**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                                         |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**   |
|----------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
|                                               |   |                                                                                           |
| **For  the Quarterly Period Ended March 31, 2003** |
|                                               |   |                                                                                           |
| **o**                                              |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile No. 0-31525**

 

**COMMUNITY VALLEY BANCORP**

(Exact name ofregistrant as specified in its charter)

 

| **California**                                                   |   | **68-0479553**            |
|------------------------------------------------------------------|--------|---------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (IRS Employer ID  Number) |
|                                                             |   |                      |
| **2041  Forest Avenue, Chico, California**                       |   | **95928**                 |
| (Address of  principal executive offices)                        |   | (Zip code)                |

 

**(530)899-2344**

(Registrant’stelephone number,including area code)

 

**notapplicable**

(Former name,former address and former fiscal year, if changedsince last report.)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.

 

Yes  ý     No  o

 

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

 

Yes  o  No  ý

 

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

 

No par value Common Stock– 2,692,528 shares outstanding at April 30, 2003.

 

 

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PART 1-FINANCIALINFORMATION

 

Item 1. FINANCIALSTATEMENTS

 

COMMUNITY VALLEYBANCORP

CONSOLIDATEDBALANCE SHEET (Unaudited)

 
| **(In thousands)**                                                                                                                                                           |   | **March 31,  2003** |    | **December  31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
| ASSETS                                                                                                                                                                       |   |                |    |                    |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| Cash  and due from banks                                                                                                                                                     |   | $                   | 15,319  |                    | $      | 15,621 |   |
| Federal  funds sold                                                                                                                                                          |   | 62,380              |    | 57,410                  |   |
| Interest-bearing  deposits in banks                                                                                                                                          |   | 5,151               |    | 4,061                   |   |
| Investment  securities (market value of $3,505 at March 31, 2003 and $3,438 at December  31, 2002)                                                                           |   | 3,696               |    | 3,387                   |   |
| Loans  held for sale                                                                                                                                                         |   | 5,242               |    | 7,912                   |   |
| Loans,  less allowance for loan losses of $3,154 at March 31, 2003 and $3,007 at  December 31, 2002                                                                          |   | 232,196             |    | 229,699                 |   |
| Bank  premises and equipment, net                                                                                                                                            |   | 6,666               |    | 6,653                   |   |
| Accrued  interest receivable and other assets                                                                                                                                |   | 11,531              |    | 12,492                  |   |
|                                                                                                                                                                         |   | $                   | 342,181 |                    | $      | 337,235 |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                                                   |   |                |    |                    |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| Deposits:                                                                                                                                                                    |   |                |    |                    |   |
| Non-interest  bearing                                                                                                                                                        |   | $                   | 52,428  |                    | $      | 62,889 |   |
| Interest  bearing                                                                                                                                                            |   | 250,683             |    | 235,092                 |   |
| Total  deposits                                                                                                                                                              |   | 303,111             |    | 297,981                 |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| Employee  stock ownership plan note payable                                                                                                                                  |   | 779                 |    | 732                     |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| Mandatorily  redeemable cumulative trust preferred securities of subsidiary grantor trust                                                                                    |   | 8,000               |    | 8,000                   |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| Accrued  interest payable and other liabilities                                                                                                                              |   | 4,104               |    | 5,142                   |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| Total  liabilities                                                                                                                                                           |   | 315,994             |    | 311,855                 |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| Commitments  and contingencies                                                                                                                                               |   |                |    |                    |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| Shareholders’  equity:                                                                                                                                                  |   |                |    |                    |   |
| Common  stock – no par value; 20,000,000 shares authorized; issued and outstanding –  2,692,278 shares at March 31, 2003 and 2,685,351 shares at December 31, 2002 |   | 6,767               |    | 6,660                   |   |
| Unearned  ESOP shares (66,662 shares at March 31, 2003 and 65,437 shares at December  31, 2002, at cost)                                                                     |   | (918                | )       |  (852              | )      |
|                                                                                                                                                                         |   |                |    |                    |   |
| Retained  earnings                                                                                                                                                           |   | 20,326              |    | 19,558                  |   |
| Accumulated  other comprehensive income (Note 3)                                                                                                                             |   | 12                  |    | 14                      |   |
|                                                                                                                                                                         |   |                |    |                    |   |
| Total  shareholders’ equity                                                                                                                                             |   | 26,187              |    | 25,381                  |   |
|                                                                                                                                                                         |   | $                   | 342,181 |                    | $      | 337,235 |   |

 

See Notes to UnauditedConsolidated Financial Statements

 

2

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COMMUNITY VALLEYBANCORP

CONSOLIDATEDSTATEMENT OF INCOME(Unaudited)

 

(In thousands, except pershare data)

 
| **For the 3 months ended  March 31,**                            |   | **2003** |   | **2002** |   |
|------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                             |   |     |   |     |   |
| Interest  income:                                                |   |     |   |     |   |
| Interest  and fees on loans                                      |   | $        | 4,775  |     | $      | 4,224 |   |
| Interest  on Federal funds sold                                  |   | 182      |   | 140      |   |
| Interest  on deposits in banks                                   |   | 41       |   | 10       |   |
| Interest  and dividends on investment securities:                |   |     |   |     |   |
| Taxable                                                          |   | 36       |   | 15       |   |
| Exempt  from Federal income taxes                                |   | 19       |   | 28       |   |
|                                                             |   |     |   |     |   |
| Total  interest income                                           |   | 5,053    |   | 4,417    |   |
| Interest  expense:                                               |   |     |   |     |   |
| Interest  on deposits                                            |   | 1,013    |   | 1,330    |   |
| Interest  on long-term debt                                      |   | 138      |   | 10       |   |
| Total  interest expense                                          |   | 1,151    |   | 1,340    |   |
|                                                             |   |     |   |     |   |
| Net  interest income                                             |   | 3,902    |   | 3,077    |   |
|                                                             |   |     |   |     |   |
| Provision  for loan losses                                       |   | 150      |   | 103      |   |
| Net  interest income after provision for loan losses             |   | 3,752    |   | 2,974    |   |
|                                                             |   |     |   |     |   |
| Non-interest  income                                             |   | 1,183    |   | 2,020    |   |
|                                                             |   |     |   |     |   |
| Non-interest  expense:                                           |   |     |   |     |   |
| Salaries  and employee benefits                                  |   | 2,138    |   | 1,461    |   |
| Occupancy                                                        |   | 172      |   | 137      |   |
| Furniture  and equipment                                         |   | 240      |   | 173      |   |
| Other  expense                                                   |   | 670      |   | 1,993    |   |
| Total  non-interest expense                                      |   | 3,220    |   | 3,764    |   |
|                                                             |   |     |   |     |   |
| Income  before income taxes                                      |   | 1,715    |   | 1,230    |   |
|                                                             |   |     |   |     |   |
| Income  taxes (benefit)                                          |   | 678      |   | (23      | )      |
|                                                             |   |     |   |     |   |
| Net  income                                                      |   | $        | 1,037  |     | $      | 1,253 |   |
|                                                             |   |     |   |     |   |
| Basic  earnings per share (Note 2)                               |   | $        | .39    |     | $      | .49 |   |
| Diluted  earnings per share (Note 2)                             |   | $        | .38    |     | $      | .46 |   |
|                                                             |   |     |   |     |   |
| Cash  dividends per share of issued and outstanding common stock |   | $        | .10    |     | $      | .075 |   |

 

SeeNotes to Unaudited Consolidated Financial Statements

 

3

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COMMUNITY VALLEY BANCORP

CONSOLIDATED STATEMENT OFCHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands exceptnumber of shares)

