**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|------------|-----------------------------------------------------------------------------------------------|
|       |                                                                                          |
| ** ** | **For the Quarterly Period Ended    March 31, 2005**                           |
|       |                                                                                          |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       |                                                                                          |
| ** ** | **Commission File No. 0-31525**                                                               |

 

**COMMUNITY VALLEY BANCORP**

(Exact name of registrant as specified in its charter)

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

 

**(530) 899-2344**

(Registrant’s telephone number,including area code)

 

**not applicable**

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ý        No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2)

 

Yes o        No ý

 

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

 

No par value Common Stock – 3,655,124 shares outstanding at April 30, 2005.

 

 

 

PART 1-FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

COMMUNITY VALLEYBANCORP

CONDENSEDCONSOLIDATED BALANCE SHEET (Unaudited)

 
| **(In  thousands, except share amounts)**                                                                                                                                    | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                   | ** ** | ** **          | ** ** | ** **             | ** ** |
| ASSETS                                                                                                                                                                       |       |                |       |                   |       |
|                                                                                                                                                                         |       |                |       |                   |       |
| Cash and due from banks                                                                                                                                                      |       | $                   | 21,557     |                   | $          | 21,778 |   |
| Federal funds sold                                                                                                                                                           |       | 43,905              |       | 46,440                 |       |
| Total cash and  cash equivalents                                                                                                                                             |       | 65,462              |       | 68,218                 |       |
| Interest-bearing deposits in banks                                                                                                                                           |       | 8,814               |       | 8,715                  |       |
| Investment  securities (market value of $8,764 at March 31, 2005 and $6,963 at December  31, 2004)                                                                           |       | 8,798               |       | 6,961                  |       |
| Loans held for sale, at lower of cost or market                                                                                                                              |       | 3,477               |       | 1,490                  |       |
| Loans, less  allowance for loan losses of $4,605 at March 31, 2005 and $4,381 at December  31, 2004                                                                          |       | 344,324             |       | 339,174                |       |
| Bank premises and equipment, net                                                                                                                                             |       | 9,201               |       | 9,027                  |       |
| Accrued interest receivable and other assets                                                                                                                                 |       | 18,637              |       | 16,091                 |       |
| Total Assets                                                                                                                                                                 |       | $                   | 458,713    |                   | $          | 449,676 |   |
|                                                                                                                                                                         |       |                |       |                   |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                    |       |                |       |                   |       |
|                                                                                                                                                                         |       |                |       |                   |       |
| Deposits:                                                                                                                                                                    |       |                |       |                   |       |
| Non-interest  bearing                                                                                                                                                        |       | $                   | 88,732     |                   | $          | 80,793 |   |
| Interest bearing                                                                                                                                                             |       | 318,108             |       | 318,266                |       |
| Total deposits                                                                                                                                                               |       | 406,840             |       | 399,059                |       |
|                                                                                                                                                                         |       |                |       |                   |       |
| Employee stock ownership plan (ESOP) note payable                                                                                                                            |       | 800                 |       | 833                    |       |
|                                                                                                                                                                         |       |                |       |                   |       |
| Junior subordinated debentures                                                                                                                                               |       | 8,248               |       | 8,248                  |       |
|                                                                                                                                                                         |       |                |       |                   |       |
| Accrued interest payable and other liabilities                                                                                                                               |       | 6,919               |       | 7,005                  |       |
|                                                                                                                                                                         |       |                |       |                   |       |
| Total  liabilities                                                                                                                                                           |       | 422,807             |       | 415,145                |       |
|                                                                                                                                                                         |       |                |       |                   |       |
| Commitments and contingencies                                                                                                                                                |       |                |       |                   |       |
|                                                                                                                                                                         |       |                |       |                   |       |
| Shareholders’ equity:                                                                                                                                                   |       |                |       |                   |       |
| Common stock –  no par value; 20,000,000 shares authorized; issued and outstanding –  3,650,179 Shares at March 31, 2005 and 3,636,791 shares at December 31, 2004 |       | 8,066               |       | 7,861                  |       |
| Unallocated ESOP  shares (88,015 shares at March 31, 2005 and 89,642 shares at December 31,  2004, at cost)                                                                  |       | (1,126              | )          | (1,144                 | )          |
| Retained  earnings                                                                                                                                                           |       | 28,982              |       | 27,802                 |       |
| Accumulated  other comprehensive (loss) income, net o taxes                                                                                                                  |       | (16                 | )          | 12                     |       |
|                                                                                                                                                                         |       |                |       |                   |       |
| Total  shareholders’ equity                                                                                                                                             |       | 35,906              |       | 34,531                 |       |
| Total  liabilities and shareholders’ equity                                                                                                                             |       | $                   | 458,713    |                   | $          | 449,676 |   |

 
| See Notes to Unaudited Condensed Consolidated  Financial Statements |   |   |   |   |   |
|---------------------------------------------------------------------|--------|--------|--------|--------|--------|

