**SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-Q**

**x****     ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Quarterly Period Ended June 30, 2007**

**o****        ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**COMMUNITY VALLEY BANCORP**(Exact name of registrant as specified in its charter)

| **California**                                |   | **000-51678**             |   | **68-0479553**            |
|-----------------------------------------------|--------|---------------------------|--------|---------------------------|
| (State or other  jurisdiction of              |   | (Commission File  Number) |   | (IRS Employer ID  Number) |
| incorporation or  organization)               |   |                      |   |                      |
|                                          |   |                      |   |                      |
| **1360 E.  Lassen Avenue, Chico, California** |   | **95973**                 |
| (Address of  principal executive offices)     |   | (Zip code)                |

 

**(530) 899-2344**

(Registrant’s telephone number,

including area code)

**2041 Forest Avenue, Chico, California 95928**

(Former name, former address and former fiscal year, if changed

since last report.)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 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  x  No  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Exchange Act Rule 12-b-2.
| Large accelerated filer |   | o |   | Accelerated filer |   | x |   | Non-accelerated filer |   | o |
|-------------------------|--------|---|--------|-------------------|--------|---|--------|-----------------------|--------|---|

 

Indicateby check mark whether the registrant is a shell company (as defined in ExchangeAct Rule 12b-2. Yes  o  No  x

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

No par value Common Stock — 7,617,066 shares outstanding at July 31, 2007.

 

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**PART I - FINANCIALINFORMATION**

**Item 1**

**COMMUNITY VALLEY BANCORP**

**CONSOLIDATED BALANCE SHEET (Unaudited)**

(dollars in thousands)
| ** **                                                                                                                                                        | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ASSETS                                                                                                                                                            |       |                        |       |                            |       |
| Cash and due from banks                                                                                                                                           |       | $                           | 16,175     |                            | $          | 20,558 |   |
| Federal funds sold                                                                                                                                                |       | 56,965                      |       | 42,070                          |       |
| Total cash & cash  equivalents                                                                                                                                |       | 73,140                      |       | 62,628                          |       |
|                                                                                                                                                              |       |                        |       |                            |       |
| Interest-bearing deposits in banks                                                                                                                                |       | 6,981                       |       | 2,278                           |       |
| Investment securities (fair value of $ 4,890 at June 30, 2007 and $ 5,109 at December 31, 2006)                                                         |       | 4,902                       |       | 5,127                           |       |
| Loans held for sale at lower of cost or market                                                                                                                    |       | 1,115                       |       | 790                             |       |
| Loans, less allowance for loan losses of $ 5,305 at June 30, 2007 and  $ 5,274 at December 31, 2006                                                     |       | 453,372                     |       | 442,251                         |       |
| Premises and equipment, net                                                                                                                                       |       | 17,208                      |       | 15,359                          |       |
| Accrued interest receivable and other assets                                                                                                                      |       | 24,051                      |       | 21,604                          |       |
| Total assets                                                                                                                                                      |       | $                           | 580,769    |                            | $          | 550,037 |   |
| ** **                                                                                                                                                        |       |                        |       |                            |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                         |       |                        |       |                            |       |
|                                                                                                                                                              |       |                        |       |                            |       |
| Deposits:                                                                                                                                                         |       |                        |       |                            |       |
| Non-interest bearing                                                                                                                                              |       | $                           | 81,920     |                            | $          | 76,988 |   |
| Interest bearing                                                                                                                                                  |       | 429,609                     |       | 407,868                         |       |
| Total deposits                                                                                                                                                    |       | 511,529                     |       | 484,856                         |       |
|                                                                                                                                                              |       |                        |       |                            |       |
| Notes payable                                                                                                                                                     |       | 1,159                       |       | 1,217                           |       |
| Junior subordinated debentures                                                                                                                                    |       | 8,248                       |       | 8,248                           |       |
| Accrued interest payable and other liabilities                                                                                                                    |       | 11,414                      |       | 9,989                           |       |
|                                                                                                                                                              |       | —                      |       |                            |       |
| Total liabilities                                                                                                                                                 |       | $                           | 532,350    |                            | $          | 504,310 |   |
| ** **                                                                                                                                                        |       |                        |       |                            |       |
| Commitment and contingencies                                                                                                                                      |       |                        |       |                            |       |
|                                                                                                                                                              |       |                        |       |                            |       |
| Shareholders’ equity                                                                                                                                         |       |                        |       |                            |       |
| Common stock - no par  value; 20,000,000 shares authorized; issued and outstanding - 7,592,519 shares  at June 30, 2007 and 7,394,664 shares at December 31, 2006 |       | 10,736                      |       | 9,727                           |       |
|                                                                                                                                                              |       |                        |       |                            |       |
| Unallocated ESOP shares  135,135 shares at June 30, 2007 and 155,258 shares at December 31, 2006 (at  cost)                                                       |       | (1,480                      | )          | (1,514                          | )          |
| Retained Earnings                                                                                                                                                 |       | 39,190                      |       | 37,505                          |       |
| Accumulated other  comprehensive (loss) income, net                                                                                                               |       | (27                         | )          | 9                               |       |
|                                                                                                                                                              |       |                        |       |                            |       |
| Total shareholders’  equity                                                                                                                                  |       | 48,419                      |       | 45,727                          |       |
| Total liabilities and  shareholders’ equity                                                                                                                  |       | $                           | 580,769    |                            | $          | 550,037 |   |

 

See Notes toUnaudited Condensed Consolidated Financial Statements

2

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**COMMUNITY VALLEYBANCORP**

**CONSOLIDATED STATEMENTS OF INCOME (Unaudited)**

(dollars in thousands, except per sharedata)
| ** **                                            | ** ** | **For the periods ended June 30th,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Three Months**                                         | ** ** | **Six Months** | ** ** |
| ** **                                            | ** ** | **2007**                                                      | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income:                                      |       |                                                          |       |   |   |   |   |   |   |
| Interest and  fees on loans                           |       | $                                                             | 10,157     |   | $ | 9,848 |   | $ | 20,089 |   | $ | 18,789 |   |
| Interest on  federal funds sold                       |       | 702                                                           |       | 150 |   | 1,296 |   | 355 |   |
| Interest on  deposits in banks                        |       | 25                                                            |       | 51 |   | 49 |   | 107 |   |
| Interest on  investment securities:                   |       |                                                          |       |   |   |   |   |   |   |
| Taxable                                               |       | 45                                                            |       | 44 |   | 94 |   | 94 |   |
| Exempt from  federal income tax                       |       | 16                                                            |       | 16 |   | 32 |   | 32 |   |
| Dividends                                             |       | 15                                                            |       | 8 |   | 15 |   | 8 |   |
| Total interest  income                                |       | 10,960                                                        |       | 10,117 |   | 21,575 |   | 19,385 |   |
| ** **                                            |       |                                                          |       |   |   |   |   |   |   |
| Interest expense:                                     |       |                                                          |       |   |   |   |   |   |   |
| Interest expense  on deposits                         |       | 3,248                                                         |       | 2,015 |   | 6,421 |   | 3,554 |   |
| Interest expense  on junior subordinated debentures   |       | 187                                                           |       | 182 |   | 372 |   | 352 |   |
| Interest expense  on notes payble                     |       | 28                                                            |       | 19 |   | 51 |   | 37 |   |
| Total interest  expense                               |       | 3,463                                                         |       | 2,216 |   | 6,844 |   | 3,943 |   |
| Net interest  income before provision for loan losses |       | 7,497                                                         |       | 7,901 |   | 14,731 |   | 15,442 |   |
| Provision for loan  losses                            |       | 0                                                             |       | 225 |   | 75 |   | 450 |   |
| Net interest  income after provision for loan losses  |       | 7,497                                                         |       | 7,676 |   | 14,656 |   | 14,992 |   |
|                                                  |       |                                                          |       |   |   |   |   |   |   |
| Non-interest income                                   |       | 1,973                                                         |       | 1,878 |   | 3,687 |   | 3,361 |   |
|                                                  |       |                                                          |       |   |   |   |   |   |   |
| Non-interest expenses:                                |       |                                                          |       |   |   |   |   |   |   |
| Salaries and  employee benefits                       |       | 3,934                                                         |       | 3,800 |   | 7,952 |   | 7,488 |   |
| Occupancy                                             |       | 454                                                           |       | 322 |   | 942 |   | 639 |   |
| Furniture and  equipment                              |       | 534                                                           |       | 483 |   | 1,079 |   | 939 |   |
| Other expense                                         |       | 1,735                                                         |       | 1,430 |   | 3,390 |   | 2,729 |   |
| Total  non-interest expense                           |       | 6,657                                                         |       | 6,035 |   | 13,362 |   | 11,795 |   |
|                                                  |       |                                                          |       |   |   |   |   |   |   |
| Income before  provision for income taxes             |       | 2,813                                                         |       | 3,519 |   | 4,981 |   | 6,558 |   |
|                                                  |       |                                                          |       |   |   |   |   |   |   |
| Provision for income  taxes                           |       | 1,171                                                         |       | 1,409 |   | 2,089 |   | 2,699 |   |
|                                                  |       |                                                          |       |   |   |   |   |   |   |
| Net income                                            |       | $                                                             | 1,642      |   | $ | 2,110 |   | $ | 2,892 |   | $ | 3,859 |   |
|                                                  |       |                                                          |       |   |   |   |   |   |   |
| Basic earnings per  share                             |       | $                                                             | 0.22       |   | $ | 0.28 |   | $ | 0.39 |   | $ | 0.53 |   |
| Diluted earnings per  share                           |       | $                                                             | 0.22       |   | $ | 0.28 |   | $ | 0.38 |   | $ | 0.50 |   |
|                                                  |       |                                                          |       |   |   |   |   |   |   |
| Cash dividends per  share                             |       | $                                                             | 0.08       |   | $ | 0.06 |   | $ | 0.16 |   | $ | 0.11 |   |

 