 
|                                                             |   | **Common  Stock** |   | **Unearned  ESOP** |   | **Retained** |   | **Accumulated  Other  Comprehensive** |   | **Shareholders’** |   | **Comprehensive** |   |
|------------------------------------------------------------------|--------|-------------------|--------|--------------------|--------|--------------|--------|---------------------------------------|--------|------------------------|--------|-------------------|--------|
|                                                             |   | **Shares**        |   | **Amount**         |   | **Shares**   |   | **Earnings**                          |   | **Income**             |   | **Equity**        |   | **Income** |   |
|                                                             |   |              |   |               |   |         |   |                                  |   |                   |   |              |   |   |   |
| Balance, January 1, 2002                                         |   | 2,648,389         |   | $                  | 6,131  |         | $      | (902                                  | )      | $                      | 15,591 |              |   |   | $ | 20,820 |   |   |   |
|                                                             |   |              |   |               |   |         |   |                                  |   |                   |   |              |   |   |   |
| Comprehensive income (Note 3):                                   |   |              |   |               |   |         |   |                                  |   |                   |   |              |   |   |   |
| Net income                                                       |   |              |   |               |   |         |   | 4,849                                 |   |                   |   | 4,849             |   | $ | 4,849 |   |
| Other comprehensive gain except unrealized gain                  |   |              |   |               |   |         |   |                                  |   | $                      | 14     |              | 14     |   | 14 |   |
| Total comprehensive income                                       |   |              |   |               |   |         |   |                                  |   |                   |   |              |   | $ | 4,863 |   |
|                                                             |   |              |   |               |   |         |   |                                  |   |                   |   |              |   |   |   |
| Exercise of stock options and related tax benefit                |   | 36,962            |   | 426                |   |         |   |                                  |   |                   |   | 426               |   |   |   |
| Earned ESOP shares                                               |   |              |   | 108                |   | 50           |   |                                  |   |                   |   | 158               |   |   |   |
| Cash dividends- $.33 per share                                   |   |              |   |               |   |         |   | (882                                  | )      |                   |   | (882              | )      |   |   |
| Cash in lieu of fractional shares in  four-for-three stock split |   |              |   | (5                 | )      |         |   |                                  |   |                   |   | (5                | )      |   |   |
|                                                             |   |              |   |               |   |         |   |                                  |   |                   |   |              |   |   |   |
| Balance, December 31, 2002                                       |   | 2,685,351         |   | 6,660              |   | (852         | )      | 19,558                                |   | 14                     |   | 25,380            |   |   |   |
|                                                             |   |              |   |               |   |         |   |                                  |   |                   |   |              |   |   |   |
| Comprehensive income (Note 3):                                   |   |              |   |               |   |         |   |                                  |   |                   |   |              |   |   |   |
| Net income                                                       |   |              |   |               |   |         |   | 1,037                                 |   |                   |   | 1,037             |   | $ | 1,037 |   |
| Other comprehensive loss, net of tax:                            |   |              |   |               |   |         |   |                                  |   |                   |   |              |   |   |   |
| Unrealized loss on available-for-sale investment  securities     |   |              |   |               |   |         |   |                                  |   | (2                     | )      | (2                | )      | (2 | ) |
|                                                             |   |              |   |               |   |         |   |                                  |   |                   |   |              |   |   |   |
| Total comprehensive income                                       |   |              |   |               |   |         |   |                                  |   |                   |   |              |   | $ | 1,035 |   |
|                                                             |   |              |   |               |   |         |   |                                  |   |                   |   |              |   |   |   |
| Exercise of stock options and related tax benefit                |   | 7,177             |   | 80                 |   |         |   |                                  |   |                   |   | 80                |   |   |   |
| Earned ESOP shares                                               |   |              |   | 27                 |   |         |   | 12                                    |   |                   |   |              |   | 39 |   |
| Shares acquired by ESOP                                          |   |              |   |               |   | (78          | )      |                                  |   |                   |   | (78               | )      |   |   |
| Cash dividends declared                                          |   |              |   |               |   |         |   | (269                                  | )      |                   |   | (269              | )      |   |   |
|                                                             |   |              |   |               |   |         |   |                                  |   |                   |   |              |   |   |   |
| Balance, March 31, 2003                                          |   | 2,692,278         |   | $                  | 6,767  |         | $      | (918                                  | )      | $                      | 20,326 |              | $      | 12 |   | $ | 26,187 |   |   |   |

 

See Notes to UnauditedConsolidated Financial Statements

 

4

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COMMUNITY VALLEY BANCORP

CONSOLIDATED STATEMENT OFCASH FLOWS(Unaudited**)**

** **
| **(In thousands)****For the  three months ended March 31,**                        |   | **2003** |   | **2002** |   |
|------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                               |   |     |   |     |   |
| Cash  flows from operating activities:                                             |   |     |   |     |   |
| Net  income                                                                        |   | $        | 1,037  |     | $      | 1,253 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |     |   |     |   |
| Provision  for loan losses                                                         |   | 150      |   | 103      |   |
| Deferred  loan origination costs, net                                              |   | (158     | )      | (105     | )      |
| Depreciation  and amortization                                                     |   | 210      |   | 180      |   |
| Net  decrease in loans held for sale                                               |   | 2,670    |   | 3,678    |   |
| (Increase)  decrease in cash surrender value of life insurance                     |   | (49      | )      | 339      |   |
| Gain  on cash surrender value                                                      |   |     |   | (1,173   | )      |
| Non-cash  compensation expense associated with the ESOP                            |   | 39       |   | 41       |   |
| Decrease  (increase) in accrued interest receivable and other assets               |   | 1,052    |   | (573     | )      |
| Decrease  in accrued interest payable and other liabilities                        |   | (1,038   | )      | (406     | )      |
|                                                                               |   |     |   |     |   |
| Net  cash provided by operating activities                                         |   | 3,913    |   | 3,337    |   |
|                                                                               |   |     |   |     |   |
| Cash  flows from investing activities:                                             |   |     |   |     |   |
|                                                                               |   |     |   |     |   |
| Net  (increase) decrease in interest-bearing deposits in banks                     |   | (1,090   | )      | 99       |   |
| Proceeds  from called held-to-maturity investment securities                       |   | 1,000    |   |     |   |
| Purchase  of held-to-maturity investment securities                                |   | (1,311   | )      | (327     | )      |
| Purchases  of bank premises and equipment                                          |   | (243     | )      | (762     | )      |
| Proceeds  from sale of oreo                                                        |   |     |   | 13       |   |
| Proceeds  from life insurance                                                      |   |     |   | 1,750    |   |
| Life  insurance purchased                                                          |   |     |   | (383     | )      |
| Net  (increase) decrease in loans                                                  |   | (2,491   | )      | 281      |   |
|                                                                               |   |     |   |     |   |
| Net  cash (used in) provided by investing activities                               |   | (4,135   | )      | 671      |   |
|                                                                               |   |     |   |     |   |
| Cash  flows from financing activities:                                             |   |     |   |     |   |
|                                                                               |   |     |   |     |   |
| Net  increase in demand, interest-bearing and savings deposits                     |   | $        | 2,158  |     | $      | 10,925 |   |
| Net  (increase) decrease in time deposits                                          |   | 2,972    |   | (12,355  | )      |
| Proceeds  from repayment of ESOP loan, net                                         |   | 48       |   | (30      | )      |
| Payment  of cash dividends                                                         |   | (269     | )      | (199     | )      |
| Exercise  of stock options                                                         |   | 58       |   | 43       |   |
| Purchase  of unearned ESOP shares                                                  |   | (78      | )      |     |   |
|                                                                               |   |     |   |     |   |
| Net  cash provided by (used) in financing activities                               |   | 4,889    |   | (1,616   | )      |
|                                                                               |   |     |   |     |   |
| Increase  in cash and cash equivalents                                             |   | 4,667    |   | 2,392    |   |
|                                                                               |   |     |   |     |   |
| Cash  and cash equivalents at beginning of year                                    |   | 73,031   |   | 49,672   |   |
|                                                                               |   |     |   |     |   |
| Cash  and cash equivalents at end of period                                        |   | $        | 77,698 |     | $      | 52,064 |   |

 

See Notes to UnauditedConsolidated Financial Statements

 

5

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**CommunityValley Bancorp and Subsidiaries**

 

NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS

 

1.   BASIS OF PRESENTATION

 

In May 2002, shareholders of Butte Community Bank (the“Bank”) approved a plan of reorganization and merger whereby the Bank became awholly owned subsidiary of a newly formed bank holding company, CommunityValley Bancorp.  Management expects thatthe holding company structure will facilitate growth within the banking fieldand in areas related to banking, either by the creation of new subsidiaries orthe acquisition of existing companies and banks.

 

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

 

In December 2002, the Company issued to CVB Trust Isubordinated deferrable interest debentures due December 31, 2032.  Simultaneously, CVB Trust I issued 8,000floating rate capital securities, with liquidation values of $1,000 persecurity, for gross proceeds of $8,000,000. The subordinated debentures represent the sole assets of CVBTrust I.  The subordinated debenturesare redeemable by the Company, subject to the receipt by the Company of priorapproval from the Federal Reserve Bank (FRB), if then required under applicablecapital guidelines or policies of the FRB. The Company may redeem the subordinated debentures on any December 31ston or after December 31, 2007.  Theredemption price shall be par plus accrued and unpaid interest, except in thecase of redemption under a special event which is defined in thedebenture.  The floating rate capitalsecurities are subject to mandatory redemption to the extent of any earlyredemption of the subordinated debentures and upon maturity of the subordinateddebentures on December 31, 2032.

 

Holders of the securities are entitled to cumulativecash distributions on the liquidation amount of $1,000 per security.  Interest rates on the capital securities anddebentures are computed on a 360-day basis. The stated interest rate is the three-month London Interbank OfferedRate (LIBOR) plus 3.3%, with a maximum rate of 12.5% annually, adjustablequarterly.

 

The consolidated financial statements include theaccounts of the Company and its wholly owned bank subsidiary, Butte CommunityBank. All significant inter-company balances and transactions have beeneliminated in consolidation.  Theresults of operations for the three-month period ended March 31, 2003 may notnecessarily be indicative of the operating results for the full year 2003.