 

2

----

 

COMMUNITY VALLEYBANCORP

CONDENSED CONSOLIDATEDSTATEMENT OF INCOME(Unaudited)

 
| ** **                                                       | ** ** | **For the 3 months ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(In  thousands, except per share data)**                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                                             |       |                                 |       |   |   |
| Interest income:                                                 |       |                                 |       |   |   |
| Interest and  fees on loans                                      |       | $                                    | 6,688      |   | $ | 5,357 |   |
| Interest on  Federal funds sold                                  |       | 232                                  |       | 122 |   |
| Interest on  deposits in banks                                   |       | 60                                   |       | 58 |   |
| Interest on  investment securities:                              |       |                                 |       |   |   |
| Taxable                                                          |       | 47                                   |       | 28 |   |
| Exempt from  Federal income taxes                                |       | 25                                   |       | 10 |   |
|                                                             |       |                                 |       |   |   |
| Total interest  income                                           |       | 7,052                                |       | 5,575 |   |
| Interest expense:                                                |       |                                 |       |   |   |
| Interest on  deposits                                            |       | 1,003                                |       | 878 |   |
| Interest junior  subordinated debentures                         |       | 131                                  |       | 101 |   |
| Interest on ESOP  note payable                                   |       | 11                                   |       | 9 |   |
| Total interest  expense                                          |       | 1,145                                |       | 988 |   |
|                                                             |       |                                 |       |   |   |
| Net interest  income before provision for loan losses            |       | 5,907                                |       | 4,587 |   |
|                                                             |       |                                 |       |   |   |
| Provision for loan losses                                        |       | 225                                  |       | 225 |   |
| Net interest  income after provision for loan losses             |       | 5,682                                |       | 4,362 |   |
|                                                             |       |                                 |       |   |   |
| Non-interest income                                              |       | 1,636                                |       | 1,229 |   |
|                                                             |       |                                 |       |   |   |
| Non-interest expense:                                            |       |                                 |       |   |   |
| Salaries and  employee benefits                                  |       | 3,036                                |       | 2,279 |   |
| Occupancy                                                        |       | 281                                  |       | 239 |   |
| Furniture and  equipment                                         |       | 391                                  |       | 373 |   |
| Other                                                            |       | 1,166                                |       | 896 |   |
| Total  non-interest expense                                      |       | 4,874                                |       | 3,787 |   |
|                                                             |       |                                 |       |   |   |
| Income before  provision for income taxes                        |       | 2,444                                |       | 1,804 |   |
|                                                             |       |                                 |       |   |   |
| Provision for income taxes                                       |       | 990                                  |       | 716 |   |
|                                                             |       |                                 |       |   |   |
| Net income                                                       |       | $                                    | 1,454      |   | $ | 1,088 |   |
|                                                             |       |                                 |       |   |   |
| Basic earnings per share                                         |       | $                                    | .41        |   | $ | .31 |   |
| Diluted earnings per share                                       |       | $                                    | .38        |   | $ | .29 |   |
|                                                             |       |                                 |       |   |   |
| Cash dividends per share of issued and outstanding  common stock |       | $                                    | .075       |   | $ | .075 |   |

 

INCLUDE PROFORMA EPS FOR STOCK SPLITAND REF TOFOOTNOTE

 

See Notes to Unaudited Condensed ConsolidatedFinancial Statements

 

3

----

 

COMMUNITY VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENT OF CHANGES INSHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands except share amounts)