See Notes to UnauditedCondensed Consolidated Financial Statements

3

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COMMUNITY VALLEYBANCORPCONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY(Unaudited)(In thousands except number of shares)
| ** **                                                                           | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **                        | ** ** | **Accumulated Other** | ** ** | **Total**                                    | ** ** | ** **                     | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|-----------------------------------|------------|----------------------------|------------|----------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                           | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Unallocated  ESOP shares** | ** ** | **Retained  Earnings**     | ** ** | **Comprehensive  Income / (Loss)** | ** ** | **Shareholders’  Equity** | ** ** | **Comprehensive  Income** | ** ** |
| Balance, January 1, 2006                                                             |       | 7,408,047             |       | $          | 9,051      |                              | $          | (1,391                     | )          | $                                            | 33,908     |                           | $          | (13 | ) | $ | 41,555 |   |   |   |
|                                                                                 |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       |   |   |
| Comprehensive income                                                                 |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       |   |   |
| Net income                                                                           |       |                  |       |       |       |                              |       | 7,151                      |       |                                         |       | 7,151                          |       | 7,151 |   |
| Other comprehensive income                                                           |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       |   |   |
| Net change in unrealized  gains on available-for-sale investment securities          |       |                  |       |       |       |                              |       |                       |       | 22                                           |       | 22                             |       | 22 |   |
| Total comprehensive income                                                           |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       | 7,173 |   |
|                                                                                 |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       |   |   |
| Exercise of stock options and related tax benefit                                    |       | 130,567               |       | 1,000      |       |                              |       |                       |       |                                         |       | 1,000                          |       |   |   |
| Retirement of common stock                                                           |       | (143,950              | )          | (876       | )          |                              |       | (1,621                     | )          |                                         |       | (2,497                         | )          |   |   |
| Amortization of stock compensation – ESOP shares                                |       |                  |       | 377        |       | 231                               |       |                       |       |                                         |       | 608                            |       |   |   |
| Shares acquired or redeemed by ESOP                                                  |       |                  |       |       |       | (354                              | )          |                       |       |                                         |       | (354                           | )          |   |   |
|  Cash dividends- $.26 per share                                                 |       |                  |       |       |       |                              |       | (1,933                     | )          |                                         |       | (1,933                         | )          |   |   |
| Stock based compensation expense                                                     |       |                  |       | 175        |       |                              |       |                       |       |                                         |       | 175                            |       |   |   |
|                                                                                 |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       |   |   |
| Balance, December 31, 2006                                                           |       | 7,394,664             |       | 9,727      |       | (1,514                            | )          | 37,505                     |       | 9                                            |       | 45,727                         |       |   |   |
|                                                                                 |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       |   |   |
| Comprehensive income                                                                 |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       |   |   |
| Net income                                                                           |       |                  |       |       |       |                              |       | 2,892                      |       |                                         |       | 2,892                          |       | 2,892 |   |
| Other comprehensive income                                                           |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       |   |   |
| Net change in unrealized  gains/(losses) on available-for-sale investment securities |       |                  |       |       |       |                              |       |                       |       | (36                                          | )          | (36                            | )          | (36 | ) |
| Total comprehensive income                                                           |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       | 2,856 |   |
|                                                                                 |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       |   |   |
| Exercise of stock options and related tax benefit                                    |       | 197,855               |       | 849        |       |                              |       |                       |       |                                         |       | 849                            |       |   |   |
| Retirement of common stock                                                           |       |                  |       |       |       |                              |       |                       |       |                                         |       | —                         |       |   |   |
| Amortization of stock compensation – ESOP shares                                |       |                  |       | 75         |       | 34                                |       |                       |       |                                         |       | 109                            |       |   |   |
| Shares acquired or redeemed by ESOP                                                  |       |                  |       |       |       |                              |       |                       |       |                                         |       | —                         |       |   |   |
|  Cash dividends- $.16 per share                                                 |       |                  |       |       |       |                              |       | (1,207                     | )          |                                         |       | (1,207                         | )          |   |   |
| Stock based compensation expense                                                     |       |                  |       | 85         |       |                              |       |                       |       |                                         |       | 85                             |       |   |   |
|                                                                                 |       |                  |       |       |       |                              |       |                       |       |                                         |       |                           |       |   |   |
| Balance,  June 30, 2007                                                              |       | 7,592,519             |       | $          | 10,736     |                              | $          | (1,480                     | )          | $                                            | 39,190     |                           | $          | (27 | ) | $ | 48,419 |   |   |   |

 

SeeNotes to Unaudited Condensed Consolidated Financial Statements

4

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COMMUNITY VALLEY BANCORPCONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS(Unaudited)(In thousands)
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(dollars in thousands)**                                               | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                              |       |                                          |       |   |   |
| Net income                                                                         |       | $                                             | 2,892      |   | $ | 3,859 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                          |       |   |   |
| Provision for loan losses                                                          |       | 75                                            |       | 450 |   |
| Increase in deferred loan origination costs                                        |       | (282                                          | )          | (99 | ) |
| Depreciation and amortization, net                                                 |       | 978                                           |       | 801 |   |
| Loss on disposition of Bank premises and equipment                                 |       | 27                                            |       |   |   |
| Net increase in loans held for sale                                                |       | (325                                          | )          | 55 |   |
| Increase in cash surrender value of bank-owned life  insurance, net                |       | (191                                          | )          | (165 | ) |
| Tax benefit from exercise of stock options                                         |       | (345                                          | )          | (313 | ) |
| Non-cash compensation expense associated with the  ESOP                            |       | 109                                           |       | 247 |   |
| Share based compensation expense associated with the  stock options                |       | 85                                            |       | 86 |   |
| Increase (decrease) in accrued interest receivable  and other assets               |       | (854                                          | )          | 139 |   |
| Increase in accrued interest payable and other  liabilities                        |       | 1,375                                         |       | (470 | ) |
| Provision for deferred tax benefit                                                 |       | (1,032                                        | )          | (7 | ) |
| Net cash provided by operating activities                                          |       | 2,512                                         |       | 4,590 |   |
|                                                                               |       |                                          |       |   |   |
| Cash flows from investing activities:                                              |       |                                          |       |   |   |
| (Increase) decrease in interest-bearing deposits in  banks                         |       | (4,703                                        | )          | 2,675 |   |
| Proceeds from matured or called available-for-sale  investment securities          |       | 1,000                                         |       | 1,000 |   |
| Proceeds from principal payments on  available-for-sale investment sercurities     |       | 45                                            |       | 12 |   |
| Proceeds from matured or called held-to-maturity  investment securities            |       | —                                        |       | 246 |   |
| Proceeds from principal payments of held-to-maturity  investment securities        |       | 112                                           |       | 138 |   |
| Purchase of held-to-maturity investment securities                                 |       |                                          |       | — |   |
| Purchase of available-for-sale investment securities                               |       | (1,000                                        | )          | — |   |
| Purchases of premises and equipment                                                |       | (2,864                                        | )          | (2,096 | ) |
| Proceeds from sale of premises and equipment                                       |       | 16                                            |       | — |   |
| Purchase of bank-owned life insurance                                              |       | —                                        |       | — |   |
| Investment in ATM program                                                          |       |                                          |       |   |   |
| Net increase in loans                                                              |       | (10,878                                       | )          | (36,606 | ) |
| Net cash used in investing activities                                              |       | (18,272                                       | )          | (34,631 | ) |
|                                                                               |       |                                          |       |   |   |
| Cash flows from financing activities:                                              |       |                                          |       |   |   |
| Net increase (decrease) in demand, interest-bearing  and savings deposits          |       | 38,860                                        |       | (23,951 | ) |
| Net increase (decrease) in time deposits                                           |       | (12,188                                       | )          | 45,585 |   |
| (Repayment) proceeds from note payable                                             |       | —                                        |       | — |   |
| Repayment of ESOP note payable                                                     |       | (58                                           | )          | (60 | ) |
| Proceeds from ESOP loan                                                            |       | —                                        |       | 151 |   |
| Purchase of unallocated ESOP shares                                                |       | —                                        |       | (151 | ) |
| Payment of cash dividends                                                          |       | (1,192                                        | )          | (668 | ) |
| Tax benefit from the exercise of stock options                                     |       | 345                                           |       | 313 |   |
| Proceeds from exercise of stock options                                            |       | 505                                           |       | 257 |   |
| Payment of note payable                                                            |       |                                          |       | (800 | ) |
| Repurchase of common stock                                                         |       | —                                        |       | (480 | ) |
| Net cash provided by financing activities                                          |       | 26,272                                        |       | 20,196 |   |
|                                                                               |       |                                          |       |   |   |
| Increase (decrease) in cash and cash equivalents                                   |       | 10,512                                        |       | (9,845 | ) |
|                                                                               |       |                                          |       |   |   |
| Cash and cash equivalents at beginning of year                                     |       | 62,628                                        |       | 48,003 |   |
|                                                                               |       |                                          |       |   |   |
| Cash and cash equivalents at end of period                                         |       | $                                             | 73,140     |   | $ | 38,158 |   |

 

See Notes to UnauditedCondensed Consolidated Financial Statements

5

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Community Valley Bancorp

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

**1. BASISOF PRESENTATION**

Theaccompanying unaudited condensed consolidated financial statements of CommunityValley Bancorp and subsidiaries (the “Company”) have been prepared pursuant tothe rules and regulations of the Securities Exchange Commission (the “SEC”) andthe instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,certain information and footnote disclosures required by accounting principles generallyaccepted in the United States of America for annual financial statements arenot included herein, however the Company believes that the disclosures made areadequate to make the information not misleading. In the opinion of management,all adjustments (which consist solely of normal recurring adjustments)considered necessary for a fair presentation of the results for the interimperiods presented have been included. These interim consolidated financialstatements should be read in conjunction with the financial statements andrelated notes contained in the Company’s 2006 Annual Report to Shareholders onForm 10-K.

Thecondensed consolidated financial statements include the accounts of the Companyand its wholly owned subsidiaries, Butte Community Bank (the “Bank”) and BCBInsurance Agency, LLC. All significant inter-company balances and transactionshave been eliminated in consolidation. The Company has also established awholly-owned unconsolidated subsidiary, Community Valley Bancorp Trust I (the “Trust”),a Delaware statutory business trust, formed for the sole purpose of issuingtrust preferred securities. The results of operations for the three-month andsix-month periods ended June 30, 2007 may not necessarily be indicative of theoperating results for the full year 2007.

Managementhas determined that because all of the commercial banking products and servicesoffered by the Company are available in each branch of the bank, all branchesare located within the same economic environment and management does notallocate resources based on the performance of different lending or transactionactivities, it is appropriate to aggregate the Bank branches and report them asa single operating segment. No single customer accounts for more than 10% of therevenues of the Company or the Bank.

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions.  These estimates andassumptions affect the reported amounts of assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actual results could differ from theseestimates.

**2.EARNINGS PER SHARE COMPUTATION**

Basicearnings per share are computed by dividing net income by the weighted averagecommon shares outstanding for the period (7,397,582 and 7,350,838 shares forthe three and six month periods ended June 30, 2007 and 7,279,749 and 7,264,629shares for the three month and six month periods ended June 30, 2006). Dilutedearnings per share reflect the potential dilution that could occur ifoutstanding stock options were exercised using the treasury stock method.Diluted earnings per share is computed by dividing net income by the weightedaverage common shares outstanding for the period plus the dilutive effect ofoptions (206,037 and 242,758 shares for the three and six month periods endedJune 30, 2007 and 386,570 and 384,249 shares for the three and six monthperiods ended June 30, 2006). During the periods covered the Company had nostock options that were considered anti-dilutive.

**3.COMPREHENSIVE INCOME**

Comprehensiveincome is reported in addition to net income for all periods presented. Comprehensiveincome is made up of net income plus other comprehensive income or loss. TheCompany’s only source of comprehensive income or loss, is comprised of changesin unrealized gains or losses, net of taxes, on available-for-sale securities,adjusted for the effect of realized gains or losses on available-for-salesecurities, net of taxes.

6

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**4. STOCK –BASEDCOMPENSATION**

TheCompany issues stock options under two stock-based compensation plans, theCommunity Valley Bancorp 1997 and 2000 Stock Option Plans. The plans requirethat the option price may not be less than the fair market value of the stockat the date the option is granted, and that the stock must be paid in full atthe time the option is exercised. The options expire on a date determined by theBoard of Directors, but not later than ten years from the date of grant. Thevesting period is determined by the Board of Directors and is generally overfive years; however, nonstatutory options granted during 1997 vestedimmediately. Under the 1997 plan 25,930 shares of common stock remain reservedfor issuance to employees and directors, and the related options areexercisable until their expiration. However, no new options will be grantedunder these plans. Under the Company’s 2000 stock option plan, 496,400 sharesof common stock remain reserved for issuance to employees and directors, ofwhich 65,877 shares are available for future grants.