 

2.   EARNINGS PER SHARE COMPUTATION

 

Basic earnings per share are computed by dividing netincome by the weighted average common shares outstanding for the period(2,625,270 shares for the three month period ended March 31, 2003 and 2,579,296shares for the three month period ended March 31, 2002).  Diluted earnings per share reflect thepotential dilution that could occur if outstanding stock options were exercisedusing the treasury stock method.  Diluted earnings per share is computed by dividing net income by theweighted average common shares outstanding for the period plus the dilutiveeffect of options (133,176 shares for the three-month period ended March 31,2003 and 131,420 shares for the three-month

 

6

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period ended March 31,2002).  Earnings per share areretroactively adjusted for stock splits and dividends for all periodspresented.

 

3. COMPREHENSIVE INCOME

 

Comprehensive income is reported in addition to netincome for all periods presented. Comprehensive income is made up of net income plus other comprehensiveincome.  Other comprehensive income, netof taxes, is comprised of changes in unrealized gains or losses, net of taxes,on available-for-sale securities, adjusted for the effect of realized gains orlosses on available-for-sale securities, net of taxes. Total comprehensiveincome for the three-month period ended March 31, 2003 was $1,035,000. TheCompany did not generate other comprehensive income during the three monthsended March 31, 2002.  Therefore, totalcomprehensive income equaled net income for the three month period ended March31, 2002.

 

## **4.**  STOCK–BASED COMPENSATION

 

The Company issues stock options under threestock-based compensation plans, the Community Valley Bancorp 1991, 1997 and2000 Stock Option Plans.  The Companyaccounts for these plans under the recognition and measurement principles ofAPB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related Interpretations.  Nostock-based compensation cost is reflected in net income, as all optionsgranted under these plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant.  In accordance with Financial Accounting Standards Board (“FASB”)No. 148, *Accounting for Stock-BasedCompensation – Transition and Disclosure, an Amendment of FASB No. 12,*the following table illustrates the effect on net income and earnings per shareif the Company had applied the fair value recognition provisions of FASBStatement No. 123, *Accounting for Stock-Based Compensation*,to stock-based employee compensation.

 

Pro forma adjustments to the Company’s consolidatednet earnings and earnings per share are disclosed during the periods in whichthe options become vested. 

 
|                                                                                                                                           |   | **March 31, 2003** |      | **March 31, 2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|--------------------|--------|
|                                                                                                                                           |   |               |      |               |   |
| Net earnings as reported                                                                                                                       |   | $                  | 1,036,800 |               | $      | 1,253,100 |   |
| Deduct:  Total stock-based compensation expense  determined under the fair value based method for all awards, net of related  tax effects |   | (64,500            | )         | (68,500            | )      |
|                                                                                                                                           |   |               |      |               |   |
| Pro forma net income                                                                                                                           |   | $                  | 972,300   |               | $      | 1,184,600 |   |
|                                                                                                                                           |   |               |      |               |   |
| Basic earnings per share -  as reported                                                                                                        |   | $                  | 0.39      |               | $      | 0.49 |   |
| Basic earnings per share -  pro forma                                                                                                          |   | $                  | 0.37      |               | $      | 0.46 |   |
|                                                                                                                                           |   |               |      |               |   |
| Diluted earnings per share -  as reported                                                                                                      |   | $                  | 0.38      |               | $      | 0.46 |   |
| Diluted earnings per share -  pro forma                                                                                                        |   | $                  | 0.36      |               | $      | 0.44 |   |

 

7

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4.  ACCOUNTINGPRONOUNCEMENTS

 

In December 2002, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 148, Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB Statement No.123.  This Statement amends SFASNo. 123, Accounting for Stock-Based Compensation, to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  In addition, this statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results.  The transition guidance and annualdisclosure provisions of SFAS No. 148 are effective for fiscal yearsending after December 15, 2002. The interim disclosure provisions are effective for financial reportingcontaining financial statements for interim periods beginning afterDecember 15, 2002.  Because theCompany accounts for the compensation cost associated with its stock optionplan under the intrinsic value method, the alternative methods of transitionwill not apply to the Company.  Inmanagement’s opinion, the adoption of this Statement did not have a materialimpact on the Company’s consolidated financial position or results ofoperations.

 

On April 30, 2003, the Financial Accounting StandardsBoard issued Statement No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.” This Statement amends and clarifies the accounting for derivative instrumentsby providing guidance related to circumstances under which a contract with anet investment meets the characteristics of a derivative as discussed inStatement 133.  The Statement alsoclarifies when a derivative contains a financing component.   The Statement is intended to result in moreconsistent reporting for derivative contracts and must be applied prospectivelyfor contracts entered into or modified after June 30, 2003, except for hedgingrelationships designated after June 30, 2003.  In management’s opinion, adoption of this Statement is not expected tohave a material effect on the Company’s consolidated financial position orresults of operations.

 

8

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**Item 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OFCOMMUNITY VALLEY BANCORP**

 

The following is Community Valley Bancorp’s (the“Company”) management’s discussion and analysis of the significant changes inbalance sheet accounts for March 31, 2003 and December 31, 2002 and income andexpense accounts for the three-month period ended March 31, 2003 and 2002. Thediscussion is designed to provide a better understanding of significant trendsrelated to the Company’s financial condition, results of operations, liquidity,capital resources and interest rate sensitivity.

 

In addition to the historical information containedherein, this report on Form 10-Q contains certain forward-lookingstatements.  The reader of this reportshould understand that all such forward-looking statements are subject tovarious uncertainties and risks that could affect their outcome.   The Company’s actual results could differmaterially from those suggested by such forward-looking statements.  Factors that could cause or contribute to such differencesinclude, but are not limited to, variances in the actual versus projectedgrowth in assets, return on assets, loan losses, expenses, rates charged onloans and earned on securities investments, rates paid on deposits, competitioneffects, 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,  theeffects 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 asother factors. This entire report should be read putting suchforward-looking statements in context.

 

**GeneralDevelopment of Business**

** **

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

 

The Company owns 100% of the issued and outstandingcommon shares of Butte Community Bank. Butte Community Bank was incorporated and commenced business in Paradiseand Oroville, California in 1990.  ButteCommunity Bank operates seven full service offices within its primary serviceareas of Butte and Sutter Counties.  TheBank also maintains a Loan Production Office in Roseville. Butte CommunityBank’s primary business is serving the commercial banking needs of small tomid-sized businesses and consumers 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.

 

**Overview**

 

The Company recorded net income of $1,037,000 for thequarter ended March 31, 2003, which was a 10% decrease from the $1,253,000reported for the same period of 2002. Diluted earnings per share for the first quarter of 2003 were $0.38,compared to the $0.46 recorded in the first quarter of 2002.  The return on average equity (ROAE) and thereturn on average assets (ROA) for the first quarter of 2003 were 16.00% and1.25%, respectively, as compared to 23.65% and 1.90%, respectively, for thesame period in 2002.  The primary reasonfor the decline in net income is the net increase in tax expense of$655,000.  The Company realized a netcredit of $23,000 for the first quarter of 2002 due to the tax-free proceedsfrom key man insurance policies the Bank received in March of 2002 as a resultof the death of the Company’s Chief Operating Officer.

 

9

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Total assets of the Company increased by $4,945,000 or(1.5%) from December 31, 2002 to $342,180,000 at March 31, 2003.  Net loans totaled $237,438,000, down$173,000 (.07%) from the ending balances on December 31, 2002.  Deposit balances at March 31, 2003 totaled$303,111,000, up $5,130,000 (1.7%) from December 31, 2002.

 

The Company ended the first quarter of 2003 with aTier 1 risk based capital ratio of 10.1% and a total risk-based capital ratioof 11.3% versus 10.4% and 11.6%, respectively, at December 31, 2002.

 

Table One below provides a summary of the componentsof net income for the periods indicated:

 

**Table One:  Componentsof Net Income**

 
|                                                             |   | **Three  months ended  March 31,** |   |
|------------------------------------------------------------------|--------|------------------------------------|--------|
| **(In thousands, except  percentages)**                          |   | **2003**                           |   | **2002** |   |
| Net  interest income                                             |   | $                                  | 3,902  |   | $ | 3,077 |   |
| Provision  for loan losses                                       |   | (150                               | )      | (103 | ) |
| Non-interest  income                                             |   | 1,183                              |   | 2,020 |   |
| Non-interest  expense                                            |   | (3,220                             | )      | (3,764 | ) |
| (Provision  for) benefit from income taxes                       |   | (678                               | )      | 23 |   |
|                                                             |   |                               |   |   |   |
| Net  income                                                      |   | $                                  | 1,037  |   | $ | 1,253 |   |
|                                                             |   |                               |   |   |   |
| Average  total assets (In millions)                              |   | $                                  | 335.6  |   | $ | 257.3 |   |
|                                                             |   |                               |   |   |   |
| Net  income (annualized) as a percentage of average total assets |   | 1.25                               | %      | 1.87 | % |

 

**Results of Operations**

 

**NetInterest Income and Net Interest Margin**

 

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

 

The Company’s net interest margin was 5.15% for thethree months ended March 31, 2003 and 5.20% for the three months ended March31, 2002.  Net interest income increased$825,000 (26.8%) for the first quarter of 2003 compared to the same period in2002.  The primary reason for thisincrease was the loan growth and the resulting interest income and feesassociated with that growth together with the decrease in the interest ratespaid on deposits.