 
| ** **                                                                         | ** ** | **Common  Stock** | ** ** | **Unallocated  ESOP** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Shareholders’** | ** ** | **Comprehensive** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|--------------|------------|---------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                         | ** ** | **Shares**        | ** ** | **Amount**            | ** ** | **Shares**   | ** ** | **Earnings**                          | ** ** | **Income  (loss)**     | ** ** | **Equity**        | ** ** | **Income** | ** ** |
|                                                                               |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Balance,  January 1, 2004                                                     |       | 3,621,824         |       | $                     | 7,271      |         | $          | (1,070                                | )          | $                      | 23,746     |              | $          | 2 |   | $ | 29,949 |   |   |   |
|                                                                               |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Comprehensive  income:                                                             |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Net income                                                                         |       |              |       |                  |       |         |       | 5,609                                 |       |                   |       | 5,609             |       | $ | 5,609 |   |
| Other  comprehensive income net of taxes                                           |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Net change in  unrealized gains on available-for-sale   investment securities |       |              |       |                  |       |         |       |                                  |       | $                      | 10         |              | 10         |   | 10 |   |
| Total  comprehensive income                                                        |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       | $ | 5,619 |   |
| Exercise of stock  options and related  tax benefit                           |       | 34,202            |       | 532                   |       |         |       |                                  |       |                   |       | 532               |       |   |   |
| Amortization of  stock compensation - ESOP shares                                  |       |              |       | 104                   |       | 76           |       |                                  |       |                   |       | 180               |       |   |   |
| Shares acquired  or redeemed by ESOP                                               |       |              |       |                  |       | (150         | )          |                                  |       |                   |       | (150              | )          |   |   |
| Cash dividends-  $.30 per share                                                    |       |              |       |                  |       |         |       | (1,091                                | )          |                   |       | (1,091            | )          |   |   |
| Cash in lieu of  fractional shares in  four-for-three  stock split            |       |              |       | (6                    | )          |         |       |                                  |       |                   |       | (6                | )          |   |   |
| Repurchase and  retirement of common stock                                         |       | (19,235           | )          | (40                   | )          |         |       | (462                                  | )          |                   |       | (502              | )          |   |   |
|                                                                               |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Balance,  December 31, 2004                                                   |       | 3,636,791         |       | 7,861                 |       | (1,144       | )          | 27,802                                |       | 12                     |       | 34,531            |       |   |   |
|                                                                               |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Comprehensive  income:                                                             |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Net income                                                                         |       |              |       |                  |       |         |       | 1,454                                 |       |                   |       | 1,454             |       | $ | 1,454 |   |
| Other  comprehensive loss, net of taxes:                                           |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Net change in  unrealized loss on available-for-sale investment  securities   |       |              |       |                  |       |         |       |                                  |       | (28                    | )          | (28               | )          | (28 | ) |
|                                                                               |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Total  comprehensive income                                                        |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       | $ | 1,426 |   |
|                                                                               |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Exercise of stock  options and related tax benefit                                 |       | 13,388            |       | 177                   |       |         |       |                                  |       |                   |       | 177               |       |   |   |
|                                                                               |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Amortization of  stock compensation -  ESOP shares                            |       |              |       | 28                    |       | 18           |       |                                  |       |                   |       | 46                |       |   |   |
|                                                                               |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Cash dividends -  $.075 per share                                                  |       |              |       |                  |       |         |       | (274                                  | )          |                   |       | (274              | )          |   |   |
|                                                                               |       |              |       |                  |       |         |       |                                  |       |                   |       |              |       |   |   |
| Balance,  March 31, 2005                                                      |       | 3,650,179         |       | $                     | 8,066      |         | $          | (1,126                                | )          | $                      | 28,982     |              | $          | (16 | ) | $ | 35,906 |   |   |   |

 

See Notes to Unaudited Condensed ConsolidatedFinancial Statements

 

4

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COMMUNITY VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited**)**

 
| **(In  thousands)**                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **For the three months ended March  31,**                                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|                                                                                         |       |       |       |       |       |
| Cash flows from operating activities:                                                        |       |       |       |       |       |
| Net income                                                                                   |       | $          | 1,454      |       | $          | 1,088 |   |
| Adjustments to  reconcile net income to net cash (used in) provided by operating activities: |       |       |       |       |       |
| Provision for  loan losses                                                                   |       | 225        |       | 225        |       |
| Decrease in  deferred loan origination fees, net                                             |       | (182       | )          | (126       | )          |
| Depreciation,  amortization and accretion, net                                               |       | 296        |       | 312        |       |
| Net increase in  loans held for sale                                                         |       | (1,987     | )          | (1,180     | )          |
| Increase in cash  surrender value of life insurance policies                                 |       | (68        | )          | (19        | )          |
| Non-cash  compensation associated with the ESOP                                              |       | 46         |       | 45         |       |
| (Increase)  decrease in accrued interest receivable and other assets                         |       | (909       | )          | 1,359      |       |
| (Decrease)  increase in accrued interest payable and other liabilities                       |       | (105       | )          | 583        |       |
|                                                                                         |       |       |       |       |       |
| Net cash (used  in) provided by operating activities                                         |       | (1,231     | )          | 2,287      |       |
|                                                                                         |       |       |       |       |       |
| Cash flows from investing activities:                                                        |       |       |       |       |       |
|                                                                                         |       |       |       |       |       |
| Net increase in  interest-bearing deposits in banks                                          |       | (99        | )          | (692       | )          |
| Proceeds from  called available-for-sale investment securities                               |       |       |       | 300        |       |
| Proceeds from  matured or called held-to-maturity investment securities                      |       | 115        |       | 250        |       |
| Purchases of  available-for-sale investment Securities                                       |       | (999       | )          |       |       |
| Purchases of  held-to-maturity investment Securities                                         |       | (995       | )          | (927       | )          |
| Premiums paid  for life insurance policies                                                   |       | (1,450     | )          | —     |       |
| Purchases of  premises and equipment                                                         |       | (500       | )          | (574       | )          |
| Net increase in  loans                                                                       |       | (5,193     | )          | (9,707     | )          |
|                                                                                         |       |       |       |       |       |
| Net cash used in  investing activities                                                       |       | (9,121     | )          | (11,350    | )          |
|                                                                                         |       |       |       |       |       |
| Cash flows from financing activities:                                                        |       |       |       |       |       |
|                                                                                         |       |       |       |       |       |
| Net increase in demand, interest-bearing and savings  deposits                               |       | $          | 12,760     |       | $          | 9,374 |   |
| Net increase in  time deposits                                                               |       | (4,960     | )          | (50        | )          |
| Repayments of  ESOP note payable                                                             |       | (33        | )          | (36        | )          |
| Payment of cash  dividends                                                                   |       | (273       | )          | (278       | )          |
| Proceeds from  exercise of stock options                                                     |       | 101        |       | 135        |       |
| Purchase of  unallocated ESOP shares                                                         |       |       |       |       |       |
|                                                                                         |       |       |       |       |       |
| Net cash  provided by financing activities                                                   |       | 7,595      |       | 9,145      |       |
|                                                                                         |       |       |       |       |       |
| (Decrease)  Increase in cash and cash equivalents                                            |       | (2,757     | )          | 82         |       |
|                                                                                         |       |       |       |       |       |
| Cash and cash equivalents at beginning of year                                               |       | 68,218     |       | 76,810     |       |
|                                                                                         |       |       |       |       |       |
| Cash and cash equivalents at end of period                                                   |       | $          | 65,462     |       | $          | 76,892 |   |