Stockoption activity for the interim 2007 period is summarized as follows:
| **2007**                                       | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at January 1                       |       | 719,183    |       | $                                          | 5.97       |                                     | 5.25 years |                                | $          | 7,867,000 |   |
| Exercised                                      |       | (197,855   | )          | $                                          | 2.55       |                                     |       |                                |       |   |
| Granted                                        |       | 1,000      |       | $                                          | 13.95      |                                     |       |                                |       |   |
| Cancelled                                      |       | (1         | )          | $                                          | 12.88      |                                     |       |                                |       |   |
| Outstanding at June 30                         |       | 522,327    |       | $                                          | 7.61       |                                     | 4.5 years  |                                | $          | 2,786,000 |   |
| Options vested  or expected to vest at June 30 |       | 511,880    |       | $                                          | 7.46       |                                     | 4.4 years  |                                | $          | 2,730,000 |   |
| Exercisable at June 30                         |       | 408,639    |       | $                                          | 6.19       |                                     | 3.7 years  |                                | $          | 2,654,000 |   |

 

TheCompany bases their fair value of the options granted on the date of grantusing a Black-Sholes option pricing model that uses assumptions based onexpected option life and the level of estimated forfeitures, expected stockvolatility, risk free interest rate, and dividend yield.  The “simplified” method described in SECStaff Accounting Bulletin No. 107 was used to determine the estimated expectedoption term of the Company’s option for 2007. Stock volatility is based on the historical volatility of the Company’sstock.  The risk-free rate is based onthe U.S. Treasury yield curve for the periods within the contractual life ofthe options in effect at the time of grant. The weighted average grant date fair value per share for the 1,000options granted for the six months ended June 30, 2007 was $7.50.

7

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**5.COMMITMENTS AND CONTINGENCIES**

TheCompany is party to claims and legal proceedings arising in the ordinary courseof business. In the opinion of the Company’s management, the amount of ultimateliability with respect to such proceedings will not have a material adverseeffect on the financial condition or result of operations of the Company takenas a whole.

In thenormal course of business, there are various outstanding commitments to extendcredit which are not reflected in the financial statements, including loancommitments of $160,343,000 and $186,299,000 and stand-by letters of credit of$3,958,000 and $5,139,000 at June 30, 2007 and December 31, 2006,respectively.

Of theloan commitments outstanding at June 30, 2007, $79,188,000 are real estate constructionloan commitments that are expected to fund within the next twelve months. Theremaining commitments primarily relate to revolving lines of credit or othercommercial loans, and many of these are expected to expire without being drawnupon. Therefore, the total commitments do not necessarily represent future cashrequirements. Each loan commitment and the amount and type of collateralobtained, if any, are evaluated on an individual basis. Collateral held varies,but may include real property, bank deposits, debt or equity securities orbusiness assets.

Stand-byletters of credit are conditional commitments written to guarantee theperformance of a customer to a third party. These guarantees are primarilyrelated to the purchases of inventory by commercial customers and are typicallyshort-term in nature. Credit risk is similar to that involved in extending loancommitments to customers and accordingly, evaluation and collateralrequirements similar to those for loan commitments are used. The fair value ofthe liability related to these stand-by letters of credit, which represents thefees received for issuing the guarantees, was not significant at June 30, 2007and December 31, 2006. The Company recognizes these fees as revenues over theterm of the commitment or when the commitment is used.

## **6. INCOME TAXES**

In July 2006, the FinancialAccounting Standards Board (FASB) issued Financial Accounting StandardsInterpretation No. 48 (FIN 48), *Accountingfor Uncertainty in Income Taxes—an Interpretation of FASB statement No. 109*. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, *Accounting for IncomeTaxes*. FIN 48 also prescribes a recognition threshold andmeasurement standard for the financial statement recognition and measurement ofan income tax position taken or expected to be taken in a tax return. FIN 48also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosures and transitions. TheCompany has adopted FIN 48 as of January 1, 2007.

The Company previously recognized income taxpositions based on management’s estimate of whether it is reasonably possiblethat a liability has been incurred for unrecognized income tax benefits byapplying FASB Statement No. 5, *Accountingfor Contingencies*.

The provisions of FIN 48 have been applied to alltax positions of the Company as of January 1, 2007.  There was no cumulative effect of applying theprovisions of FIN 48 and there was no material effect on the Company’sprovision for income taxes for the six months ended June 30, 2007.  The Company recognizes interest accruedrelated to unrecognized tax benefits in interest expense and penalties in operatingexpense.

**7.  NEW ACCOUNTING PRONOUNCEMENTS**

*FairValue Option for Financial Assets and Financial Liabilities*

InFebruary 2007, the FASB issued Statement No. 159 (SFAS 159), *The Fair Value Option for Financial Assets and Financial Liabilities –Including an Amendment of FASB Statement No. 115*.  This standard permits an entity to choose tomeasure many financial instruments and certain other items at fair value atspecified election dates.  The entitywill report unrealized gains and losses on items for which the fair valueoption has been elected in earnings at each subsequent reporting date.  The fair value option: (a) may be appliedinstrument by instrument, with a few exceptions, such as investments otherwiseaccounted for by the equity method; (b) is irrevocable (unless a new electiondate occurs); and (c) is applied only to entire instruments and not to portionsof instruments.  The provisions of SFAS159 are effective as of the beginning of an

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entity’sfirst fiscal year that begins after November 15, 2007.  Management did not elect to early adopt SFAS159 and has not yet completed its evaluation of the impact SFAS No. 159 willhave.

*Accountingfor Deferred Compensation and Postretirement Benefit Aspects of CollateralAssignment Split-Dollar Life Insurance Arrangements*

InMarch 2007, the Emerging Issues Task Force (EITF) reached a finalconsensus on Issue No. 06-10 (EITF 06-10), *Accountingfor Deferred Compensation and Postretirement Benefit Aspects of CollateralAssignment Split-Dollar Life Insurance Arrangements.*  EITF 06-10 requires employers to recognize aliability for the post-retirement benefit related to collateral assignmentsplit-dollar life insurance arrangements in accordance with SFAS No. 106or APB Opinion No. 12. EITF 06-10 also requires employers to recognize andmeasure an asset based on the nature and substance of the collateralassignment split-dollar life insurance arrangement. The provisions of EITF06-10 are effective for the Company on January 1, 2008, with earlierapplication permitted, and are to be applied as a change in accountingprinciple either through a cumulative-effect adjustment to retained earnings orother components of equity or net assets in the statement of financial positionas of the beginning of the year of adoption; or as a change in accountingprinciple through retrospective application to all prior periods. The Companydoes not expect adoption of EITF 06-10 to have a significant impact on itsconsolidated financial statements, results of operations or liquidity.

**8.  SUBSEQUENT EVENTS**

OnJuly 10, 2007 the Company finalized the purchase of $8.0 million of capitaltrust pass-through securities in the name of Community Valley Bancorp TrustII.  This was done to replace the $8.0million of capital trust pass-through securities in Community Valley BancorpTrust I which was purchased in December 2002 and will be eligible forredemption in December 2007.

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

Thefollowing is Community Valley Bancorp’s (the “Company”) management’s discussionand analysis of the significant changes in balance sheet accounts for June 30,2007 and December 31, 2006 and income and expense accounts for the three andsix month periods ended June 30, 2007 and 2006. The discussion is designed toprovide a better understanding of significant trends related to the Company’sfinancial condition, results of operations, liquidity, capital resources andinterest rate sensitivity.

In additionto the historical information contained herein, this report on Form 10-Qcontains certain forward-looking statements. The reader of this report shouldunderstand that all such forward-looking statements are subject to variousuncertainties and risks that could affect their outcome. The Company’s actualresults could differ materially from those suggested by such forward-lookingstatements. Factors that could cause or contribute to such differences include,but are not limited to, variances in the actual versus projected growth inassets, return on assets, loan losses, expenses, rates charged on loans andearned on securities investments, rates paid on deposits, competition effects,fee and other noninterest income earned, general economic conditions,nationally, regionally and in the operating market areas of the Company and itssubsidiaries, changes in the regulatory environment, changes in businessconditions and inflation, changes in securities markets, data processingproblems, a decline in real estate values in the Company’s market area, the effects of terrorism, including the events of September 11, 2001 andthereafter, and the conduct of the war on terrorism by the United States andits allies, as well as other factors. This entire report should be read puttingsuch forward-looking statements in context.

**General Development of Business**

CommunityValley Bancorp is a financial holding company (“FHC”) registered and authorizedto engage in the activities permitted under the Bank Holding Company Act of1956, as amended. The Company was incorporated under the laws of the State ofCalifornia in 2002 and elected to change to a FHC in 2004. As a financialholding company, the Company is subject to the Federal Holding Company Act andto supervision by the board of Governors of the Federal Reserve System (“FRB”).Its principal office is located at 1360 E. Lassen Avenue, Chico, California95973 and its telephone number is (530) 899-2344.

9

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TheCompany owns 100% of the issued and outstanding common shares of ButteCommunity Bank. Butte Community Bank was incorporated and commenced business inParadise and Oroville, California in 1990. Butte Community Bank operatesthirteen full service offices within its service areas of Butte, Sutter, Yuba,Tehama, Shasta, and Colusa Counties. The Bank also maintains Loan ProductionOffices in Citrus Heights and Gridley. Butte Community Bank’s primary businessis serving the commercial banking needs of small to mid-sized businesses andconsumers within those counties. Butte Community Bank accepts checking andsavings deposits, offers money market deposit accounts and certificates ofdeposit, makes secured and unsecured commercial, secured real estate, and otherinstallment and term loans and offers other customary banking services.

OnDecember 19, 2002, the Company formed a wholly-owned unconsolidated subsidiary,Community Valley Bancorp Trust I (the “Trust”), a Delaware statutory businesstrust, for the purpose of issuing trust preferred securities.

OnDecember 1, 2004, the Company formed a wholly-owned subsidiary, CVB InsuranceAgency LLC for the purpose of providing insurance related services.  The name has subsequently been changed toButte Community Insurance Agency LLC in April 2006.

**Critical Accounting Policies**

*General*

The Company’ssignificant accounting principles are described in Note 1 of the consolidatedfinancial statements in the Company’s 2006 Annual Report to Shareholders onForm 10-K and are essential to understanding Management’s Discussion andAnalysis of Results of Operations and Financial Condition. Community ValleyBancorp’s annual consolidated financial statements are prepared in accordancewith accounting principles generally accepted in the United States of America(GAAP). The financial information contained within our statements is, to asignificant extent, financial information that is based on measures of thefinancial effects of transactions and events that have already occurred. Someof the Company’s accounting principles require significant judgment to estimatevalues of assets or liabilities. In addition, certain accounting principlesrequire significant judgment in applying the complex accounting principles totransactions to determine the most appropriate treatment. The following is asummary of the more judgmental and complex accounting estimates and principles.

*Allowance for Loan Losses (ALL)*

Theallowance for loan losses is management’s best estimate of the probable lossesthat may be sustained in our loan portfolio. The allowance is based on two basicprinciples of accounting:  (1) SFAS No.5 which requires that lossesbe accrued when they are probable of occurring and estimable and (2) SFASNo. 114, which requires that losses be accrued on impaired loans based onthe differences between the value of collateral, present value of future cashflows or values that are observable in the secondary market and the loanbalance.

TheCompany performs periodic and systematic detailed evaluations of its lendingportfolio to identify and estimate the inherent risks and assess the overallcollectibility. These evaluations include general conditions such as theportfolio composition, size and maturities of various segmented portions of theportfolio such as secured, unsecured, construction, and Small Business Administration(“SBA”).

Additionalfactors include concentrations of borrowers, industries, geographical sectors,loan product, loan classes and collateral types, volume and trends of loandelinquencies and non-accrual, criticized and classified assets and trends inthe aggregate in significant credits identified as watch list items. There areseveral components to the determination of the adequacy of the ALL. Each ofthese components is determined based upon estimates that can and do change whenthe actual events occur. The Company estimates the SFAS No. 5 portion ofthe ALL based on the segmentation of its portfolio. For those segments thatrequire an ALL, the Company estimates loan losses on a monthly basis based uponits ongoing loan review process and analysis of loan performance. The Companyfollows a systematic and consistently applied approach to select the mostappropriate loss measurement methods and support its conclusions and rationalewith written documentation. One method of estimating loan losses for groups ofloans is through the application of loss rates to the groups’ aggregate loanbalances. Such rates typically reflect historical loss experience for eachgroup of loans, adjusted for relevant economic factors over a defined period oftime. The Company evaluates and modifies its loss estimation model as needed toensure that the resulting loss estimate is consistent with GAAP.