 

Deposit interest expense was $316,000 (31.2%) lower inthe first quarter of 2003 versus the prior year period. The average balances ofinterest bearing liabilities were $41,359,000 (20.6%) higher in the firstquarter of 2003 versus the same quarter in 2002. Even though the interestbearing balances increased, rates paid on these liabilities decreased 99 basispoints on a quarter over quarter basis. The reason for this decrease was the ability of management to change themix of the deposits away from higher interest rate certificates of deposit tolower rate demand deposits and to lower the average cost of certificates ofdeposit as higher cost deposits were re-priced in a lower rate environment.

 

10

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Table Two, Analysis of Net Interest Margin on EarningAssets, and Table Three, Analysis of Volume and Rate Changes on Net InterestIncome and Expenses, are provided to enable the reader to understand thecomponents and past trends of the Company’s interest income and expense.  Table Two provides an analysis of netinterest margin on earning assets setting forth average assets, liabilities andshareholders’ equity; interest income earned and interest expense paid andaverage rates earned and paid; and the net interest margin on earning assets.

 

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

** **
| **Three Months Ended March 31,**                 |   | **2003**         |    | **2002**     |   |
|--------------------------------------------------|--------|------------------|---------|--------------|--------|
| **(In thousands, except percentages)**           |   | **Avg  Balance** |    | **Interest** |   | **Avg  Yield (4)** |   | **Avg  Balance** |   | **Interest** |   | **Avg  Yield (4)** |   |
| **Assets:**                                      |   |             |    |         |   |   |   |   |   |   |   |   |   |
| Earning  assets                                  |   |             |    |         |   |   |   |   |   |   |   |   |   |
| Loans  (1)                                       |   | $                | 239,134 |         | $      | 4,775 |   | 8.10 | % | $ | 203,476 |   | $ | 4,224 |   | 8.42 | % |
| Taxable  investment securities                   |   | 2,293            |    | 36           |   | 6.37 | % | 1,040 |   | 15 |   | 5.85 | % |
| Tax-exempt  investment securities (2)            |   | 1,090            |    | 19           |   | 7.07 | % | 2,086 |   | 28 |   | 5.44 | % |
| Federal  funds sold                              |   | 59,866           |    | 182          |   | 1.23 | % | 32,624 |   | 140 |   | 1.74 | % |
| Investments  in time deposits                    |   | 4,678            |    | 41           |   | 3.55 | % | 641 |   | 10 |   | 6.33 | % |
| Total  earning assets                            |   | 307,061          |    | 5,052        |   | 6.67 | % | 240,130 |   | 4,417 |   | 7.46 | % |
| Cash  & due from banks                       |   | 13,901           |    |         |   |   |   | 11,927 |   |   |   |   |   |
| Other  assets                                    |   | 14,668           |    |         |   |   |   | 15,162 |   |   |   |   |   |
|                                             |   | $                | 335,630 |         |   |   |   |   | $ | 267,219 |   |   |   |   |   |
|                                             |   |             |    |         |   |   |   |   |   |   |   |   |   |
| **Liabilities  & Shareholders’ Equity** |   |             |    |         |   |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities:                   |   |             |    |         |   |   |   |   |   |   |   |   |   |
| NOW  & MMDA                                  |   | $                | 136,902 |         | 358    |   | 1.06 | % | $ | 84,734 |   | 253 |   | 1.21 | % |
| Savings                                          |   | 20,530           |    | 37           |   | .73 | % | 17,352 |   | 42 |   | .98 | % |
| Time  deposits                                   |   | 84,496           |    | 618          |   | 2.97 | % | 98,483 |   | 1,034 |   | 4.26 | % |
| Other  borrowings                                |   | 8,734            |    | 138          |   | 6.41 | % | 745 |   | 10 |   | 5.44 | % |
| Total  interest bearing liabilities              |   | 250,662          |    | 1,151        |   | 1.86 | % | 201,314 |   | 1,339 |   | 2.70 | % |
| Demand  deposits                                 |   | 54,605           |    |         |   |   |   | 40,680 |   |   |   |   |   |
| Other  liabilities                               |   | 4,073            |    |         |   |   |   | 3,739 |   |   |   |   |   |
| Total  liabilities                               |   | 309,340          |    |         |   |   |   | 245,733 |   |   |   |   |   |
| Shareholders’  equity                       |   | 26,290           |    |         |   |   |   | 21,486 |   |   |   |   |   |
|                                             |   | $                | 335,630 |         |   |   |   |   | $ | 267,219 |   |   |   |   |   |
| Net  interest income & margin (3)            |   |             |    | $            | 3,901  |   | 5.15 | % |   |   | $ | 3,078 |   | 5.20 | % |

 

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(1)          Loan interest includesloan fees of $480,000 and $351,000 during the three months ended March 31, 2002and March 31, 2002, respectively.

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

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

(4)          Average yield iscalculated based on actual days in quarter (90 for March 31, 2003 and March 31,2002) and annualized to actual days in year (365 for 2003 and 2002).

 

11

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Table Three sets forth asummary of the changes in interest income and interest expense from changes inaverage asset and liability balances (volume) and changes in average interestrates.  On a year to date basis throughMarch 31, 2003 net interest income has increased $823,000 over the same timeperiod in 2002.  Interest income fromearning assets has increased by $635,000. Changes in the volume of earningassets, primarily loans, have resulted in an increase in interest income of $935,000while interest income from changes in rates has decreased by $300,000.  Interest expense for the first three monthsof 2003 is $188,000 less than the same time period in 2002.  Changes in the volume of interest bearingliabilities, primarily the reduction of balances in certificates of deposit andthe increase in balances of demand deposits, as well as the addition ofinterest expense related to the trust preferred securities, have resulted in anet increase of interest expense of $125,000. Decreases in average rates paid, primarily on certificates of depositand demand deposits have resulted in an interest expense reduction of $313,000.

 

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

 

(In thousands) ThreeMonths Ended March 31, 2003 over 2002 Increase (decrease) due to change in:

 
|                                  |   | **Volume** |   | **Rate (3)** |   | **Net Change** |   |
|---------------------------------------|--------|------------|--------|--------------|--------|----------------|--------|
| Interest-earning assets:              |   |       |   |         |   |           |   |
| Net  loans (1)                        |   | $          | 748    |         | $      | (198           | )      | $ | 550 |   |
| Taxable  investment securities        |   | 18         |   | 3            |   | 21             |   |
| Tax  exempt investment securities (2) |   | (14        | )      | 5            |   | (9             | )      |
| Federal  funds sold                   |   | 118        |   | (76          | )      | 42             |   |
| Investment  in time deposits          |   | 64         |   | (33          | )      | 31             |   |
| Total                                 |   | 934        |   | (299         | )      | 635            |   |
|                                  |   |       |   |         |   |           |   |
| Interest-bearing  liabilities:        |   |       |   |         |   |           |   |
| Demand  deposits                      |   | 157        |   | (52          | )      | 105            |   |
| Savings  deposits                     |   | 8          |   | (13          | )      | (5             | )      |
| Time  deposits                        |   | (148       | )      | (268         | )      | (416           | )      |
| Other  borrowings                     |   | 108        |   | 20           |   | 128            |   |
| Total                                 |   | 125        |   | (313         | )      | (188           | )      |
| Interest  differential                |   | $          | 809    |         | $      | 14             |   | $ | 823 |   |

 

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

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

(3)          The rate/volume variancehas been included in the rate variance.

 

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## **Provision for LoanLosses**

 

The Company provided $150,000 for loan and leaselosses for the first quarter of 2003 as compared to $103,000 for the firstquarter of 2002.  Net loan charge-offsfor the three months ended March 31, 2003 were $3,000 as compared to $4,000 incharge-offs for the three months ended March 31, 2002.