 

See Notes to Unaudited Consolidated FinancialStatements

 

5

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**CommunityValley Bancorp and Subsidiaries**

 

NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidatedfinancial statements of Community Valley Bancorp and subsidiaries (the“Company”) have been prepared pursuant to the rules and regulations of theSecurities Exchange Commission (the “SEC”) and the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, certain information and footnotedisclosures required by accounting principles generally accepted in the UnitedStates of America for annual financial statements are not include herein. Inthe opinion of management, all adjustments (which consist solely of normalrecurring accruals) considered necessary for a fair presentation of the resultsfor the interim periods presented have been included.  These interim consolidated financialstatements should be read in conjunction with the financial statements andrelated notes contained in the Company’s 2004 Annual Report to Shareholders onForm 10-K.

 

The condensed consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiaries, ButteCommunity Bank and CVB Insurance Agency, LLC. All significant inter-companybalances and transactions have been eliminated in consolidation. The Companyhas also established a wholly-owned unconsolidated subsidiary, Community ValleyBancorp Trust I (the “Trust”), a Delaware statutory business trust, for thepurpose of issuing trust preferred securities. The results of operations forthe three-month period ended March 31, 2005 may not necessarily be indicativeof the operating results for the full year 2005.

 

Management has determined that since all of thecommercial banking products and services offered by the Company are availablein each branch of the bank, all branches are located within the same economicenvironment and management does not allocate resources based on the performanceof different lending or transaction activities, it is appropriate to aggregatethe Bank branches and report them as a single operating segment.

 

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual results coulddiffer from these estimates.

 

2. SUBSEQUENT EVENT

 

On April 13, 2005, the Board of Directors of theCompany declared a two-for-one stock split effective May 16, 2005 forshareholders of record on May 2, 2005. Share and per share information has notbeen retroactively adjusted to reflect the stock split except for the pro formabasic and diluted earnings per share included in the condensed consolidatedstatement of income.

 

2. EARNINGS PER SHARECOMPUTATION

 

Basic earnings per share are computed by dividing net income by the weighted average common shares outstanding for the period (3,554,987 shares for the three month period ended March 31, 2005 and 3,540,713 shares for the three month period ended March 31, 2004).  Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised using the treasury stock method.   Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period plus the dilutive effect of options (238,088 shares for the three-month period ended March 31, 2005 and 271,007 shares for the three-month period ended March 31, 2004). During the periods covered the Company had no stock options that were considered anti-dilutive.

 

6

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3. COMPREHENSIVE INCOME

 

Comprehensive income is reported in additionto net income for all periods presented. Comprehensive income is made up of net income plus other comprehensiveincome or loss.  The Company’sonly source of comprehensive income or loss, is comprised of changes inunrealized gains or losses, net of taxes, on available-for-sale securities,adjusted for the effect of realized gains or losses on available-for-salesecurities, net of taxes.

 

4.  STOCK–BASEDCOMPENSATION

 

The Company issues stock options under three stock-based compensationplans, the Community Valley Bancorp 1991, 1997 and 2000 Stock OptionPlans.  The Company accounts for theseplans under the recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedInterpretations.  No stock-basedcompensation cost is reflected in net income, as all options granted underthese plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.