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Forindividually impaired loans, SFAS No. 114 provides guidance on theacceptable methods to measure impairment. Specifically, SFAS No. 114states that when a loan is impaired, the Company should measure impairmentbased on the present value of expected future principal and interest cash flowsdiscounted at the loan’s effective interest rate, except that as a practicalexpedient, a creditor may measure impairment based on a loan’s observablemarket price or the fair value of collateral, if the loan is collateraldependent. When developing the estimate of future cash flows for a loan, theCompany considers all available information reflecting past events and currentconditions, including the effect of existing environmental factors.

*Loan Sales and Servicing*

TheCompany originates government guaranteed loans and mortgage loans that may besold in the secondary market.  The amounts of gains recorded on sales ofloans and the initial recording of servicing assets and interest only (I/O)strips is based on the estimated fair values of the respectivecomponents.  In recording the initial value of the servicing assets andthe fair value of the I/O strips receivable, the Company uses estimates whichare based on management’s expectations of future prepayments and discountrates.  Servicing assets are amortized over the estimated life of therelated loan.  I/O strips are not significant at June 30, 2007. These prepayment and discount rates were based on current market conditions andhistorical performance of the various pools of serviced loans.  If actualprepayments with respect to sold loans occur more quickly than projected thecarrying value of the servicing assets may have to be adjusted through a chargeto earnings.

*Stock-Based Compensation*

On January 1, 2006, the Company adopted Statement ofFinancial Accounting Standards No. 123(R),*Share Based Payment*(“SFAS 123(R)”). Under SFAS No.123(R), compensation expense is recognized foroptions granted prior to the adoption date in an amount equal to the fair valueof the unvested amounts over their remaining vesting period, based on the grantdate fair value estimated in accordance with SFAS No. 123, *Accountingfor Stock Based Compensation* and compensation expense for all sharebased payments granted after adoption based on the grant date fair valuesestimated in accordance with SFAS No. 123(R) . The estimates of the grant datefair values are based on an option pricing model that uses assumptions based onthe expected option life, the level of estimated forfeitures, expected stockvolatility and the risk-free interest rate. The calculation of the fair valueof share based payments is by nature inexact, and represents management’s bestestimate of the grant date fair value of the share based payments.  See Note 4 to the Unaudited CondensedConsolidated Financial Statements for additional information related tostock-based compensation.

*Revenue recognition*

TheCompany’s primary source of revenue is interest income, which is the differencebetween the interest income it receives on interest-earning assets and theinterest expense it pays on interest-bearing liabilities, and (ii) feeincome, which includes fees earned on deposit services, income from SBAlending, electronic-based cash management services, mortgage brokerage feeincome and merchant credit card processing services.  Interest income is recorded on an accrualbasis. Note 1 to the Consolidated Financial Statements in the Company’s 2006Annual Report to Shareholders on Form 10-K offers an explanation of the processfor determining when the accrual of interest income is discontinued on animpaired loan.

*IncomeTaxes*

The Company accounts for income taxes under the assetand liability method. Under the asset and liability method, deferred tax assetsand liabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using currently enacted tax rates applied to suchtaxable income in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in income in the period that includesthe enactment date. If future income should prove non-existent or less than theamount of deferred tax assets within the tax years to which they may beapplied, the asset may not be realized and our net income will be reduced.Effective January 1, 2007 the Company adopted Financial Accounting Standards InterpretationNo. 48 (FIN 48), *Accounting for Uncertaintyin Income Taxes—an Interpretation of FASB statement No. 109*.  The Company previously recognized income tax positions based on management’sestimate of whether it is reasonably possible that a liability has beenincurred for unrecognized income tax benefits by applying FASB Statement No. 5,*Accounting for Contingencies*.  The provisions of FIN 48 have been applied toall tax positions of the Company as of January 1, 2007.

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**Overview**

TheCompany recorded net income of $1,642,000 for the quarter ended June 30, 2007,which was a 22.2% decrease from the $2,110,000 reported for the same period of2006. Diluted earnings per share for the second quarter of 2007 were $0.22,compared to the $0.28 recorded in the second quarter of 2006. The annualizedreturn on average equity (ROAE) and annualized return on average assets (ROAA)for the second quarter of 2007 were 13.70% and 1.15%, respectively, as comparedto 19.03% and 1.64%, respectively, for the same period in 2006. The primaryreasons for the decrease in net income for the quarter ended June 30, 2007 werea compression of the net interest margin of 94 basis points as yields onearning assets decreased 14 basis points while rates paid on interest bearingliabilities increased 85 basis points. This was partially mitigated by the 8.3% increase in the volume ofearning assets.  Also contributing to thedecrease in net income was the slowdown in the real estate construction marketand increased non-interest expenses associated with the relocation of thebranches in Red Bluff, Corning, Marysville and Redding as well as the newadministrative headquarters in Chico. These increases were partially offset bythe reduction in the provision for loan losses and higher non interest income,primarily services charges on deposit accounts.

Net incomefor the six months ended June 30, 2007 was $2,892,000 which was a decrease of25.1% from the $3,859,000 reported for the same period of 2006. Dilutedearnings per share for the six months ended June 30, 2007 were $0.38, comparedto the $0.50 recorded for the same period 2006. The annualized return onaverage equity (ROAE) and annualized return on average assets (ROAA) for thesix months ended 2007 were 12.41% and 1.03%, respectively, as compared to17.85% and 1.53%, respectively, for the same period in 2006. The primaryreasons for the decrease in net income for the six month period is generallyconsistent with the discussion above for the second quarter as the net interestmargin decreased 92 basis points from June 30, 2006.

Totalassets of the Company increased by $30,732,000 5.6% from $550,037,000 atDecember 31, 2006 to $580,769,000 at June 30, 2007. Net loans increased to$454,487,000, up $11,446,000, 2.6% from the ending balances on December 31,2006. Deposit balances at June 30, 2007 increased to $511,529,000 up$26,673,000, 5.5% from December 31, 2006.

TableOne below provides a summary of the components of net income for the periodsindicated:

**Table One:  Components of Net Income**
|                                                                  | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(In thousands, except percentages)**            | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Net interest  income                                             |       | $                                               | 7,497      |                                          | $          | 7,901 |   | $ | 14,731 |   | $ | 15,442 |   |
| Provision for  loan losses                                       |       | —                                          |       | (225                                          | )          | (75 | ) | (450 | ) |
| Non-interest  income                                             |       | 1,973                                           |       | 1,878                                         |       | 3,687 |   | 3,361 |   |
| Non-interest  expense                                            |       | (6,657                                          | )          | (6,035                                        | )          | (13,362 | ) | (11,795 | ) |
| Provision for  income taxes                                      |       | (1,171                                          | )          | (1,409                                        | )          | (2,089 | ) | (2,699 | ) |
|                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Net income                                                       |       | $                                               | 1,641      |                                          | $          | 2,110 |   | $ | 2,892 |   | $ | 3,859 |   |
|                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Average total  assets (In millions)                              |       | 570.6                                           |       | 516.2                                         |       | 566.8 |   | 507.2 |   |
| Net income  (annualized) as a percentage of average total assets |       | 1.15                                            | %          | 1.64                                          | %          | 1.02 | % | 1.53 | % |
|                                                             |       |                                            |       |                                          |       |   |   |   |   |

 

**Results of Operations**

**Net Interest Income and Net Interest Margin**

Netinterest income represents the excess of interest and fees earned on interestearning assets (loans, securities, federal funds sold and investments in timedeposits) over the interest paid on deposits and borrowed funds.  Netinterest margin is net interest income expressed as a percentage of averageearning assets.

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The Company’s netinterest margin was 5.85% for the three months ended June 30, 2007 and 5.82%for the six month period ending June 30, 2007 compared to 6.79% and 6.74% forthe same periods in the prior year.  Netinterest income decreased $404,000 (5.1%) for the second quarter of 2007compared to the same period in 2006.  Net interest income decreased$711,000 (4.6%) for the six months ended June 30, 2007 over the same period in2006. The primary reason for this decrease was the compression of the net interestmargin and slower growth of interest bearing assets as compared to interestbearing liabilities.

Theaverage balances of interest bearing liabilities of $435,315,000 were$55,365,000 (14.6%) higher in the second quarter of 2007 versus the samequarter in 2006.  As interest bearing liability balances increased, ratespaid on these liabilities also increased by 85 basis points on a quarter overquarter basis.  As a result of both the increase in interest rates and thevolume and mix of interest bearing liabilities, interest expense was $1,247,000(56.3%) higher in the second quarter versus the same period in 2006.  The average balances of interest bearingliabilities were $68,625,000 (18.8%) higher in the six-month period ended June30, 2007 versus the same period in 2006. Rates paid on interest bearing liabilities increased 101 basis pointscompared to the six month period ended June 30, 2006.

TableTwo, Analysis of Net Interest Margin, sets forth the average daily balances forthe major asset and liability categories, the related income or expense whereapplicable, and the resultant yield or cost attributable to the average earningassets and interest-bearing liabilities. Changes in the average balances and the rates received or paid depend onmarket opportunities, how well the Company has managed interest rate risks,product pricing policy, product mix, and external trends and developments.

TableThree, Analysis of Volume and Rate changes on Net Interest Income, analyzes thechanges in net interest income for the three and six month periods ended June30, 2007 compared to June 30, 2006 that are reported in Table Two.  The analysis shows the impact of volume andrate changes on the major categories of assets and liabilities between theseperiods.  The table explains what portionof the difference or variance in interest income or expense between theseperiods for each major category of assets or liabilities is due to changes inthe balances (volume) or to changes in rates.

Forexample, Table Two shows that interest income from loans for the three monthsended June 30, 2007 increased by $309,000 from $9,848,000 at June 30, 2006 to$10,157,000.  The average balance ofloans increased from $443,395,000 to $452,899,000 and the interest rate earnedincreased from 8.91% to 9.00%.  TableThree shows the $310,000 increase in interest income from loans was actuallythe result of a $210,000 increase in interest income from the higher balance ofloans and $99,000 from the increase in yields earned in the second quarter of2007 compared to the same period in 2006.

Ashift in the relative size of the major balance sheet categories has an impacton net interest income and net interest margin. For example, to the extent that funds received from maturing or soldsecurities can be repositioned into loans instead of re-invested in securities,earnings increase because of the higher yields received on loans.  However, changing the asset mix in this waycomes at the price of additional risks that must be successfully managed.  Additional credit risk is incurred with loanscompared to the very low risk of default loss on securities, and the Companymust carefully monitor the underwriting process to ensure that the benefit ofthe additional interest earned is not offset by additional credit losses.