 

**Non-interestIncome**

 

Table Four below provides a summary of the componentsof noninterest income for the periods indicated (dollars in thousands):

 

**Table Four:  Componentsof Noninterest Income (Unaudited)**

 

ThreeMonths Ended March 31,

 
|                                 |   |     |   |                  |   |     |   |                  |   |
|--------------------------------------|--------|----------|--------|-----------------------|--------|----------|--------|-----------------------|--------|
|                                 |   | **2003** |   | **% of Avg.  Assets** |   | **2002** |   | **% of Avg.  Assets** |   |
|                                 |   |     |   |                  |   |     |   |                  |   |
| Service  charges on deposit accounts |   | $        | 258    |                  | .08    |     | $      | 244                   |   | .09 |   |
| Loan  servicing fees                 |   | 339      |   | .10                   |   | 121      |   | .05                   |   |
| Fees  - alternative investment sales |   | 20       |   | .006                  |   | 9        |   | .003                  |   |
| Merchant  fee income                 |   | 106      |   | .03                   |   | 62       |   | .02                   |   |
| Gain  on the sale of loans           |   | 294      |   | .09                   |   | 225      |   | .09                   |   |
| Other                                |   | 166      |   | .05                   |   | 1,359    |   | .53                   |   |
|                                 |   |     |   |                  |   |     |   |                  |   |
| Total  non-interest income           |   | $        | 1,183  |                  | .36    |     | $      | 2,020                 |   | .78 |   |

## ** **

## **Non-interest income was down$837,000 (70.8%) to $1,183,000 for the three months ended March 31, 2003 ascompared to $2,020,000 for the three months ended March 31, 2002.  The major reason for the decrease in non-interestincome for the quarter can be attributed to the tax-free net proceeds from keyman insurance policies the Bank received in March 2002 as a result of the deathof the Company’s Chief Operating Officer. Increases in non-interest income were realized in fees from servicecharges (up 5.7%), loan servicing fees (up 180%), fees from alternativeinvestment sales commissions (up 122%), merchant fee income (up 71%) and gainon sale of loans (up 30.6%).  Theincrease in service charge income was the result of additional deposit accountsopened during the first quarter.  Theloan servicing income increased as a result of more loans being sold on thesecondary market through FNMA (Fannie Mae) as many customers of the Companytook advantage of  the low levels inmortgage financing rates.  Servicing feeincreases were also realized in SBA (Small Business Administration) and FHMA(Farmers Home Administration) through their USDA (United States Department ofAgriculture) Business and Industry program. The Company retains the servicing of loans sold through these programs,which generates fee income.  TheInvestment Department, which sells third-party mutual funds and annuities,experienced an increase in fees due to an increase in sales during the first quarter.**

 

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** **

**Non-interest Expense**

 

Non-interestexpense decreased $545,000 (16.9%) to $3,220,000 in the first quarter of 2003versus $3,764,000 in the first quarter of 2002.  As discussed in the non-interest income section, most of thisdecrease was attributable to the accelerated accrual of salary continuationplan benefits, in March 2002, associated with the death of the Company’s ChiefOperating Officer that will be subsequently paid to his beneficiary.  On a quarter over quarter basis, full timeequivalent employees increased by 20. Salary and employee benefits increased $480,000 (32.8%) resulting fromnormal cost of living raises, commissions paid to Butte Community Bank’s RealEstate Loan agents and staffing additions made during the year as the Companycontinues to grow and implement the new technology acquired during theyear.  Benefit costs and employer taxesincreased commensurate with the salaries.   On a quarter over quarter basis, occupancy expenses were higher by$35,000 (25.5%).  This increase in costsis associated with the opening of the Central Chico and the Yuba City officesin 2002, and is related to building depreciation, utilities, janitorialservices and property taxes.   Fixedasset expense was $240,000 in the first quarter of 2003 compared to $173,000 inthe same period of 2002, representing a 39% increase.   This increase relates to technology upgrades made to our corebanking system such as the digital image processing system introduced in thefirst quarter of this year.  Otherexpenses increased $47,000 (5.7%) in the first quarter of 2003 versus the firstquarter of 2002.   This increase wasattributed to higher telephone, postage and insurance costs.

 

**Provision for Income Taxes**

 

The effective tax rate for the first quarter of 2003was 39.5%, versusa benefit of  (1.9%),for the same period in 2002.  The lowereffective tax rate for the first three months of 2002 was attributable to thetax-free net proceeds from key man insurance policies received as the result ofthe death of one of the Company’s executives.

 

**Balance Sheet Analysis**

 

The Company’s total assets were $342,181,000 at March31, 2003 as compared to $337,235,000 at December 31, 2002, representing anincrease of 1.5%.  The average balanceof total assets for the three months ended March 31, 2003 was $335,630,000,which represents an increase of $68,411,000 (26%) over the $267,219,000 duringthe three-month period ended March 31, 2002.

 

**Loans**

 

The Company concentrates its lending activities in thefollowing principal areas: 1) commercial; 2) real estate; 3) residential realestate and real estate construction (both commercial and residential); 4)agriculture; and 5) consumer loans. Commercial and residential real estate loans are generally secured byimproved property, with original maturities of 3-10 years.  At March 31, 2003, these principal areasaccounted for approximately 23%, 34%, 27%, 8% and 8%, respectively, of theCompany’s loan portfolio.  The mixchanged from December 31, 2002 in the areas of commercial loans and real estateconstruction.  The mix at December 31,2002 was 21%, 35%, 28%, 8% and 8%. These changes were consistent with the Company’s plan to diversify theportfolio and reduce the concentration in single-family real estateconstruction loans.  Continuing strongeconomic activity in the Company’s market area, new borrowers developed throughthe Company’s marketing efforts and credit extensions expanded to existingborrowers, offset by normal loan pay-downs and payoffs, resulted in netincreases in loan balances for commercial loans ($5,615,000 or 11.5%), andconsumer ($509,000 or 2.6%) and decreases in real estate construction($7,078,000 or 8.2%), residential real estate ($1,023,000 or 1.2%) andagricultural loans ($1,086,000 or 6%). Table Five below summarizes the composition of the loan portfolio as ofMarch 31, 2003 and December 31, 2002.

 

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

 
| **(In thousands)**         |   | **March 31,  2003** |    | **December  31,  2002** |   |
|----------------------------|--------|---------------------|---------|-------------------------|--------|
| Commercial                 |   | $                   | 54,276  |                    | $      | 48,661 |   |
| Real  estate:              |   |                |    |                    |   |
| Mortgage                   |   | 81,034              |    | 82,057                  |   |
| Construction               |   | 63,036              |    | 64,565                  |   |
|                       |   |                |    |                    |   |
| Agriculture                |   | 17,849              |    | 18,935                  |   |
| Consumer                   |   | 19,834              |    | 19,325                  |   |
| Total  loans               |   | 236,029             |    | 233,543                 |   |
| Allowance  for loan losses |   | (3,154              | )       | (3,007                  | )      |
| Deferred  loan fees, net   |   | (679                | )       | (837                    | )      |
| Total  net loans           |   | $                   | 232,196 |                    | $      | 229,699 |   |

 

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

 

Commercial loansconsist of credit lines for operating needs, loans for equipment purchases,working capital, and various other business loan products.  Consumer loans include a range oftraditional consumer loan products such as personal lines of credit and loansto finance purchases of autos, boats, recreational vehicles, mobile homes andvarious other consumer items. Construction loans are generally composed of commitments to customers withinthe Company’s service area for construction of both commercial properties andcustom and semi-custom single-family residences.  Other real estate loans consist primarily of loans secured byfirst trust deeds on commercial and residential properties typically withmaturities from 3 to 10 years and original loan to value ratios generally from65% to 80%.  Agriculture loans consistprimarily of crop loans to farmers of peaches, prunes, walnuts, andalmonds.  In general, except in the caseof loans with SBA or FMHA guarantees, the Company does not make long-termmortgage loans; however, Butte Community Bank has a residential lendingdivision to assist customers in securing most forms of longer termsingle-family mortgage financing.

 

**RiskElements**

 

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

 

Ultimately,underlying trends in economic and business cycles may influence creditquality.  The Company’s business isconcentrated in the Butte and Sutter County Area. The economy of these twocounties is diversified with professional services, manufacturing, agricultureand real estate investment and construction.

 

15

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Special emphasis isplaced within the communities in which the Company has offices (Chico,Paradise, Magalia, Oroville and Yuba City). The Company also maintains a loan production office in the city ofRoseville.  Single-family residentialconstruction is the primary lending product from this location serving thegreater Sacramento area.