 

The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofFASB Statement No. 123, *Accounting for Stock-BasedCompensation*, to stock-based employee compensation.

 

Pro forma adjustments to the Company’s consolidated net earnings andearnings per share are disclosed during the periods in which the options becomevested.

 
| **(In  thousands, except share data)**                                                                                                  | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
|                                                                                                                                    |       |               |       |               |       |
| Net earnings as reported                                                                                                                |       | $                  | 1,454      |               | $          | 1,088 |   |
|                                                                                                                                    |       |               |       |               |       |
| Deduct: Total stock-based compensation expense determined under the  fair value based method for all awards, net of related tax effects |       | (87                | )          | (71                | )          |
|                                                                                                                                    |       |               |       |               |       |
| Pro forma net income                                                                                                                    |       | $                  | (1,367     | )                  | $          | (1,017 | ) |
|                                                                                                                                    |       |               |       |               |       |
| Basic earnings per share - as  reported                                                                                                 |       | $                  | 0.41       |               | $          | 0.31 |   |
|                                                                                                                                    |       |               |       |               |       |
| Basic earnings per share - pro  forma                                                                                                   |       | $                  | 0.38       |               | $          | 0.29 |   |
|                                                                                                                                    |       |               |       |               |       |
| Diluted earnings per share -  as reported                                                                                               |       | $                  | 0.38       |               | $          | 0.29 |   |
|                                                                                                                                    |       |               |       |               |       |
| Diluted earnings per share -  pro forma                                                                                                 |       | $                  | 0.36       |               | $          | 0.27 |   |

 

7

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| ** **                                                      | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **March 31, 2005**     | ** ** | **March 31, 2004** | ** ** |
| Dividend yield (not applicable)                                 |       |                   |       |   |   |
| Expected  volatility                                            |       | 41.00                  | %          | 95.16 | % |
|                                                            |       |                   |       |   |   |
| Risk-free  interest rate                                        |       | 4.00                   | %          | 4.52 | % |
|                                                            |       |                   |       |   |   |
| Expected option  life                                           |       | 10 years               |       | 10 years |   |
|                                                            |       |                   |       |   |   |
| Weighted average fair value of options granted  during the year |       | $                      | 7.069.51   |   | $ | 9.86 |   |
|                                                                 |            |                        |            |  |  |  |  |

 

5. COMMITMENTS AND CONTINGENCIES

 

NEED TO INCLUDE AS FOOTNOTE

 

6. NEW ACCOUNTING PRONOUNCEMENTS

 

Share-Based Payments

 

In December 2004 the FASB issued Statement Number 123 (revised 2004) (FAS 123 (R)), *Share-Based Payments*.  FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees.  In April 2005, the Securities and Exchange Commission adopted a rule that defers the compliance date of FAS 123(R) from the first reporting period beginning after June 15, 2005 to the first fiscal year beginning after June 15, 2005, January 1, 2006 for the Company. Management has not completed its evaluation of the effect that FAS 123 (R) will have, but believes that the effect will be consistent with its previous pro forma disclosures.

 

8

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

 

The following is Community Valley Bancorp’s (the“Company”) management’s discussion and analysis of the significant changes inbalance sheet accounts for March 31, 2005 and December 31, 2004 and income andexpense accounts for the three-month period ended March 31, 2005 and 2004. 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 contained herein, this report on Form 10-Q contains certain forward-looking statements.  The reader of this report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome.   The Company’s actual results could differ materially from those suggested by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments, rates paid on deposits, competition effects, fee and other noninterest income earned, general economic conditions, nationally, regionally and in the operating market areas of the Company and its subsidiaries, changes in the regulatory environment, changes in business conditions and inflation, changes in securities markets, data processing problems, a decline in real estate values in the Company’s market area,  the effects of terrorism, including the events of September 11, 2001 and thereafter, and the conduct of the war on terrorism by the United States and its allies, as well as other factors. This entire report should be read putting such forward-looking statements in context.

 

**General Development of Business**

 

The Company is a financial holding company (FHC”)registered and authorized to engage in the activities permitted under the BankHolding Company Act of 1956, as amended. The Company was incorporated under thelaws of the State of California in 2002 and elected to change to a FHC in2004.  As a financial holding company,the Company is subject to the Federal Holding Company Act and to supervision bythe board of Governors of the Federal Reserve System (“FRB”).** **Its principal office is located at2041 Forest Avenue, Chico, California 95928 and its 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 twelve full service offices within its service areas ofButte, Sutter, Yuba, Tehama, and Colusa Counties.  The Bank also maintains Loan ProductionOffices in Citrus Heights and Redding. Butte Community Bank’s primary businessis serving the commercial banking needs of small to mid-sized businesses andconsumers within those counties.  ButteCommunity Bank accepts checking and savings deposits, offers money marketdeposit accounts and certificates of deposit, makes secured and unsecuredcommercial, secured real estate, and other installment and term loans andoffers other customary banking services.