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**TableTwo:  Analysis of Net Interest Margin**
| **Three Months Ended June 30,**   | ** ** | **2007**             | ** ** | **2006**     | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|--------------|------------|
| **(In thousands, except percentages)** | ** ** | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield** | ** ** | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield** | ** ** |
| Assets:                                               |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Earning assets                                        |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Loans                                                 |       | $                    | 452,899    |         | $          | 10,157 |   | 9.00 | % | $ | 443,395 |   | $ | 9,848 |   | 8.91 | % |
| Taxable  investment securities                        |       | 3,636                |       | 60           |       | 6.62 | % | 4,715 |   | 52 |   | 4.42 | % |
| Tax-exempt  investment securities                     |       | 1,390                |       | 16           |       | 4.62 | % | 1,378 |   | 16 |   | 4.71 | % |
| Federal funds sold                                    |       | 54,505               |       | 702          |       | 5.17 | % | 12,835 |   | 150 |   | 4.70 | % |
| Interest bearing  deposits in banks                   |       | 1,844                |       | 25           |       | 5.44 | % | 4,554 |   | 51 |   | 4.46 | % |
| Total earning assets                                  |       | 514,274              |       | 10,960       |       | 8.55 | % | 466,877 |   | 10,117 |   | 8.69 | % |
| Cash & due from  banks                            |       | 17,146               |       |         |       |   |   | 17,141 |   |   |   |   |   |
| Other assets                                          |       | 39,216               |       |         |       |   |   | 32,225 |   |   |   |   |   |
| Average total assets                                  |       | $                    | 570,636    |         |       |   |   |   | $ | 516,243 |   |   |   |   |   |
|                                                  |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Liabilities &  Shareholders’ Equity          |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:                        |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| NOW & MMDA                                        |       | $                    | 148,344    |         | $          | 385 |   | 1.04 | % | $ | 174,242 |   | $ | 437 |   | 1.01 | % |
| Savings                                               |       | 118,516              |       | 968          |       | 3.28 | % | 35,511 |   | 44 |   | 0.50 | % |
| Time deposits                                         |       | 159,048              |       | 1,895        |       | 4.78 | % | 160,915 |   | 1,534 |   | 3.82 | % |
| Other borrowings                                      |       | 9,407                |       | 215          |       | 9.17 | % | 9,282 |   | 201 |   | 8.69 | % |
| Total interest bearing  liabilities                   |       | 435,315              |       | 3,463        |       | 3.19 | % | 379,950 |   | 2,216 |   | 2.34 | % |
| Demand deposits                                       |       | 77,241               |       |         |       |   |   | 82,659 |   |   |   |   |   |
| Other liabilities                                     |       | 10,006               |       |         |       |   |   | 9,167 |   |   |   |   |   |
| Total liabilities                                     |       | 522,562              |       |         |       |   |   | 471,776 |   |   |   |   |   |
| Shareholders’ equity                             |       | 48,074               |       |         |       |   |   | 44,467 |   |   |   |   |   |
| Average liabilities and  equity                       |       | $                    | 570,636    |         |       |   |   |   | $ | 516,243 |   |   |   |   |   |
|                                                  |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Net interest income & margin                      |       |                 |       | $            | 7,497      |   | 5.85 | % |   |   | $ | 7,901 |   | 6.79 | % |

 

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(1)           Loaninterest includes loan fees of $545,000 and $628,000 during the three monthsended June 30, 2007 and June 30, 2006, respectively.

(2)           Doesnot include taxable-equivalent adjustments that primarily relate to income oncertain securities that is exempt from federal income taxes.

(3)           Netinterest margin is computed by dividing net interest income by total averageearning assets.

(4)           Averageyield is calculated based on actual days in quarter (91 for June 30, 2007 and91 for June 30, 2006) and annualized to actual days in year (365 for 2007 and2006).

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| **Six months ended June 30,**     | ** ** | **2007**             | ** ** | **2006**     | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|--------------|------------|
| **(In thousands, except percentages)** | ** ** | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield** | ** ** | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield** | ** ** |
| Assets:                                               |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Earning assets                                        |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Loans                                                 |       | $                    | 453,057    |         | $          | 20,089 |   | 8.94 | % | $ | 434,418 |   | $ | 18,789 |   | 8.72 | % |
| Taxable investment securities                         |       | 3,714                |       | 109          |       | 5.93 | % | 4,987 |   | 102 |   | 4.12 | % |
| Tax-exempt investment securities                      |       | 1,389                |       | 32           |       | 4.70 | % | 1,379 |   | 32 |   | 4.71 | % |
| Federal funds  sold                                   |       | 50,180               |       | 1,296        |       | 5.21 | % | 15,808 |   | 355 |   | 4.53 | % |
| Interest bearing  deposits in banks                   |       | 1,927                |       | 49           |       | 5.13 | % | 5,298 |   | 107 |   | 4.06 | % |
| Total earning  assets                                 |       | 510,267              |       | 21,575       |       | 8.53 | % | 461,890 |   | 19,385 |   | 8.46 | % |
| Cash & due  from banks                            |       | 17,408               |       |         |       |   |   | 16,639 |   |   |   |   |   |
| Other assets                                          |       | 39,094               |       |         |       |   |   | 28,695 |   |   |   |   |   |
| Average total assets                                  |       | $                    | 566,770    |         |       |   |   |   | $ | 507,224 |   |   |   |   |   |
|                                                  |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Liabilities  & Shareholders’ Equity          |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:                        |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| NOW & MMDA                                        |       | $                    | 150,661    |         | $          | 794 |   | 1.06 | % | $ | 182,925 |   | $ | 862 |   | 0.95 | % |
| Savings                                               |       | 111,141              |       | 1,815        |       | 3.29 | % | 32,367 |   | 88 |   | 0.55 | % |
| Time deposits                                         |       | 161,459              |       | 3,812        |       | 4.76 | % | 139,532 |   | 2,604 |   | 3.76 | % |
| Other borrowings                                      |       | 9,435                |       | 423          |       | 9.05 | % | 9,247 |   | 389 |   | 8.48 | % |
| Total interest  bearing liabilities                   |       | 432,696              |       | 6,844        |       | 3.19 | % | 364,071 |   | 3,943 |   | 2.18 | % |
| Demand deposits                                       |       | 76,956               |       |         |       |   |   | 88,448 |   |   |   |   |   |
| Other liabilities                                     |       | 9,500                |       |         |       |   |   | 11,118 |   |   |   |   |   |
| Total  liabilities                                    |       | 519,152              |       |         |       |   |   | 463,637 |   |   |   |   |   |
| Shareholders’  equity                            |       | 47,617               |       |         |       |   |   | 43,587 |   |   |   |   |   |
| Average  liabilities and equity                       |       | $                    | 566,770    |         |       |   |   |   | $ | 507,224 |   |   |   |   |   |
|                                                  |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Net interest income  & margin                     |       |                 |       | $            | 14,731     |   | 5.82 | % |   |   | $ | 15,442 |   | 6.74 | % |

 

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(1)           Loaninterest includes loan fees of $1,037,000 and $1,245,000 during the six monthsended June 30, 2007 and June 30, 2006, respectively.

(2)           Doesnot include taxable-equivalent adjustments that primarily relate to income oncertain securities that is exempt from federal income taxes.

(3)           Netinterest margin is computed by dividing net interest income by total averageearning assets.

(4)           Averageyield is calculated based on actual days in quarter (181 for June 30, 2007 andJune 30, 2006) and annualized to actual days in year (365 for 2007 and 2006).

TableThree sets forth a summary of the changes in interest income and interestexpense from changes in average asset and liability balances (volume) andchanges in average interest rates.  On a quarter over quarter basis forthe period ending June 30, 2007 net interest income has decreased $404,000 overthe same time period in 2006.  Interest income from earning assets hasincreased by $843,000. Changes in the volume of earning assets, primarilyloans, have resulted in an increase in interest income of $658,000 whileinterest income from changes in rates has increased by $185,000.  Interestexpense for the second quarter of 2007 was $1,247,000 more than the same periodin 2006.  Changes in the volume ofinterest bearing liabilities, primarily the increase in balances of savingsdeposits, has resulted in a net increase of interest expense of $23,000.  Increases in average rates paid, primarilysavings and time deposits have resulted in an interest expense increase of$1,224,000.

On ayear-to-date basis through June 30, 2007, net interest income has decreased$710,000 over the total at June 30, 2006. Interest income from earning assets has increased by $2,191,000.  Changes in the volume of earning assets,primarily loans and Federal funds sold have resulted in an increase in interestincome of $1,484,000 while interest income from changes in rates has increasedby $707,000.   Interest expense for thesix month period ending June 30, 2007 was $2,901,000 more than the total atJune 30, 2006.  Changes in the volume ofinterest bearing liabilities, primarily the increase in balances of savings andtime deposits, have resulted in a net increase of interest expense of$480,000.  Increases in average ratespaid, primarily on savings and time deposits have resulted in an interestexpense increase of $2,422,000.

15

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**TableThree:  Analysis of Volume and Rate Changes on Net Interest Income andExpenses**
|                                                                                             | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net Change** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|
| (In thousands)  Three Months Ended June 30, 2007 over Increase (decrease) due to change in: |       |       |       |     |       |                |       |
| Interest-earning  assets:                                                                   |       |       |       |     |       |                |       |
| Net loans (1)                                                                               |       | 211        |       | 98       |       | 309                 |       |
| Taxable investment securities                                                               |       | (12        | )          | 20       |       | 8                   |       |
| Tax exempt investment securities (2)                                                        |       | 0          |       | (0       | )          | -                   |       |
| Federal funds sold                                                                          |       | 488        |       | 64       |       | 552                 |       |
| Interest bearing deposits in banks                                                          |       | (30        | )          | 4        |       | (26                 | )          |
| Total                                                                                       |       | 658        |       | 185      |       | 843                 |       |
|                                                                                        |       |       |       |     |       |                |       |
| Interest-bearing  liabilities:                                                              |       |       |       |     |       |                |       |
| NOW and MMDA deposits                                                                       |       | (65        | )          | 13       |       | (52                 | )          |
| Savings deposits                                                                            |       | 103        |       | 821      |       | 924                 |       |
| Time deposits                                                                               |       | (18        | )          | 379      |       | 361                 |       |
| Other borrowings                                                                            |       | 3          |       | 11       |       | 14                  |       |
| Total                                                                                       |       | 23         |       | 1,224    |       | 1,247               |       |
| Interest  differential                                                                      |       | 634        |       | (1,038   | )          | (404                | )          |

 

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(1)           Theaverage balance of non-accruing loans is not significant as a percentage oftotal loans and, as such, has been included in net loans.

(2)           Doesnot include taxable-equivalent adjustments that primarily relate to income oncertain securities that is exempt from federal income taxes.

(3)           Therate/volume variance has been included in the rate variance.
|                                                                                                 | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Net Change** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|
| (In thousands)  Six Months Ended June 30, 2007 over 2006 Increase (decrease) due to change  in: |       |       |       |     |       |                |       |
| Interest-earning  assets:                                                                       |       |       |       |     |       |                |       |
| Net loans (1)                                                                                   |       | 806        |       | 494      |       | 1,300               |       |
| Taxable investment securities                                                                   |       | (26        | )          | 33       |       | 7                   |       |
| Tax exempt investment securities (2)                                                            |       | 0          |       | 0        |       | 0                   |       |
| Federal funds sold                                                                              |       | 772        |       | 169      |       | 941                 |       |
| Interest bearing deposits in banks                                                              |       | (68        | )          | 10       |       | (58                 | )          |
| Total                                                                                           |       | 1,484      |       | 706      |       | 2,190               |       |
|                                                                                            |       |       |       |     |       |                |       |
| Interest-bearing  liabilities:                                                                  |       |       |       |     |       |                |       |
| NOW and MMDA deposits                                                                           |       | (152       | )          | 84       |       | (68                 | )          |
| Savings deposits                                                                                |       | 215        |       | 1,512    |       | 1,727               |       |
| Time deposits                                                                                   |       | 409        |       | 799      |       | 1,208               |       |
| Other borrowings                                                                                |       | 8          |       | 26       |       | 34                  |       |
| Total                                                                                           |       | 480        |       | 2,422    |       | 2,901               |       |
| Interest  differential                                                                          |       | 1,005      |       | (1,716   | )          | (711                | )          |

 

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**Non-interest Income**

TableFour below provides a summary of the components of non-interest income for theperiods indicated (dollars in thousands):

