |                       |   |                                 |   |
| Total  Risk-Based Capital           |   | 12.0                             | %      | 10.9                       | %      | 8.0                                  | %      |

 

24

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Capital ratios arereviewed on a regular basis to ensure that capital exceeds the prescribedregulatory minimums and is adequate to meet future needs.  All ratios are in excess of the regulatorydefinition of “Minimum” at September 30, 2003 and December 31,2002.  The Bank was considered“well-capitalized” by regulatory standards, at September 30, 2003 andDecember 31, 2002.

 

**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

 

**Market Risk Management**

 

*Overview*.  Market risk is the risk of loss from adversechanges in market prices and rates.  TheCompany’s market risk arises primarily from interest rate risk inherent in itsloan, investment and deposit portfolios. The goal for managing the assets and liabilities of the Company is tomaximize shareholder value and earnings while maintaining a high qualitybalance sheet without exposing the Company to undue interest rate risk.

 

The Board ofDirectors has overall responsibility for the interest rate risk managementpolicies.  The Bank has an Asset andLiability Management Committee (ALCO) that establishes and monitors guidelinesto control the sensitivity of earnings to changes in interest rates.

 

*Asset/Liability Management*.  Activities involved in asset/liabilitymanagement include, but are not limited to, lending, accepting and placingdeposits, investing in securities, using trust preferred securities andborrowings.  Interest rate risk is theprimary market risk associated with asset/liability management.  Sensitivity of earnings to interest ratechanges arises when yields on assets change in a different time period or in adifferent amount from that of interest costs on liabilities.  To mitigate interest rate risk, thestructure of the balance sheet is managed with the goal that there is acorrelation between movements of interest rates on assets and liabilities andcontributions are made to earnings even in periods of volatile interestrates.  The asset/liability managementpolicy sets limits on the acceptable amount of variance in net interest marginand market value of equity under changing interest environments.  The Company uses simulation models toforecast earnings, net interest margin and market value of equity.

 

Simulation ofearnings is the primary tool used to measure the sensitivity of earnings tointerest rate changes.  Usingcomputer-modeling techniques, the Company is able to estimate the potentialimpact of changing interest rates on earnings. A balance sheet forecast is prepared monthly using inputs of actualloans, securities and interest bearing liability (i.e. deposits/borrowings)positions as the beginning base.  Theforecast balance sheet is processed against seven interest rate scenarios.  These scenarios include a 100, 200 and 300basis point rising rate forecast, a flat rate forecast and a 100, 200 and 300basis point falling rate forecast which take place within a one year timeframe.  The net interest income ismeasured during the year assuming a gradual change in rates over thetwelve-month horizon.  The Company’s netinterest income, as forecast below, was modeled utilizing a forecast balancesheet projected from balances as of the date indicated.

 

25

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Table Nine belowsummarizes the effect on net interest income (NII) of a ±200 basis point changein interest rates as measured against a constant rate (no change)scenario.  The results shown in Tablenine for the two periods, fall within the parameters of the Bank’s policy forinterest rate risk.

 

**Table Nine:  Interest Rate Risk Simulation of Net Interest as ofSeptember 30, 2003 and December 31, 2002 (Unaudited)**

 
| **(In thousands)**                      |   | **$**  | **Change in NII  from Current  12 Month Horizon  September 30, 2003** |   | **$**  | **Change in NII  from Current  12 Month Horizon  December 31, 2002** |   |
|-----------------------------------------|--------|--------|----------------------------------------------------------------------------|--------|--------|---------------------------------------------------------------------------|--------|
| Variation from a constant rate scenario |   |   |                                                                       |   |   |
| +200bp                                  |   | $      | 336                                                                        |   | $      | 111                                                                       |   |
| - 200bp                                 |   | $      | 711                                                                        |   | $      | (1,262                                                                    | )      |

## ** **

## **The simulations of earnings do notincorporate any management actions which might moderate the negativeconsequences of interest rate deviations. Therefore, they do not reflect likely actual results, but serve asestimates of interest rate risk.**

## ** **

## **Inflation**

## ** **

The impact of inflationon a financial institution differs significantly from that exerted onmanufacturing, or other commercial concerns, primarily because its assets andliabilities are largely monetary.  Ingeneral, inflation primarily affects the Company and it subsidiaries throughits effect on market rates of interest, which affects the Company’s ability toattract loan customers.  Inflationaffects the growth of total assets by increasing the level of loan demand, andpotentially adversely affects capital adequacy because loan growth ininflationary periods can increase at rates higher than the rate that capitalgrows through retention of earnings, which may be generated in the future.  In addition to its effects on interestrates, inflation increases overall operating expenses.  Inflation has not had a material effect uponthe results of operations of the Company and its subsidiaries during theperiods ended September 30, 2003, and 2002.

 

**Liquidity**

 

Liquidity management refers to the Company’s abilityto provide funds on an ongoing basis to meet fluctuations in deposit levels aswell as the credit needs and requirements of its clients.  Both assets and liabilities contribute tothe Company’s liquidity position. Federal funds lines, short-term investments and securities, and loanrepayments contribute to liquidity, along with deposit increases, while loanfunding and deposit withdrawals decrease liquidity.  The Company assesses the likelihood of projected fundingrequirements by reviewing historical funding patterns, current and forecastedeconomic conditions and individual client funding needs.  Commitments to fund loans atSeptember 30, 2003 and December 31, 2002 were approximately$133,893,000 and $105,835,000, respectively. Such loans relate primarily to revolving lines of credit and othercommercial loans, and to real estate construction loans.