 

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

 

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

 

## **In management’s judgment, aconcentration exists in real estate loans, which represented approximately 61%of the Company’s loan portfolio at March 31, 2003, which reflects animprovement from the 62.8% concentration level at December 31, 2002.  Management believes the concentration tohave no more than the normal risk of collectability; however, a substantial declinein the economy in general, or a decline in real estate values in the Company’sprimary market areas in particular, could have an adverse impact on thecollectability of these loans and require an increase in the provision for loanlosses which could adversely affect the Company’s future prospects, results ofoperations, profitability and stock price. Management believes that its lending policies and underwriting standardswill tend to minimize losses in an economic downturn; however, there is no assurancethat losses will not occur under such circumstances.  The Company’s loan policies and underwriting standards include,but are not limited to, the following: (1) maintaining a thorough understandingof the Company’s service area and originating a significant majority of itsloans within that area, (2) maintaining a thorough understanding of borrowers’knowledge, capacity, and market position in their field of expertise, (3)basing real estate loan approvals not only on market demand for the project, butalso on the borrowers’ capacity to support the project financially in the eventit does not perform to expectations (whether sale or income performance), and(4) maintaining conforming and prudent loan to value and loan to cost ratiosbased on independent outside appraisals and ongoing inspection and analysis bythe Company’s lending officers.**

## ** **

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

## ** **

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

 

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

 

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

 
| **(In thousands)**          |   | **March 31,2003** |   | **December  31,2002** |   |
|-----------------------------|--------|-------------------|--------|-----------------------|--------|
| Nonaccrual:                 |   |              |   |                  |   |
| Commercial                  |   | 370               |   | 134                   |   |
| Real  estate                |   | 460               |   | 460                   |   |
| Consumer  and other         |   | 34                |   | —                |   |
| Total  non-performing loans |   | $                 | 864    |                  | $      | 594 |   |
|                             |        |                   |        |                       |        |  |  |

 

At March 31, 2003, non-performing loans and leaseswere .37% of total loans and leases. The recorded investments in loans that were considered to be impairedtotaled seven loans with balances of $864,000 at March 31, 2003 and two loanswith balances of $594,000 at December 31, 2002.  One of the seven impaired loans shown for March 31, 2003 has aU.S. Government guarantee for 90% of the loan balance.  The guarantee is for $414,000.  The remaining six loans have a very lowpotential for loss.  There were no loanconcentrations in excess of 10% of total loans not otherwise disclosed as acategory of loans as of March 31, 2003 or December 31, 2002.  Management is not aware of any potentialproblem loans, which were accruing and current at March 31, 2003, where seriousdoubt exists as to the ability of the borrower to comply with the presentrepayment terms.

 

## **Allowance for LoanLosses Activity**

## ** **

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

 

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

 

The Loan Committee of the Bank reviews the adequacy ofthe allowance for loan losses at least quarterly to include consideration ofthe relative risks in the portfolio and current economic conditions.  The allowance is adjusted based on thatreview if, in the judgment of the loan committee and management, changes arewarranted.  The allowance for loanlosses totaled $3,154,000 or 1.35% of total loans at March 31, 2003 and $3,007,000or 1.29% at December 31, 2002.  Netcharge-offs to average loans were .0013% for the first quarter of 2003. Netcharge-offs through the first three months of 2002 were .0024% of averageloans.

 

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

 

17

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

 
|                                                                             |   | **Three  Months  Ended  March 31,** |    |
|----------------------------------------------------------------------------------|--------|-------------------------------------|---------|
| **(In thousands, except for  percentages)**                                      |   | **2003**                            |    | **2002** |   |
|                                                                             |   |                                |    |   |   |
| Average  loans outstanding                                                       |   | $                                   | 234,060 |   | $ | 203,476 |   |
|                                                                             |   |                                |    |   |   |
| Allowance  for possible loan losses at beginning of period                       |   | $                                   | 3,007   |   | $ | 2,397 |   |
|                                                                             |   |                                |    |   |   |
| Loans  charged off:                                                              |   |                                |    |   |   |
| Commercial                                                                       |   | —                              |    | (5 | ) |
| Real  estate                                                                     |   | —                              |    | — |   |
| Consumer                                                                         |   | (3                                  | )       | — |   |
| Total                                                                            |   | (3                                  | )       | (5 | ) |
| Recoveries  of loans previously charged off:                                     |   |                                |    |   |   |
| Commercial                                                                       |   | —                              |    | — |   |
| Real  estate                                                                     |   | —                              |    | — |   |
| Consumer                                                                         |   | —                              |    |   |   |
| Total                                                                            |   |                                |    |   |   |
| Net  loan charge offs                                                            |   | (3                                  | )       | (5 | ) |
|                                                                             |   |                                |    |   |   |
| Additions  to allowance charged to operating expenses                            |   | 150                                 |    | 103 |   |
| Allowance  for loan losses at end of period                                      |   | $                                   | 3,154   |   | $ | 2,495 |   |
| Ratio  of net charge-offs to average loans outstanding                           |   | .001                                | %       | .002 | % |
| Provision  for possible loan losses to average loans outstanding                 |   | .06                                 | %       | .05 | % |
| Allowance  for loan  losses to loans net of  deferred fees at end of period |   | 1.35                                | %       | 1.23 | % |

 

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

 

**Other Real Estate**

 

At March 31, 2003 and December 31, 2002, the Companydid not have any other real estate (“ORE”) properties.

 

18

----

 

## **Deposits**

## ** **

At March 31, 2003, total deposits were $303,111,000representing an increase of $5,130,000 (1.7%) over the December 31, 2002balance of $297,981,000.

 

## **Capital Resources**

## ** **

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

 

The Board of Directors of the Company authorized thepayment of a cash dividend of $.075 per share on January 28, 2002, April 25,2002, and July 26, 2002, $.08 per share on October 25, 2002 and $.10 per shareon January 23, 2003.  The payment ofdividends in the future is subject to the discretion of the Board of Directorsof the Company and will depend on earnings, the financial condition of theCompany and other relevant factors.  Theper share amounts have been retroactively restated for the Company’s 4 for 3stock split approved by the Board of Directors on August 20, 2002.

 

The Company and its subsidiary Bank are subject tocertain regulations issued by the Board of Governors of the Federal ReserveSystem and the FDIC which require maintenance of certain levels ofcapital.  At March 31, 2003,shareholders’ equity was $26,187,000, representing an increase of $806,000(3.2%) from $25,381,000 at December 31, 2002. The Bank’s ratio of total risk-based capital to risk adjusted assets was11.3% at March 31, 2003 compared to 10.9% at December 31, 2002.  Tier 1 risk-based capital to risk-adjustedassets was 10.1% at March 31, 2003 and 9.7% at December 31, 2002.

 

Table Eight below lists the Company and the Bankcapital ratios at March 31, 2003 and December 31, 2002, as well as the minimumratios required under regulatory definitions of capital adequacy. 

 

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

 
| **Capital to Risk-Adjusted Assets  Company** |   | **At March  31,  2003** |   | **At  December 31,   2002** |   | **Minimum   Regulatory Requirement** |   |
|----------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|--------------------------------------|--------|
| Leverage  ratio                              |   | 9.2                     | %      | 10.4                        | %      | 4.0                                  | %      |
| Tier  1 Risk-Based Capital                   |   | 12.0                    | %      | 12.8                        | %      | 4.0                                  | %      |
| Total  Risk-Based Capital                    |   | 13.2                    | %      | 14.0                        | %      | 8.0                                  | %      |
| **Bank**                                     |   |                    |   |                        |   |                                 |   |
| Leverage  ratio                              |   | 7.80                    | %      | 7.9                         | %      | 4.0                                  | %      |
| Tier  1 Risk-Based Capital                   |   | 10.10                   | %      | 9.7                         | %      | 4.0                                  | %      |
| Total  Risk-Based Capital                    |   | 11.30                   | %      | 10.9                        | %      | 8.0                                  | %      |

 

Capital ratios are reviewed on a regular basis toensure that capital exceeds the prescribed regulatory minimums and is adequateto meet future needs.  All ratios are inexcess of the regulatory definition of “Minimum” at March 31, 2003 and December31, 2002.  The Bank was considered“well-capitalized” by regulatory standards, at March 31, 2003 and December 31,2002.

 

19

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**Item3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

**Market Risk Management**

 

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

 

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

 

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

 

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

 

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

 

**Table Nine:  Interest Rate Risk Simulation of Net Interestas of March 31, 2003 and December 31, 2002 (Unaudited)**

 
| **(In thousands)**                      |   | **$ Change in NII  from Current  12 Month Horizon   March 31, 2003** |   | **$ Change in NII    from Current    12 Month Horizon   December 31, 2002** |   |
|-----------------------------------------|--------|--------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|
| Variation from a constant rate scenario |   |                                                                           |   |                                                                                  |   |
| +200bp                                  |   | $                                                                              | 68     |                                                                                  | $      | 111 |   |
| - 200bp                                 |   | $                                                                              | (1,180 | )                                                                                     | $      | (1,262 | ) |

## ** **

## **The simulations of earnings do notincorporate any management actions which might moderate the**

 

20

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## **negative consequences of interestrate deviations.  Therefore, they do notreflect likely actual results, but serve as estimates of interest rate risk.**

## ** **

## **Inflation**

## ** **

The impact of inflationon a financial institution differs significantly from that exerted onmanufacturing, or other commercial concerns, primarily because its assets andliabilities are largely monetary.  Ingeneral, inflation primarily affects the Company and it subsidiaries throughits effect on market rates of interest, which affects the Company’s ability toattract loan customers.  Inflationaffects the growth of total assets by increasing the level of loan demand, andpotentially adversely affects capital adequacy because loan growth ininflationary periods can increase at rates higher than the rate that capitalgrows through retention of earnings, which may be generated in the future.  In addition to its effects on interestrates, inflation increases overall operating expenses.  Inflation has not had a material effect uponthe results of operations of the Company and its subsidiaries during theperiods ended March 31, 2003, and 2002.