**Table Four:  Components ofNon-interest Income**
|                                                     | ** ** | ** ** | ** ** | **% of Avg.** | ** ** | ** ** | ** ** | **% of Avg.** | ** ** |
|-----------------------------------------------------|------------|------------|------------|-------------------------|------------|------------|------------|-------------------------|------------|
| **Three months ended June 30,** | ** ** | **2007**   | ** ** | **Assets**              | ** ** | **2006**   | ** ** | **Assets**              | ** ** |
| Service charges  on deposit accounts                |       | 873        |       | 0.61                    | %          | 679        |       | 0.53                    | %          |
| Loan servicing  fees                                |       | 105        |       | 0.07                    | %          | 107        |       | 0.08                    | %          |
| Fees -  alternative investment sales                |       | 68         |       | 0.05                    | %          | 86         |       | 0.07                    | %          |
| Merchant fee  income                                |       | 107        |       | 0.08                    | %          | 99         |       | 0.08                    | %          |
| Gain on the sale  of loans                          |       | 401        |       | 0.28                    | %          | 576        |       | 0.45                    | %          |
| Other                                               |       | 419        |       | 0.29                    | %          | 331        |       | 0.25                    | %          |
| Total  non-interest income                          |       | 1,973      |       | 1.39                    | %          | 1,878      |       | 1.46                    | %          |

 
|                                                   | ** ** | ** ** | ** ** | **% of Avg.** | ** ** | ** ** | ** ** | **% of Avg.** | ** ** |
|---------------------------------------------------|------------|------------|------------|-------------------------|------------|------------|------------|-------------------------|------------|
| **Six months ended June 30,** | ** ** | **2007**   | ** ** | **Assets**              | ** ** | **2006**   | ** ** | **Assets**              | ** ** |
| Service charges  on deposit accounts              |       | $          | 1,598      |                    | 0.57       | %          | 1,257      |                    | 0.50       | % |
| Loan servicing  fees                              |       | 209        |       | 0.07                    | %          | 211        |       | 0.08                    | %          |
| Fees -  alternative investment sales              |       | 155        |       | 0.05                    | %          | 155        |       | 0.06                    | %          |
| Merchant fee  income                              |       | 200        |       | 0.07                    | %          | 187        |       | 0.07                    | %          |
| Gain on the sale  of loans                        |       | 730        |       | 0.26                    | %          | 932        |       | 0.37                    | %          |
| Other                                             |       | 797        |       | 0.28                    | %          | 619        |       | 0.24                    | %          |
| Total  non-interest income                        |       | $          | 3,687      |                    | 1.31       | %          | $          | 3,361                   |       | 1.32 | % |
|                                                   |            |            |            |                         |            |            |            |                         |            |  |  |

 

Non-interestincome increased by $95,000 (5.1%) to $1,973,000 for the three months endedJune 30, 2007 as compared to $1,878,000 for the three months ended June 30,2006.  Increases in non-interest income were realized in fees from servicecharges (up 28.6%), merchant fee income (up 8.1%) and other income (up26.9%).  Decreases were in loan servicingfees (down 1.9%), fees from alternative investment sales (down 26.5%) and gainson the sale of loans (down 43.6%).  The increase in service charge incomewas the result of additional deposit accounts opened during the second quarterthroughout our system of branches and an increase in the amounts charged forservices which took effect as of May 1, 2007.  Merchant fee income washigher in the second quarter due to an increase in the volume of credit cardsales. Increases in the “Other” category were a result of increased fees fromATM transaction, commissions earned on sales of insurance policies and feespaid for payroll processing through our Business Services Division.   Loan servicing fees decreased slightly asthe volume of loans sold in the secondary market for which the Company retainsservicing rights decreased. Gains on sales of loans into the secondary marketdecreased compared to the prior year as the loans sold by our Government andMortgage Lending Divisions decreased as refinancing and new housingconstruction activity slowed.  TheAlternative Investment Department, which sells third-party mutual funds andannuities, experienced a decrease in fees due to a decline in sales during thesecond quarter.

Non-interestincome increased by $326,000 (9.7%) to $3,687,000 for the six months ended June30, 2007 as compared to $3,361,000 for the six months ended June 30,2006.  Increases in non-interest income were realized in fees from servicecharges (up 27.1%), merchant fee income (up 6.9%) and other income (up28.8%).    There was a decrease inloan servicing fees (down 1.0%) and gains on the sale of loans (down 27.6%).  Fees from alternative investment sales wereunchanged from the six months ended June 30, 2006.   The increase in service charge income wasthe result of additional deposit accounts opened during the first half of theyear throughout our system of branches and the increase in the amounts chargedfor services as discussed above.  Merchant fee income was higher in thefirst six months of 2007 due to an increase in the volume of credit card salesof the same time frame in 2006. Increases in the “Other” category were a resultof increased fees from ATM transaction, commissions earned on sales ofinsurance policies and fees paid for payroll processing through our BusinessServices Division.  Loan servicing feesdecreased slightly as the volume of loans sold in the secondary market 

17

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for which theCompany retains servicing rights decreased.  Gains on sales of loans intothe secondary market decreased during the first half of 2007 as compared to thesame period in 2006 as the loans sold by our Government and Mortgage LendingDivisions were of a lesser total value generating less income.

**Non-interest Expense**

Non-interestexpense increased $622,000 (10.3%) from $6,035,000 in the second quarter of2006 to $6,657,000 in the second quarter of 2007.  Salary and employeebenefits increased $134,000 (3.5%) resulting from normal cost of living raises,commissions paid and staffing additions made during the year as the Companycontinues to grow.  Benefit costs and employer taxes increasedcommensurate with the salaries.  On a quarter over quarter basis,occupancy expenses were higher by $132,000 (41.0%) which is related toadditional building depreciation, utilities, janitorial services and propertytaxes.  Furniture and equipment expense was $534,000 in the second quarterof 2007 compared to $483,000 in the same period of 2006, representing a 10.6%increase.  This increase relates to the depreciation recorded on the newadministrative headquarters, the purchase of new technology software andhardware as well as additional furniture and fixtures as the Red Bluff, Corning,Redding and Marysville branches have been relocated to larger facilities.  Other expenses increased $305,000 from$1,430,000 to $1,735,000 in the second quarter of 2007 versus the secondquarter of 2006.  This increase wasattributed to higher telephone, postage and insurance costs as well asincreased advertising and promotion costs associated with the new offices.

Non-interestexpense increased $1,567,000 (13.3%) from $11,795,000 in the first six monthsof 2006 to $13,362,000 in the first six months of 2007.  Salaries and benefits increased by $463,000(6.2%) due to cost of living raises added benefit costs and employer taxesassociated with the staffing additions made during the year as the Companycontinues to grow.  On a year over yearbasis, full time equivalent employees increased by 12 to 258.  Occupancy expense was up $303,000 (47.4%)from the first six months of 2006 to the first six months of 2007 due toincreases in utilities, landscape maintenance, janitorial services and propertytaxes. Furniture and equipment expense was up $140,000 (14.9%) from the firstsix months of 2006 to the first six months of 2007 due to the new branchesdiscussed above and increases in depreciation from purchases of equipment andassociated maintenance contracts.  Otherexpenses increased by $661,000 (24.2%). This increase was attributable to higher telephone, postage andinsurance costs as well as increased advertising and promotion costs.

**Provision for Loan Losses**

TheCompany did not add to the provision for loan losses in the second quarter of2007.   In the second quarter of 2006 theCompany provided $225,000 for loan losses.  Net loan charge-offs for thesecond quarter of 2007 and 2006 were $8,000 and $9,000 respectively.  For the first six months of 2007, the Companymade provisions for loan losses of $75,000 which compared to $450,000 for thefirst six months of 2006.  Net loancharge-offs for the six months ended June 30, 2007 and June 30, 2006 were$8,000.   Management assesses its loanquality on a monthly basis to maintain an adequate allowance for loanlosses.  The Company’s loan portfolio composition, non-performing assetsand allowance for loan losses are further discussed under the Balance SheetAnalysis section below.

**Provision for Income Taxes**

Theeffective tax rate for the second quarter and first six months of 2007 remainedfairly consistent at 41.6% and 41.9%, versus 40.0%  and 41.2% for the same periods in 2006.

**Balance Sheet Analysis**

TheCompany’s total assets were $580,769,000 at June 30, 2007 up $30,732,000 (5.6%)from $550,037,000 at December 31, 2006.  On a year over year basis, theaverage balance of total assets for the six months ended June 30, 2007 was$566,770,000, which represents an increase of $59,546,000 (11.7%) over the$507,224,000 during the six-month period ended June 30, 2006.

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**Loans**

TheCompany concentrates its lending activities in the following principal areas:1) commercial; 2) real estate mortgage; 3) residential real estate and realestate construction (both commercial and residential); 4) agriculture; and 5)consumer loans.  Commercial and residential real estate loans aregenerally secured by improved property, with original maturities of 3-10years.  At June 30, 2007, these principal areas accounted forapproximately 15%, 47%, 20%, 7% and 11%, respectively, of the Company’s loanportfolio.  The mix at December 31, 2006 was 15%, 46%, 23%, 6% and10%.  Continuing strong economic activity in the Company’s market area,new borrowers developed through the Company’s marketing efforts and creditlines expanded to existing borrowers, offset by normal loan pay-downs andpayoffs, resulted in net increases in loan balances from December 31, 2006 forcommercial loans of $4,457,000 or (6.8%), commercial and residential mortgagereal estate loans of $10,032,000 or (4.8%), agricultural loans of $7,422,000 or(28.8%) ,consumer loans of $4,647,000 or (10.6%).  Real estate construction loans decreased$15,687,000 or (14.9%) over the same period.  Table Five below summarizesthe composition of the loan portfolio as of June 30, 2007 and December 31,2006.

**Table Five: Loan Portfolio Composition**
| (In thousands)        | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Commercial                 |       | $                           | 69,698     |                            | $          | 65,241 |   |
| Real estate:               |       |                        |       |                            |       |
| Mortgage                   |       | 218,134                     |       | 208,102                         |       |
| Construction               |       | 89,762                      |       | 105,449                         |       |
|                       |       |                        |       |                            |       |
| Agriculture                |       | 33,167                      |       | 25,745                          |       |
| Consumer                   |       | 48,436                      |       | 43,789                          |       |
| Total loans                |       | 459,197                     |       | 448,326                         |       |
| Allowance for  loan losses |       | (5,305                      | )          | (5,274                          | )          |
| Deferred loan  fees, net   |       | (520                        | )          | (801                            | )          |
| Total net loans            |       | $                           | 453,372    |                            | $          | 442,251 |   |

 

Themajority of the Company’s loans are direct loans made to individuals and localbusinesses.  The Company relies substantially on local promotionalactivity and personal contacts by bank officers, directors and employees tocompete with other financial institutions.  The Company makes loans toborrowers whose applications include a sound purpose and a viable primaryrepayment source, generally supported by a secondary source of repayment.

Commercialloans consist of credit lines for operating needs, loans for equipmentpurchases, working capital, and various other business loan products. Consumer loans include a range of traditional consumer loan products such aspersonal lines of credit and loans to finance purchases of autos, boats,recreational vehicles, mobile homes and various other consumer items.

Realestate construction loans are generally composed of commitments to customerswithin the Company’s service area for construction of both commercialproperties and custom and semi-custom single-family residences.  Otherreal estate loans consist primarily of loans secured by first trust deeds oncommercial and residential properties typically with maturities from 3 to 10years and original loan to value ratios generally from 65% to 80%. Agriculture loans consist primarily of crop loans to farmers of peaches,prunes, walnuts, and almonds.  In general, except in the case of loanswith SBA or FMHA guarantees, the Company does not make long-term mortgageloans; however, Butte Community Bank has a residential lending division toassist customers in securing most forms of longer term single-family mortgagefinancing.

**Risk Elements**

TheCompany assesses and manages credit risk on an ongoing basis through a totalcredit culture that emphasizes excellent credit quality, extensive internalmonitoring and established formal lending policies.  Additionally, theCompany contracts with an outside loan review consultant to periodically reviewthe 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 itsemphasis on credit quality in the loan approval process, active creditadministration and regular monitoring.  With this in mind, management hasdesigned and implemented a comprehensive loan review and grading system thatfunctions to continually assess the credit risk inherent in the loan portfolio.