 

On December 19, 2002, the Company formed awholly-owned unconsolidated subsidiary, Community Valley Bancorp Trust I (the“Trust”), a Delaware statutory business trust, for the purpose of issuing trustpreferred securities.

 

On December 1, 2004, the Company formed a wholly-ownedsubsidiary, CVB Insurance Agency LLC for the purpose of providing insurancerelated services.

** **

Critical Accounting Policies

* *

*General*

 

The Company’s significant accounting principles aredescribed in Note 1 of the consolidated financial statements in the Company’s2004 Annual Report to Shareholders on Form 10-K and are essential tounderstanding

 

9

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Management’s Discussion and Analysis of Results ofOperations and Financial Condition. Community Valley Bancorp’s annualconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America (GAAP). Thefinancial information contained within our statements is, to a significantextent, financial information that is based on measures of the financialeffects of transactions and events that have already occurred. Some of theCompany’s accounting principles require significant judgment to estimate valuesof assets or liabilities. In addition, certain accounting principles requiresignificant judgment in applying the complex accounting principles totransactions to determine the most appropriate treatment. The following is a summaryof the more judgmental and complex accounting estimates and principles.

* *

*Allowance for Loan Losses (ALL)*

 

The allowance for loan losses is management’s bestestimate of the probable losses that may be sustained in our loan portfolio.The allowance is based on two basic principles of accounting: (1) SFAS No.5 which requires that losses be accrued when they are probableof occurring and estimable and (2) SFAS No. 114, which requires thatlosses be accrued on impaired loans based on the differences between the valueof collateral, present value of future cash flows or values that are observablein the secondary market and the loan balance. The Company performs periodic andsystematic detailed evaluations of its lending portfolio to identify andestimate the inherent risks and assess the overall collectibility. Theseevaluations include general conditions such as the portfolio composition, sizeand maturities of various segmented portions of the portfolio such as secured,unsecured, construction, and Small Business Administration (“SBA”).

 

Additional factors include concentrations ofborrowers, industries, geographical sectors, loan product, loan classes andcollateral types, volume and trends of loan delinquencies and non-accrual,criticized and classified assets and trends in the aggregate in significantcredits identified as watch list items. There are several components to thedetermination of the adequacy of the ALL. Each of these components isdetermined based upon estimates that can and do change when the actual eventsoccur. The Company estimates the SFAS No. 5 portion of the ALL based onthe segmentation of its portfolio. For those segments that require an ALL, theCompany estimates loan losses on a monthly basis based upon its ongoing loanreview process and analysis of loan performance. The Company follows asystematic and consistently applied approach to select the most appropriateloss measurement methods and support its conclusions and rationale with writtendocumentation. One method of estimating loan losses for groups of loans isthrough the application of loss rates to the groups’ aggregate loan balances.Such rates typically reflect historical loss experience for each group ofloans, adjusted for relevant economic factors over a defined period of time.The Company evaluates and modifies its loss estimation model as needed toensure that the resulting loss estimate is consistent with GAAP.

 

For individually impaired loans, SFAS No. 114provides guidance on the acceptable methods to measure impairment.Specifically, SFAS No. 114 states that when a loan is impaired, theCompany should measure impairment based on the present value of expected futureprincipal and interest cash flows discounted at the loan’s effective interestrate, except that as a practical expedient, a creditor may measure impairmentbased on a loan’s observable market price or the fair value of collateral, ifthe loan is collateral dependent. When developing the estimate of future cashflows for a loan, the Company considers all available information reflectingpast events and current conditions, including the effect of existingenvironmental factors.

* *

*Loan Sales and Servicing*

 

The Company originates government guaranteed loans andmortgage loans that may be sold in the secondary market.  The amounts ofgains recorded on sales of loans and the initial recording of servicing assetsand interest only (I/O) strips is based on the estimated fair values of therespective components.  In recording the initial value of the servicingassets and the fair value of the I/O strips receivable, the Company usesestimates which are based on management’s expectations of future prepaymentsand discount rates.  Servicing assets are amortized

 

10

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over the estimated life of the related loan.  I/Ostrips are not significant at March 31, 2005.  These prepayment anddiscount rates were based on current market conditions and historicalperformance of the various pools of serviced loans.  If actual prepaymentswith respect to sold loans occur more quickly than projected the carrying valueof the servicing assets may have to be adjusted through a charge to earnings.