 

**Liquidity**

 

Liquidity management refers to the Company’s abilityto provide funds on an ongoing basis to meet fluctuations in deposit levels aswell as the credit needs and requirements of its clients.  Both assets and liabilities contribute tothe Company’s liquidity position. Federal funds lines, short-term investments and securities, and loanrepayments contribute to liquidity, along with deposit increases, while loanfunding and deposit withdrawals decrease liquidity.  The Company assesses the likelihood of projected fundingrequirements by reviewing historical funding patterns, current and forecastedeconomic conditions and individual client funding needs.  Commitments to fund loans at March 31, 2003and December 31, 2002 were approximately $95,178,000 and $105,835,000,respectively.  Such loans relateprimarily to revolving lines of credit and other commercial loans, and to realestate construction loans.

 

The Company’ssources of liquidity consist of cash and due from correspondent banks,overnight funds sold to correspondent banks, unpledged marketable investmentsand loans held for sale.  On March 31,2003, consolidated liquid assets totaled $83.4 million or 24.4% of total assetscompared to $81.4 million or 24.1% of total assets on December 31, 2002.  In addition to liquid assets, the Companymaintains short-term lines of credit in the amount of $6,000,000 with correspondentbanks.  There were no borrowingsoutstanding under these arrangements at March 31, 2003.    The Bank also has informal agreements withvarious other banks to sell participations in loans, if necessary.  The Company serves primarily a business andprofessional customer base and, as such, its deposit base is susceptible toeconomic fluctuations.  Accordingly,management strives to maintain a balanced position of liquid assets to volatileand cyclical deposits.

 

Liquidity is also affected by portfolio maturities andthe effect of interest rate fluctuations on the marketability of both assetsand liabilities.  The Company can sellany of its unpledged securities held in the available-for-sale category to meetliquidity needs.

 

## **Off-Balance SheetItems**

## ** **

The Company has certain ongoing commitments underoperating leases.  These commitments donot significantly impact operating results. As of March 31, 2003 and December31, 2002, commitments to extend credit and letters of credit were the onlyfinancial instruments with off-balance sheet risk.  The Company has not entered into any contracts for financialderivative instruments such as futures, swaps, options or similarinstruments.  Loan commitments andletters of credit were $95,178,000 and $105,835,000 at March 31, 2003 andDecember 31, 2002, respectively.  As apercentage of net loans, these off-balance sheet items represent 40.9% and46.1%, respectively.

 

**Other Matters**

 

Effectsof Terrorism Theterrorist actions on September 11, 2001 and thereafter have had significantadverse effects upon the United States economy.  Whether the terrorist activities in the future and the actions ofthe United States and its allies in combating terrorism on a worldwide basiswill adversely impact the Company and the extent of such impact isuncertain.  However, such events havehad and may continue to 

 

21

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have an adverse effect

 

onthe economy in the Company’s market areas. Such continued economic deterioration could adversely affect theCompany’s future results of operations by, among other matters, reducing thedemand for loans and other products and services offered by the Company,increasing nonperforming loans and the amounts reserved for loan losses, andcausing a decline in the Company’s stock price.

 

**Item 4.Controls and Procedures**

 

The Company’s Chief Executive Officer and ChiefFinancial Officer, based on their evaluation within 90 days prior to thedate of this report of the Company’s disclosure controls and procedures (asdefined in Exchange Act Rule 13a—14(c)), have concluded that the Company’sdisclosure controls and procedures are adequate and effective for purposes ofRule 13a—14(c) in timely alerting them to material information relating tothe Company required to be included in the Company’s filings with the SEC underthe Securities Exchange Act of 1934. There were no significant changes inthe Company’s internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of their evaluation.

 

## **PART II - OTHER INFORMATION**

## ** **

Item 1.  Legal Proceedings.

 

None.

 

Item 2.  Changes in Securities and Use of Proceeds.

 

None.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Submission of Matters to a Vote of SecurityHolders.

 

None.

 

Item 5.  Other Information.

 

None.

 

Item 6.  Exhibits

 

(a)  Exhibits

 

Exhibit

 

22

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|    | Number Document Description                                                                                                                                                                                                                                                                                                                                                                        |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (3.1)   | Articles of  Incorporation incorporated by reference from the Company’s Registration  Statement Form S-4EF, file #333-85950.                                                                                                                                                                                                                                                                  |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (3.2)   | Bylaws incorporated by  reference from the Company’s Registration Statement Form S-4EF, file  #333-85950.                                                                                                                                                                                                                                                                                     |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (4)     | Specimen of Company’s  Common Stock Certificate incorporated by reference from the Company’s  Registration Statement Form S-4EF, file #333-85950.                                                                                                                                                                                                                                        |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (10.1)  | Employment Agreement  with Keith C. Robbins dated April 27, 1995.   Salary Continuation Agreement dated April 14, 1998, and Amendment to  Salary Continuation Agreement dated January 10, 2002, for Keith C. Robbins.  Incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for the period  ended June 30, 2002, filed with the Commission on August 14, 2002. |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (10.2)  | Executive Supplemental  Retirement Plan dated August 1, 2000, and Amendment to Executive Supplement Retirement  Plan dated January 10, 2002,  for  Keith C. Robbins. Incorporated by  reference to the Company’s Quarterly Report on Form 10-Q for the period ended  June 30, 2002, filed with the Commission on August 14, 2002.                                                        |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (10.3)  | 1997 Stock Option  Agreement for Keith C. Robbins dated May 1, 1997.  Incorporated by  reference to the Company’s Quarterly Report on Form 10-Q for the period ended  June 30, 2002, filed with the Commission on August 14, 2002.                                                                                                                                                       |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (10.4)  | 2000 Stock Option  Agreement for Keith C. Robbins dated March 14, 2000. Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002.                                                                                                                                                          |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (10.5)  | Employment Agreement  with John F. Coger dated April 27, 1995.   Incorporated by reference to  the Company’s Quarterly Report on Form 10-Q for the period ended June 30,  2002, filed with the Commission on August 14, 2002.                                                                                                                                                            |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (10.6)  | Salary Continuation  Agreement dated April 14, 1998, and Amendment to Salary Continuation Agreement  dated January 10, 2002, for John F Coger.   Incorporated by reference to  the Company’s Quarterly Report on Form 10-Q for the period ended June 30,  2002, filed with the Commission on August 14, 2002.                                                                            |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (10.7)  | Executive Supplemental  Retirement Plan dated August 1, 2000, and Amendment to Executive Supplement  Retirement Plan dated January 10, 2002, for John F. Coger.  Incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for the period  ended June 30, 2002, filed with the Commission on August 14, 2002.                                                            |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (10.8)  | 2000 Stock Option  Agreement for John F. Coger dated March 14, 2000 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..                                                                                                                                                             |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (10.9)  | 1997 Stock Option  Agreement for M. Robert Ching dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..                                                                                                                                                              |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |
| (10.10) | 2000 Stock Option Agreement  for M. Robert Ching dated May 1, 2000.   Incorporated by reference to  the Company’s Quarterly                                                                                                                                                                                                                                                              |
|    |                                                                                                                                                                                                                                                                                                                                                                                               |

 