19

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Ultimately,underlying trends in economic and business cycles may influence creditquality.  The Company’s business is concentrated in the Butte, Sutter andShasta County areas. The economy of these three counties is diversified withprofessional services, manufacturing, agriculture and real estate investmentand construction.

Specialemphasis is placed within the communities in which the Company has offices(Chico, Paradise, Magalia, Oroville, Yuba City, Red Bluff, Marysville, Colusa,Corning and Redding).  The Company also maintains loan production officesin the cities of Citrus Heights and Gridley.  Single-family residentialconstruction is the primary lending product from the Citrus Heights locationserving the greater Sacramento area.  The primary focus of the loanproduction office in Gridley is commercial and agricultural loans.

TheCompany has significant extensions of credit and commitments to extend creditthat are secured by real estate.  The ultimate repayment of these loans isgenerally dependent on personal or business cash flows or the sale orrefinancing of the real estate.  The Company monitors the effects ofcurrent and expected market conditions and other factors on the collectabilityof real estate loans.  The more significant factors management considersinvolve the following:  lease, absorption and sale rates; real estatevalues and rates of return; operating expenses; inflation; and sufficiency ofcollateral independent of the real estate including, in limited instances,personal guarantees.

Inextending credit and commitments to borrowers, the Company generally requirescollateral and/or guarantees as security.  The repayment of such loans isexpected to come from cash flow or from proceeds from the sale of selectedassets of the borrowers.  The Company’s requirement for collateral and/orguarantees is determined on a case-by-case basis in connection with management’sevaluation of the creditworthiness of the borrower.  Collateral heldvaries but may include accounts receivable, inventory, property, plant andequipment, income-producing properties, residences and other realproperty.  The Company secures its collateral by perfecting its securityinterest in business assets, obtaining deeds of trust, or outright possessionamong other means.

Inmanagement’s judgment, a concentration exists in real estate loans, whichrepresented approximately 67.0% of the Company’s loan portfolio at June 30,2007, which is slightly less, on a percentage basis, than the 69.9%concentration level at December 31, 2006.  Management believes theconcentration to have no more than the normal risk of collectability; however,a substantial decline in the economy in general, or a decline in real estatevalues in the Company’s primary market areas in particular, could have anadverse impact on the collectability of these loans and require an increase inthe provision for loan losses which could adversely affect the Company’s futureprospects, results of operations, profitability and stock price. Management believes that its lending policies and underwriting standards willtend to minimize losses in an economic downturn; however, there is no assurancethat losses will not occur under such circumstances.  The Company’s loanpolicies 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 loan approvalsnot only on market demand for the project, but also on the borrowers’ capacityto support the project financially in the event it does not perform toexpectations (whether sale 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.  The Companydoes not participate in any sub-prime lending activities.

**Nonaccrual, Past Due and Restructured Loans**

Managementgenerally places loans on nonaccrual status when they become 90 days past due,unless the loan is well secured and in the process of collection.  Loansare charged off when, in the opinion of management, collection appearsunlikely.

Table Sixbelow sets forth nonaccrual loans as of June 30, 2007 and December 31,2006.  There were no loans past due 90 days or more and still accruinginterest at June 30, 2007 or December 31, 2006.

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**Table Six:  Non-Performing Loans**
| (In thousands)         | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Nonaccrual:                 |       |                        |       |                            |       |
| Commercial                  |       |                        |       | $                               | 1,502      |   |
| Real estate                 |       | $                           | 213        |                            | 780        |   |
| Consumer and other          |       |                        |       |                            |       |
| Total non-performing  loans |       | $                           | 213        |                            | $          | 2,282 |   |

 

At June 30, 2007,there were two non-performing loans which were considered to be impaired. Both loans were secured by real estate. Subsequent to June 30, 2007, one of the loans was brought to a currentstatus.  The other loan is in the processof foreclosure with an estimated loan to value of 43%.  Management does not foresee a loss from thisloan.   There was no specific valuation allowance on these impairedloans. There were no loan concentrations in excess of 10% of total loans nototherwise disclosed as a category of loans as of June 30, 2007 or December 31,2006.  Management is not aware of any potential problem loans, which wereaccruing and current at June 30, 2007, where serious doubt exists as to theability of the borrower to comply with the present repayment terms.

**Allowance for Loan Losses Activity**

Weemploy a systematic methodology for determining the allowance for loan lossesthat includes a monthly review process and monthly adjustment of theallowance.  Our process includes a periodic review of individual loansthat have been specifically identified as problem loans or have characteristicswhich could lead to impairment, as well as detailed reviews of other loans(either individually or in pools).  While this methodology utilizeshistorical and other objective information, the establishment of the allowancefor loan losses and the classification of loans are, to some extent, based onmanagement’s judgment and experience.

Ourmethodology incorporates a variety of risk considerations, both quantitativeand qualitative, in establishing an allowance for loan losses that managementbelieves is appropriate at each reporting date.  Quantitative factorsinclude our historical loss experience, delinquency and charge-off trends,collateral values, changes in non-performing loans, and other factors. Quantitative factors also incorporate known information about individual loans,including borrowers’ sensitivity to interest rate movements and borrowers’sensitivity to quantifiable external factors including commodity prices as wellas acts of nature (freezes, earthquakes, fires, etc.) that occur in aparticular period.

Qualitativefactors include the general economic environment in our markets and, inparticular, the state of the agriculture industry and other key industries inthe Northern Sacramento Valley.  The way a particular loan might bestructured, the extent and nature of waivers of existing loan policies, loanconcentrations and the rate of portfolio growth are other qualitative factorsthat are considered.

Ourmethodology is, and has been, consistently followed.  However, as we addnew products, increase in complexity, and expand our geographic coverage, weexpect to enhance our methodology to keep pace with the size and complexity ofthe loan portfolio.  On an ongoing basis we engage outside firms toindependently assess our methodology, and to perform independent credit reviewsof our loan portfolio.  The FDIC and the California Department ofFinancial Institutions review the allowance for loan losses as an integral partof the examination processes.  Management believes that our currentmethodology is appropriate given our size and level of complexity. Further, management believes that the allowance for loan losses is adequate asof June 30, 2007 to cover known and inherent risks in the loan portfolio. However, fluctuations in credit quality, or changes in economic conditions orother factors could cause management to increase or decrease the allowance forloan losses as necessary.

TheBoard of Directors of the Bank reviews the adequacy of the allowance for loanlosses at least quarterly to include consideration of the relative risks in theportfolio and current economic conditions.  The allowance is adjustedbased on that review if, in the judgment of the loan committee and management,changes are warranted.  The allowance for loan losses totaled $5,305,000or 1.17% of total loans at June 30, 2007 and $5,274,000 or 1.18% at December31, 2006.  Net charge-offs for the quarter and six month period ended June30, 2007 were $8,000.

TableSeven below summarizes, for the periods indicated, the activity in theallowance for loan losses.

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**Table Seven: Allowance for Loan Losses**
|                                                                           | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                                                                | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| **(In thousands, except for percentages)**            | ** ** | **2007**              | ** ** | **2006**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                      |       |                  |       |                |       |   |   |   |   |
| Average loans outstanding                                                 |       | $                     | 452,899    |                | $          | 443,395 |   | $ | 453,057 |   | $ | 434,418 |   |
|                                                                      |       |                  |       |                |       |   |   |   |   |
| Allowance for possible loan losses at beginning of  period                |       | $                     | 5,349      |                | $          | 4,961 |   | $ | 5,274 |   | $ | 4,716 |   |
|                                                                      |       |                  |       |                |       |   |   |   |   |
| Loans charged off:                                                        |       |                  |       |                |       |   |   |   |   |
| Commercial                                                                |       |                  |       |                |       |   |   |   |   |
| Real estate                                                               |       | (8                    | )          |                |       | (8 | ) |   |   |
| Consumer                                                                  |       |                  |       | (9                  | )          |   |   | (9 | ) |
| Total                                                                     |       | (8                    | )          | (9                  | )          | (8 | ) | (9 | ) |
| Recoveries of loans previously charged off:                               |       |                  |       |                |       |   |   |   |   |
| Commercial                                                                |       |                  |       |                |       |   |   |   |   |
| Real estate                                                               |       |                  |       |                |       |   |   |   |   |
| Consumer                                                                  |       |                  |       | —              |       |   |   | 1 |   |
| Total                                                                     |       | —                |       | —              |       | — |   | 1 |   |
| Net loan charge offs                                                      |       | (8                    | )          | (9                  | )          | (8 | ) | (8 | ) |
|                                                                      |       |                  |       |                |       |   |   |   |   |
| Additions to allowance charged to operating expenses                      |       | —                |       | 225                 |       | 75 |   | 450 |   |
| Allowance for unfunded loan commitments                                   |       | (36                   | )          | 7                   |       | (36 | ) | 26 |   |
| Allowance for loan losses at end of period                                |       | $                     | 5,305      |                | $          | 5,184 |   | $ | 5,305 |   | $ | 5,184 |   |
|                                                                      |       |                  |       |                |       |   |   |   |   |
| Ratio of net charge-offs to average loans  outstanding                    |       | 0.00                  | %          | 0.00                | %          | 0.00 | % | 0.00 | % |
| Provision for possible loan losses to average loans outstanding           |       | 0.00                  | %          | 0.05                | %          | 0.02 | % | 0.10 | % |
| Allowance for loan losses to loans net of deferred  fees at end of period |       | 1.17                  | %          | 1.17                | %          | 1.17 | % | 1.19 | % |

 

It isthe policy of management to maintain the allowance for loan losses at a leveladequate for known and inherent risks in the portfolio.  Based oninformation currently available to analyze inherent credit risk, includingeconomic factors, overall credit quality, historical delinquencies and a historyof actual charge-offs, management believes that the provision for loan lossesand the allowance are adequate.  The Company generally makes monthlyallocations to the allowance for loan losses.  The budgeted allocation isbased on estimates of loss risk and loan growth.  Adjustments may be madebased on differences from estimated loan growth, the types of loansconstituting this growth, changes in risk ratings within the portfolio, andgeneral economic conditions.  However, no prediction of the ultimate levelof loans charged off in future years can be made with any certainty.

**Other Real Estate**

AtJune 30, 2007 and December 31, 2006, the Company did not have any other realestate (“ORE”) properties.

**Deposits**

AtJune 30, 2007, total deposits were $511,529,000 representing an increase of$26,673,000 (5.5%) over the December 31, 2006 balance of $484,856,000.  Wehave experienced a migration of funds from interest bearing demand depositaccounts (down $14.1 million) and traditional certificates of deposit (down $12million) into our liquid certificate of deposit product which has increased by$47.8 million in the first six months of 2007. Non-interest bearing demand deposits have increased by $4.9 millionwhile interest bearing demand deposits have decreased by $14.1 million in thefirst six months of 2007.  We have alsobeen able to reduce the level of brokered certificates of deposits by $5.8million by not offering renewal options and returning these funds.

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**Capital Resources**

Thecurrent and projected capital position of the Company and the impact of capitalplans and long-term strategies are reviewed regularly by management. TheCompany’s capital position represents the level of capital available to supportcontinued operations and expansion.

TheBoard of Directors of the Company authorized the payment of quarterly cashdividends totaling $0.26 per share for 2006 and $0.16 per share for the firsttwo quarters of 2007.  The payment of dividends in the future is subjectto the discretion of the Board of Directors of the Company and will depend onearnings, the financial condition of the Company and other relevant factors.