* *

*Stock-Based Compensation*

 

The Company uses the intrinsic value based method formeasuring compensation cost related to stock options. Under the intrinsic valuebased method, compensation cost is the excess, if any, of the quoted marketprice of the stock at grant date over the amount an employee must pay toacquire the stock. This cost is amortized on a straight-line basis over thevesting period of the options granted. The Company applies AccountingPrinciples Board Opinion (“APB”) No. 25 *Accountingfor Stock Issued to Employees*and related interpretations inaccounting for stock options.  No compensation cost has been recorded inthe accompanying financial statements because all options have been granted atan exercise price of no less than the fair market value at date of grant.

* *

*Revenue recognition*

 

The Company’s primary source of revenue is interest income,which is the difference between the interest income it receives oninterest-earning assets and the interest expense it pays on interest-bearingliabilities, and (ii) fee income, which includes fees earned on depositservices, income from SBA lending, electronic-based cash management services,mortgage brokerage fee income and merchant credit card processing services.Interest income is recorded on an accrual basis. Note 1 to the ConsolidatedFinancial Statements in the Company’s 2004 Annual Report to Shareholders onForm 10-K offers an explanation of the process for determining when the accrualof interest income is discontinued on an impaired loan.

* *

*Income Taxes*

 

The Company accounts forincome taxes under the asset and liability method. Under the asset andliability method, deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured usingcurrently enacted tax rates applied to such taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date. If futureincome should prove non-existent or less than the amount of deferred tax assetswithin the tax years to which they may be applied, the asset may not be realizedand our net income will be reduced.

 

Stock Split

 

On April 13, 2005, the Board of Directors of theCompany declared a two-for-one stock split effective May 16, 2005 forshareholders of record on May 2, 2005. Share and per share information has notbeen retroactively adjusted to reflect the stock split except for the pro formabasic and diluted earnings per share included in the condensed consolidatedstatement of income.

** **

**Overview**

 

The Company recorded net income of $1,454,000 for the quarter ended March 31, 2005, which was a 34% increase from the $1,088,000 reported for the same period of 2004.  Diluted earnings per share for the first quarter of 2005 were $0.38, compared to the $0.29 recorded in the first quarter of 2004.  The annualized return on average equity (ROAE) and the annualized return on average assets (ROA) for the first quarter of 2005 were 16.61% and 1.31%, respectively, as compared to 14.13% and 1.12%, respectively, for the same period in 2004.  The primary reason for the increase in income was due to significant growth in earning assets. Total assets of the Company increased by $9,038,000 or (2.0%) from December 31, 2004 to $458,700,000 at March 31, 2005.  Net loans totaled $347,801,000, up $7,137,000 (2.1%) from the ending balances on December 31, 2004.  Deposit balances at March 31, 2005 totaled $406,840,000 up $7,781,000 (1.9%) from December 31, 2004.

 

11

 

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

 

**Table One:  Components of Net Income**

** **
| ** **                                                       | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(In thousands, except percentages)**                           | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                                             |       |                              |       |   |   |
| Net interest  income                                             |       | $                                 | 5,907      |   | $ | 4,587 |   |
| Provision for  loan losses                                       |       | (225                              | )          | (225 | ) |
| Non-interest  income                                             |       | 1,636                             |       | 1,229 |   |
| Non-interest  expense                                            |       | (4,874                            | )          | (3,787 | ) |
| (Provision for)  income taxes                                    |       | (990                              | )          | (716 | ) |
|                                                             |       |                              |       |   |   |
| Net income                                                       |       | $                                 | 1,454      |   | $ | 1,088 |   |
|                                                             |       |                              |       |   |   |
| Average total  assets (In millions)                              |       | $                                 | 449.8      |   | $ | 390.1 |   |
| Net income  (annualized) as a percentage of average total assets |       | 1.31                              | %          | 1.12 | % |

 

**Results of Operations**

## **Net Interest Income and Net Interest Margin**

 

Net interest incomerepresents the excess of interest and fees earned on interest earning assets(loans, securities, federal funds sold and investments in time deposits) overthe interest paid on deposits and borrowed funds.  Net interest margin is net interest incomeexpressed as a percentage of average earning assets.

 

The Company’s netinterest margin was 5.94% for the three months ended March 31, 2005 and 5.40%for the three months ended March 31, 2004. Net interest income increased $1,318,000 (28.8%) for the first quarterof 2005 compared to the same period in 2004. The primary reason for this increase was the increase in average loansof $69,146,000 (24.8%) higher in the first quarter of 2005 versus the sameperiod in 2004 resulting in increased interest income and fees associated withthat growth.

 

Interest expense was $159,000 (16%) higher in thefirst quarter versus the same period in 2004. The average balances of interestbearing liabilities were $40,691,000 (14.2%) higher in the first quarter of2005 versus the same quarter in 2004. Even though interest bearing balances increased, rates paid on theseliabilities only increased by 4 basis points on a quarter over quarter basis.