23

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|    | Report on Form 10-Q for the period ended June 30, 2002, filed with  the Commission on August 14, 2002.                                                                                                                                        |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                                                          |
| (10.11) | 1997 Stock Option  Agreement for Eugene B. Even dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002..           |
|    |                                                                                                                                                                                                                                          |
| (10.12) | 2000 Stock Option  Agreement for Eugene B. Even dated May 1, 2000.  Incorporated by  reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the  Commission on August 14, 2002.    |
|    |                                                                                                                                                                                                                                          |
| (10.13) | 1997 Stock Option  Agreement for John D. Lanam dated May 1, 1997.  Incorporated by  reference to the Company’s Quarterly Report on Form 10-Q for the period ended  June 30, 2002, filed with the Commission on August 14, 2002.     |
|    |                                                                                                                                                                                                                                          |
| (10.14) | 2000 Stock Option  Agreement for John D. Lanam dated May 1, 2000. Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended  June 30, 2002, filed with the Commission on August 14, 2002.           |
|    |                                                                                                                                                                                                                                          |
| (10.15) | 1997 Stock Option  Agreement for Donald W. Leforce dated May 1, 1997. Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002.       |
|    |                                                                                                                                                                                                                                          |
| (10.16) | 2000 Stock Option  Agreement for Donald W. Leforce dated May 1, 2000 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended  June 30, 2002, filed with the Commission on August 14, 2002..       |
|    |                                                                                                                                                                                                                                          |
| (10.17) | 1997 Stock Option  Agreement for Ellis L. Matthews dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended  June 30, 2002, filed with the Commission on August 14, 2002..       |
|    |                                                                                                                                                                                                                                          |
| (10.18) | 2000 Stock Option  Agreement for Ellis L. Matthews dated May 1, 2000 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended  June 30, 2002, filed with the Commission on August 14, 2002..       |
|    |                                                                                                                                                                                                                                          |
| (10.19) | 1997 Stock Option  Agreement for Robert L. Morgan dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..        |
|    |                                                                                                                                                                                                                                          |
| (10.20) | 2000 Stock Option  Agreement for Robert L. Morgan dated May 1, 2000 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..        |
|    |                                                                                                                                                                                                                                          |
| (10.21) | 1997 Stock Option  Agreement for James S. Rickards dated May 1, 1997.  Incorporated by  reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission  on August 14, 2002. |
|    |                                                                                                                                                                                                                                          |
| (10.22) | 2000 Stock Option  Agreement for James S. Rickards dated May 1, 2000 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended  June 30, 2002, filed with the Commission on August 14, 2002..       |
|    |                                                                                                                                                                                                                                          |
| (10.23) | 1997 Stock Option  Agreement for Gary B. Strauss dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended  June 30, 2002, filed with the Commission on August 14, 2002..         |
|    |                                                                                                                                                                                                                                          |
| (10.24) | 2000 Stock Option  Agreement for Gary B. Strauss dated May 1, 2000.                                                                                                                                                                           |
|    |                                                                                                                                                                                                                                          |
|    | Incorporated by reference to the Company’s Quarterly  Report on Form 10-Q for the period ended June 30, 2002, filed with the  Commission on August 14, 2002.                                                                             |
|    |                                                                                                                                                                                                                                          |

 

24

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| (10.25) | 1997 Stock Option  Agreement for Hubert I. Townshend dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..          |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                                                               |
| (10.26) | 2000 Stock Option  Agreement for Hubert I. Townshend dated May 1, 2000 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..          |
|    |                                                                                                                                                                                                                                               |
| (10.27) | Director Deferred Fee  Agreement for M. Robert Ching dated April 8, 1998 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..        |
|    |                                                                                                                                                                                                                                               |
| (10.28) | Director Retirement  Agreement for M. Robert Ching dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..         |
|    |                                                                                                                                                                                                                                               |
| (10.29) | Director Retirement  Agreement for Eugene B. Even dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..          |
|    |                                                                                                                                                                                                                                               |
| (10.30) | Director Retirement  Agreement for John D. Lanam dated April 14, 1998.  Incorporated by  reference to the Company’s Quarterly Report on Form 10-Q for the period ended  June 30, 2002, filed with the Commission on August 14, 2002.     |
|    |                                                                                                                                                                                                                                               |
| (10.31) | Director Deferred Fee  Agreement for Donald W. Leforce dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..     |
|    |                                                                                                                                                                                                                                               |
| (10.32) | Director Retirement  Agreement for Donald W. Leforce dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..       |
|    |                                                                                                                                                                                                                                               |
| (10.33) | Director Retirement  Agreement for Ellis L. Matthews dated April 14, 1998.  Incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for the period  ended June 30, 2002, filed with the Commission on August 14, 2002. |
|    |                                                                                                                                                                                                                                               |
| (10.34) | Director Retirement  Agreement for Robert L. Morgan dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..        |
|    |                                                                                                                                                                                                                                               |
| (10.35) | Director Retirement  Agreement James S. Rickards dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form  10-Q for the period ended June 30, 2002, filed with the Commission on August  14, 2002..           |
|    |                                                                                                                                                                                                                                               |
| (10.36) | Director Retirement  Agreement for Gary B. Strauss dated April 14, 1998.  Incorporated by  reference to the Company’s Quarterly Report on Form 10-Q for the period ended  June 30, 2002, filed with the Commission on August 14, 2002.   |
|    |                                                                                                                                                                                                                                               |
| (10.37) | Director Retirement  Agreement for Hubert I. Townshend dated April 14, 1998. Incorporated by reference to the  Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002,  filed with the Commission on August 14, 2002.     |
|    |                                                                                                                                                                                                                                               |
| (10.38) | Lease agreement between Butte Community Bank and  Anna                                                                                                                                                                                             |
|    |                                                                                                                                                                                                                                               |

 

25

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|    | Laura Schilling Trust  dated March 20, 2001, related to 900 Mangrove  Ave., Chico, California.  Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with  the Commission on August 14, 2002.                                                                                                                                     |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                                                                                                                                                                                                                       |
| (10.39) | Lease agreement between  Butte Community Bank and M&H Realty Partners IV L.P., a California  limited partnership, dated January 28, 2002, related to Unit #101-37 North  Valley Plaza, East and Cohasset Avenues, Chico, California. Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with  the Commission on August 14, 2002. |
|    |                                                                                                                                                                                                                                                                                                                                                                                                       |
| (11)    | See Note 2 Earnings Per  Share Computation                                                                                                                                                                                                                                                                                                                                                                 |
|    |                                                                                                                                                                                                                                                                                                                                                                                                       |
| (99.1)  | 1991 Stock Option Plan  is incorporated by reference from the Company’s Registration Statement Form  S-8, filed August 14, 2002.                                                                                                                                                                                                                                                                      |
|    |                                                                                                                                                                                                                                                                                                                                                                                                       |
| (99.2)  | 1997 Stock Option Plan  is incorporated by reference from the Company’s Registration Statement Form  S-8, filed August 14, 2002.                                                                                                                                                                                                                                                                      |
|    |                                                                                                                                                                                                                                                                                                                                                                                                       |
| (99.3)  | 2000 Stock Option Plan  is incorporated by reference from the Company’s Registration Statement Form  S-8, filed August 14, 2002.                                                                                                                                                                                                                                                                      |
|    |                                                                                                                                                                                                                                                                                                                                                                                                       |
| (99.4)  | Director Emeritus Plan  dated March 20, 2001*                                                                                                                                                                                                                                                                                                                                                              |
|    |                                                                                                                                                                                                                                                                                                                                                                                                       |
| (99.5)  | Certification of CEO  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                           |
|    |                                                                                                                                                                                                                                                                                                                                                                                                       |
| (99.6)  | Certification of CFO  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                           |
|    |                                                                                                                                                                                                                                                                                                                                                                                                       |
| (b)     | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                        |
|    |                                                                                                                                                                                                                                                                                                                                                                                                       |
|    | On March 21, 2003, the  Company filed a Report on form 8-K announcing a ten cent per share cash  dividend for shareholders of record on April 2, 2003, payable April 24, 2003.                                                                                                                                                                                                                             |

 

 

25

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**SIGNATURES**

 

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

 
|        | COMMUNITY VALLEY  BANCORP           |
|-------------|-------------------------------------|
|        |                                |
| May 9, 2003 | By: /s/ *Keith C.  Robbins*         |   |
|        | Keith C. Robbins                    |
|        | President, Chief  Executive Officer |
|        |                                |
|        |                                |
| May 9, 2003 | By*: /s/ John F. Coger*             |   |
|        | John F. Coger                       |
|        | Executive Vice  President, CFO      |

 

26

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*Certifications:  Pursuant to Section 302 of theSarbanes-Oxley Act of 2002*

 

*I,Keith C. Robbins, certify that:*

 

*1.**              I have reviewed this quarterly report onForm 10-Q of Community Valley Bancorp (the “registrant”);*

 

*2.**              Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;*

 

*3.**              Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;*

 

*4.**              The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:*

 

*a)**                 designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;*

 

*b)**                 evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (April 15, 2003); and*

 

*c)**                    presented in this quarterly reportour conclusions about the effectiveness of the    disclosure controls and procedures based on our evaluation asof  April 15, 2003;*

 

*5.**              The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors:*

 

*a)**                all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and*

 

*b)**            any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and*

 

*6.**              The registrant’s other certifying officerand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.*

 

 
| *Date:*                               | *May  9, 2003*          |   |
|---------------------------------------|-------------------------|--------|
|                                  |
| *By:*                                 | */s/  Keith C. Robbins* |   |
|                                  |
| *President,  Chief Executive Officer* |
|                                       |                         |        |  |  |

 

27

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*I, JohnF. Coger, certify that:*

 

*1..   I have reviewed this quarterlyreport on Form 10-Q of Community Valley Bancorp (the registrant”);*

 

*2.    Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;*

 

*3.    Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;*

 

*4.    Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:*

 

*a)**                 designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;*

 

*b)**                 evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (April 15, 2003); and*

 

*d)**                   presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of April 15, 2003;*

 

*5.    Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors:*

 

*a)**                all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and*

 

*c)**             any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and*

 

*6.    Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.*

 
| *Date:*                                              | *May  9, 2003*       |   |
|------------------------------------------------------|----------------------|--------|
|                                                 |
| *By*                                                 | */s/  John F. Coger* |   |
|                                                 |
| *Executive  Vice President, Chief Financial Officer* |
|                                                      |                      |        |  |  |

 

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