TheCompany and its subsidiary Bank are subject to certain regulations issued bythe Board of Governors of the Federal Reserve System and the FDIC which requiremaintenance of certain levels of capital.  At June 30, 2007, shareholders’equity was $48,419,000, representing an increase of $2,692,000 (5.9%) from$45,727,000 at December 31, 2006.  The increase is primarily the result ofthe exercise of stock options and net income from the period offset by thestock based compensation expense recorded and cash dividends discussedabove.  The Bank’s ratio of total risk-based capital to risk adjustedassets was 11.1% at June 30, 2007 and December 31, 2006.  Tier 1risk-based capital to risk-adjusted assets was 10.0% at June 30, 2007 andDecember 31, 2006.

TableEight below lists the Company’s and the Bank’s capital ratios at June 30, 2007and December 31, 2006, as well as the minimum ratios required under regulatorydefinitions of capital adequacy.

**TableEight: Capital Ratios**
| Company                   |   |   |   |   |   |   |   |
|---------------------------|--------|--------|--------|--------|--------|--------|--------|
| Leverage ratio            |   | 10.0   | %      | 10.1   | %      | 4.0    | %      |
|                      |   |   |   |   |   |   |   |
| Tier 1 Risk-Based Capital |   | 11.1   | %      | 10.9   | %      | 4.0    | %      |
|                      |   |   |   |   |   |   |   |
| Total Risk-Based Capital  |   | 12.1   | %      | 11.9   | %      | 8.0    | %      |
|                      |   |   |   |   |   |   |   |
| Bank                      |   |   |   |   |   |   |   |
| Leverage ratio            |   | 9.6    | %      | 9.0    | %      | 4.0    | %      |
|                      |   |   |   |   |   |   |   |
| Tier 1 Risk-Based Capital |   | 10.0   | %      | 10.0   | %      | 4.0    | %      |
|                      |   |   |   |   |   |   |   |
| Total Risk-Based Capital  |   | 11.1   | %      | 11.1   | %      | 8.0    | %      |

 

Capitalratios are reviewed on a regular basis to ensure that capital exceeds theprescribed regulatory minimums and is adequate to meet future needs.  Allratios are in excess of the regulatory definition of “Minimum” at June 30, 2007and December 31, 2006.  The Bank was considered “well-capitalized” byregulatory standards, at June 30, 2007 and December 31, 2006.

**Item 3.  Quantitative and Qualitative Disclosures aboutMarket Risk**

**Market Risk Management**

*Overview*.  Market risk is the risk ofloss from adverse changes in market prices and rates.  The Company’smarket risk arises primarily from interest rate risk inherent in its loan,investment and deposit portfolios.  The goal for managing the assets andliabilities of the Company is to maximize shareholder value and earnings whilemaintaining a high quality balance sheet without exposing the Company to undueinterest rate risk.

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TheBoard of Directors has overall responsibility for the interest rate riskmanagement policies.  The Bank has an Asset and Liability ManagementCommittee (ALCO) that establishes and monitors guidelines to control thesensitivity of earnings to changes in interest rates.

*Asset/Liability Management*. Activities involved in asset/liability management include, but are not limitedto, lending, accepting and placing deposits, investing in securities, usingtrust preferred securities and borrowings.  Interest rate risk is theprimary market risk associated with asset/liability management. Sensitivity of earnings to interest rate changes arises when yields on assetschange in a different time period or in a different amount from that ofinterest costs on liabilities.  To mitigate interest rate risk, thestructure of the balance sheet is managed with the goal that movements ofinterest rates on assets and liabilities are correlated and contributes toearnings even in periods of volatile interest rates.  The asset/liabilitymanagement policy sets limits on the acceptable amount of variance in netinterest margin and market value of equity under changing interestenvironments.  The Company uses simulation models to forecast earnings,net interest margin and market value of equity.

Simulationof earnings is the primary tool used to measure the sensitivity of earnings tointerest rate changes.  Using computer-modeling techniques, the Company isable to estimate the potential impact of changing interest rates onearnings.  A balance sheet forecast is prepared monthly using inputs ofactual loans, securities and interest bearing liability (i.e.deposits/borrowings) positions as the beginning base.  The forecast balancesheet is processed against seven interest rate scenarios.  These scenariosinclude a 100, 200 and 300 basis point rising rate forecast, a flat rateforecast and a 100, 200 and 300 basis point falling rate forecast which takeplace within a one year time frame.

The netinterest income is measured during the year assuming a gradual change in ratesover the twelve-month horizon.  The Company’s net interest income, asforecast below, was modeled utilizing a forecast balance sheet projected frombalances as of the date indicated.

TableNine below summarizes the effect on net interest income (NII) of a ±200 basispoint change in interest rates as measured against a constant rate (no change)scenario.  The results shown in Table nine for the two periods, fallwithin the parameters of the Bank’s policy for interest rate risk.

**TableNine:  Interest Rate Risk Simulation of Net Interest as of June 30, 2007and December 31, 2006**
|                                         | ** ** | **$ Change in NII** | ** ** | **$ Change in NII** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **from Current**              | ** ** | **from Current**              | ** ** |
| ** **                              | ** ** | **12 Month Horizon**     | ** ** | **12 Month Horizon**     | ** ** |
| **(In thousands)**                 | ** ** | **June 30, 2007**        | ** ** | **December 31, 2006**    | ** ** |
| Variation from a constant rate scenario |       |                               |       |                               |       |
| +200bp                                  |       | $                                  | 3,764      |                               | $          | 3,752 |   |
| - 200bp                                 |       | $                                  | (4,371     | )                                  | $          | (4,211 | ) |

 

Assumptionsare inherently uncertain, and, consequently, the model cannot precisely measurenet interest income or precisely predict the impact of changes in interestrates on net interest income. Actual results will differ from simulated resultsdue to timing, magnitude and frequency of interest rate changes, as well as changesin market conditions and management strategies which might moderate thenegative consequences of interest rate deviations. In the model above, thesimulation shows that the Company is asset sensitive over the one-year horizonas increasing rates have a positive impact on net interest income and decliningrates have a negative impact.

**Inflation**

Theimpact of inflation on a financial institution differs significantly from thatexerted on manufacturing, or other commercial concerns, primarily because its assetsand liabilities are largely monetary.  In general, inflation primarilyaffects the Company and it subsidiaries through its effect on market rates ofinterest, which affects the Company’s ability to attract loan customers. Inflation affects the growth of total assets by increasing the level of loandemand, and potentially adversely affects capital adequacy because loan growthin inflationary periods can increase at rates higher than the rate capitalgrows through retention of earnings, which may be generated in thefuture.  In addition to its effects on interest rates, inflation 

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increases overalloperating expenses.  Inflation has not had a material effect upon theresults of operations of the Company and its subsidiaries during the periodsended June 30, 2007, and 2006.

**Liquidity**

Liquiditymanagement refers to the Company’s ability to provide funds on an ongoing basisto meet fluctuations in deposit levels as well as the credit needs andrequirements of its clients.  Both assets and liabilities contribute tothe Company’s liquidity position.  Federal funds lines, short-terminvestments and securities, and loan repayments contribute to liquidity, alongwith deposit increases, while loan funding and deposit withdrawals decreaseliquidity.  The Company assesses the likelihood of projected fundingrequirements by reviewing historical funding patterns, current and forecastedeconomic conditions and individual client funding needs.

TheCompany’s sources of liquidity consist of cash and due from correspondentbanks, overnight funds sold to correspondent banks, unpledged marketableinvestments and loans held for sale.  On June 30, 2007, consolidatedliquid assets totaled $63.5 million or 10.9% of total assets compared to $64.3million or 11.7% of total assets on December 31, 2006.  In addition toliquid assets, the Company maintains short-term lines of credit in the amountof $15,000,000 with correspondent banks.  There were no borrowingsoutstanding under these arrangements at June 30, 2007.

TheBank also has informal agreements with various other banks to sellparticipations in loans, if necessary.  The Company serves primarily abusiness and professional customer base and, as such, its deposit base issusceptible to economic fluctuations.  Accordingly, management strives tomaintain a balanced position of liquid assets to volatile and cyclicaldeposits.

Liquidityis also affected by portfolio maturities and the effect of interest ratefluctuations on the marketability of both assets and liabilities.  TheCompany can sell any of its unpledged securities held in the available-for-salecategory to meet liquidity needs.

**Off-Balance Sheet Items**

TheCompany has certain ongoing commitments under operating leases.  Thesecommitments do not significantly impact operating results. As of June 30, 2007and December 31, 2006, commitments to extend credit and letters of credit werethe only financial instruments with off-balance sheet risk.  The Companyhas not entered into any contracts for financial derivative instruments such asfutures, swaps, options or similar instruments.   Commitments to fund loans and stand-byletters of credit at June 30, 2007 and December 31, 2006 were approximately$164,274,000 and $191,438,000, respectively.  Such loans relate primarilyto revolving lines of credit and other commercial loans, and to real estateconstruction loans.  As a percentage ofnet loans, these off-balance sheet items represent 36.1% and 43.3%,respectively.

**Other Matters**

**Item 4.  Controls and Procedures**

(a)Disclosure Controls and Procedures: An evaluation of the Company’s disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) was carried out under the supervision and with the participation ofthe Company’s Chief Executive Officer, Chief Financial Officer and othermembers of the Company’s senior management as of the end of the Company’sfiscal quarter ended June 30, 2007. The Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures as currently in effect are effective in ensuring that theinformation required to be disclosed by the Company in the reports it files orsubmits under the Exchange Act is (i) accumulated and communicated to theCompany’s management (including the Chief Executive Officer and Chief FinancialOfficer) to allow timely decisions regarding required disclosure, and (ii)recorded, processed, summarized and reported within the time periods specifiedin the Commission’s rules and forms.

(b)Internal Control Over Financial Reporting: An evaluation of any changes in theCompany’s internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)), that occurred during the Company’s fiscalquarter ended June 30, 2007, 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.

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**Item 5.  Subsequent Events**

OnJuly 17, 2007 the Company received approval of its applications to the FDIC toopen branch offices at 1335 Hilltop Drive, Redding, California and 5026 RhondaRoad, Anderson, California.

OnJuly 10, 2007 the Company finalized the purchase of  $8.0 million of capital trust pass-throughsecurities in the name of Community Valley Bancorp Trust II.  This was done to replace the $8.0 million ofcapital trust pass-through securites in Community Valley Bancorp Trust I whichwas purchased in December 2002 and will be eligible for redemption in December2007.

**PART II – OTHER INFORMATION**

Item1.  Legal Proceedings.

None.

Item1A. Risk Factors

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors” inour Annual Report on Form 10-K for the year ended December 31, 2006, whichcould materially affect our business, financial condition or future results.The risks described in our Annual Report on Form 10-K are not the only risksfacing our Company. Additional risks and uncertainties not currently known tous or that we currently deem to be immaterial also may materially adverselyaffect our business, financial condition and/or operating results.”

Item2.  Changes in Securities and Use of Proceeds.

None.

Item3.  Defaults Upon Senior Securities.

None.

Item 4.  Submission of Matters to a Vote ofSecurity Holders.

The Annual Shareholdermeeting of the Registrant was held on June 6, 2007.

5,736,241 shares or 77% ofthe outstanding voting stock was available for quorum.

Proposal #1   5,714,998 shares or 77% voted for theelection of thirteen directors named in the proxy statement for terms expiringon the date of the annual meeting in 2007.

Item 5.  Other Information.

None

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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. |

 

**SIGNATURES**

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                | COMMUNITY VALLEY BANCORP           |
|----------------|------------------------------------|
|           |                               |   |
| August 8, 2007 |                               |   | *By: /s/ Keith C. Robbins* | * * |
|           |                               |   |
|           | Keith C. Robbins                   |
|           |                               |   |
|           | President, Chief Executive Officer |
|           |                               |   |
| August 8, 2007 |                               |   | *By: /s/ John F. Coger* | * * |
|           |                               |   |
|           | John F. Coger                      |
|           |                               |   |
|           | Executive Vice President, CFO, COO |
|                |                                    |  |  |  |  |  |  |

 

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