 

The Company’ssources of liquidity consist of cash and due from correspondent banks,overnight funds sold to correspondent banks, unpledged marketable investmentsand loans held for sale.  OnSeptember 30, 2003, consolidated liquid assets totaled $74.9 million or19.8% of total assets compared to $81.4 million or 24.1% of total assets onDecember 31, 2002.  In addition toliquid assets, the Company maintains short-term lines of credit in the amountof $6,000,000 with correspondent banks. There were no borrowings outstanding under these arrangements atSeptember 30, 2003.    The Bankalso has informal agreements with various other banks to sell participations inloans, if necessary.  The Company servesprimarily a business and professional customer base

 

26

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and, as such, its depositbase is susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position ofliquid assets to volatile and cyclical deposits.  Liquidity is also affected by portfolio maturities and the effectof interest rate fluctuations on the marketability of both assets andliabilities.  The Company can sell anyof its unpledged securities held in the available-for-sale category to meetliquidity needs.

 

## **Off-Balance SheetItems**

## ** **

The Company has certain ongoing commitments underoperating leases.  These commitments donot significantly impact operating results. As of September 30, 2003 andDecember 31, 2002, commitments to extend credit and letters of credit werethe only financial instruments with off-balance sheet risk.  The Company has not entered into anycontracts for financial derivative instruments such as futures, swaps, optionsor similar instruments.  Loan commitmentsand letters of credit were $133,893,000 and $105,835,000 at September 30,2003 and December 31, 2002, respectively. As a percentage of net loans, these off-balance sheet items represent49.2% and 46.1%, respectively.

 

**Other Matters**

 

Effectsof Terrorism       Theterrorist actions on September 11, 2001 and thereafter have had significantadverse effects upon the United States economy.  Whether the terrorist activities in the future and the actions ofthe United States and its allies in combating terrorism on a worldwide basiswill adversely impact the Company and the extent of such impact isuncertain.  However, such events havehad and may continue to have an adverse effect on the economy in the Company’smarket areas.  Such continued economicdeterioration could adversely affect the Company’s future results of operationsby, among other matters, reducing the demand for loans and other products andservices offered by the Company, increasing nonperforming loans and the amountsreserved for loan losses, and causing a decline in the Company’s stock price.

 

**Item 4. Controls and Procedures**

 

(a) Disclosure Controls andProcedures: An evaluation of the Company’s disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) was carried outunder the supervision and with the participation of the Company’s ChiefExecutive Officer, Chief Financial Officer and other members of the Company’ssenior management as of the end of the Company’s fiscal quarter ended September 30,2003. The Company’s Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures as currently ineffect are effective in ensuring that the information required to be disclosedby the Company in the reports it files or submits under the Exchange Act is (i)accumulated and communicated to the Company’s management (including the ChiefExecutive Officer and Chief Financial Officer) to allow timely decisionsregarding required disclosure, and (ii) recorded, processed, summarized andreported within the time periods specified in the Commission’s rules and forms.

 

(b) Internal Control OverFinancial Reporting: An evaluation of any changes in the Company’s internalcontrol over financial reporting (as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)), that occurred during the Company’s fiscal quarter endedSeptember 30, 2003, was carried out under the supervision and with theparticipation of the Company’s Chief Executive Officer, Chief Financial Officerand other members of the Company’s senior management. The Company’s ChiefExecutive Officer and Chief Financial Officer concluded that no changeidentified in connection with such evaluation has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

27

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**PARTII – OTHER INFORMATION**

 
| Item 1.  | Legal Proceedings.                                    |
|---------------|-------------------------------------------------------|
|          |
| None.         |
|          |
| Item 2.  | Changes in Securities  and Use of Proceeds.           |
|          |
| None.         |
|          |
| Item 3.  | Defaults Upon Senior  Securities.                     |
|          |
| None.         |
|          |
| Item 4.  | Submission of Matters  to a Vote of Security Holders. |
|          |
| None.         |
|          |
| Item 5.  | Other Information.                                    |
|          |
| None          |
|          |
| Item 6.  | Exhibits                                              |
|          |                                                  |
|          | (a)  Exhibits                                    |
|          |                                                  |

 
| **Exhibit****Number** |   | **Document Description**                                                              |
|-----------------------|--------|---------------------------------------------------------------------------------------|
|                  |   |                                                                                  |
| (31.1)                |   | Certification of CEO  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                  |   |                                                                                  |
| (31.2)                |   | Certification of CFO  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                  |   |                                                                                  |
| (32.1)                |   | Certification of CEO  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|                  |   |                                                                                  |
| (32.2)                |   | Certification of CFO  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

(b)  Reports onForm 8-K

 

On July 10, 2003,the Company filed a Report on form 8-k announcing the approval by the Board ofDirectors of the Company of a stock repurchase plan.

 

On September 19,2003, the Company filed a Report on form 8-k announcing a ten cent per shareStock Dividend for shareholders of record on October 1, 2003, payableOctober 24, 2003.

 

28

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**SIGNATURES**

 

Pursuant to the requirements of the Securities andExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized. 

 
|                   |   | COMMUNITY VALLEY  BANCORP           |
|------------------------|--------|-------------------------------------|
|                   |   |                                |   |
| November 11, 2003 |   | By:                                 | /s/ Keith C. Robbins |   |
|                   |   |                                |   |
|                   |   | Keith C. Robbins                    |
|                   |   |                                |   |
|                   |   | President, Chief  Executive Officer |
|                   |   |                                |   |
|                   |   |                                |   |
| November 11, 2003 |   | By:                                 | /s/ John F. Coger |   |
|                   |   |                                |   |
|                   |   | John F. Coger                       |
|                   |   |                                |   |
|                   |   | Executive Vice  President, CFO      |
|                        |        |                                     |  |  |  |

 

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