 

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.

 

12

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**Table Two: Analysis of Net Interest Margin on Earning Assets**

** **

Three Months Ended March 31,

** **
| ** **                                       | ** ** | **2005**         | ** ** | **2004**     | ** ** |
|--------------------------------------------------|------------|------------------|------------|--------------|------------|
| **(In thousands, except percentages)**           | ** ** | **Avg  Balance** | ** ** | **Interest** | ** ** | **Avg  Yield (4)** | ** ** | **Avg  Balance** | ** ** | **Interest** | ** ** | **Avg  Yield (4)** | ** ** |
| ** **                                       |       |             |       |         |       |   |   |   |   |   |   |   |   |
| **Assets:**                                      |       |             |       |         |       |   |   |   |   |   |   |   |   |
| Earning assets                                   |       |             |       |         |       |   |   |   |   |   |   |   |   |
| Loans (1)                                        |       | $                | 348,003    |         | $          | 6,688 |   | 7.79 | % | $ | 278,857 |   | $ | 5,357 |   | 7.71 | % |
| Taxable  investment Securities                   |       | 6,047            |       | 47           |       | 3.15 | % | 3,277 |   | 28 |   | 3.43 | % |
| Tax-exempt  investment securities (2)            |       | 2,041            |       | 25           |       | 4.97 | % | 740 |   | 10 |   | 5.42 | % |
| Federal funds  sold                              |       | 38,069           |       | 232          |       | 2.47 | % | 49,618 |   | 122 |   | 0.99 | % |
| Interest bearing  deposits in banks              |       | 8,781            |       | 60           |       | 2.77 | % | 8,247 |   | 58 |   | 2.82 | % |
| Total earning  assets                            |       | 402,941          |       | $            | 7,052      |   | 7.10 | % | 340,739 |   | $ | 5,575 |   | 6.56 | % |
| Cash & due  from banks                       |       | 12,751           |       |         |       |   |   | 13,202 |   |   |   |   |   |
| Other assets                                     |       | 34,077           |       |         |       |   |   | 36,168 |   |   |   |   |   |
| Average total  assets                            |       | $                | 449,769    |         |       |   |   |   | $ | 390,109 |   |   |   |   |   |
|                                             |       |             |       |         |       |   |   |   |   |   |   |   |   |
| **Liabilities  & Shareholders’ Equity** |       |             |       |         |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:                   |       |             |       |         |       |   |   |   |   |   |   |   |   |
| NOW & MMDA                                   |       | $                | 180,901    |         | $          | 270 |   | 0.61 | % | $ | 166,728 |   | $ | 302 |   | 0.73 | % |
| Savings                                          |       | 34,628           |       | 42           |       | 0.49 | % | 25,894 |   | 32 |   | .50 | % |
| Time deposits                                    |       | 102,249          |       | 693          |       | 2.75 | % | 84,712 |   | 544 |   | 2.58 | % |
| Other borrowings                                 |       | 9,058            |       | 142          |       | 6.36 | % | 8,811 |   | 110 |   | 5.01 | % |
| Total interest  bearing liabilities              |       | 326,836          |       | $            | 1,147      |   | 1.42 | % | 286,145 |   | $ | 988 |   | 1.38 | % |
|                                             |       |             |       |         |       |   |   |   |   |   |   |   |   |
| Demand deposits                                  |       | 81,664           |       |         |       |   |   | 65,129 |   |   |   |   |   |
| Other  liabilities                               |       | 5,775            |       |         |       |   |   | 8,045 |   |   |   |   |   |
| Total  liabilities                               |       | 414,275          |       |         |       |   |   | 359,319 |   |   |   |   |   |
| Shareholders’  equity                       |       | 35,494           |       |         |       |   |   | 30,790 |   |   |   |   |   |
| Average  liabilities and equity                  |       | $                | 449.769    |         |       |   |   |   | $ | 390,109 |   |   |   |   |   |
| Net interest  income & margin (3)            |       |             |       | 5,905        |       | 5.94 | % |   |   | $ | 4,587 |   | 5.40 | % |

 

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(1)   Loan interest includes loan fees of $616,000and $532,000 during the three months ended March 31, 2005 and March 31, 2004,respectively.

(2)   Does not include taxable-equivalentadjustments that primarily relate to income on certain securities that isexempt from federal income taxes.

(3)   Net interest margin is computed by dividingnet interest income by total average earning assets.

(4)   Average yield is calculated based on actualdays in quarter (90 for March 31, 2005 and 91 for March 31, 2004) andannualized to actual days in year (365 for 2005 and 366 for 2004).

 

13

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Table Three sets forth a summary of the changes in interest income andinterest expense from changes in average asset and liability balances (volume)and changes in average interest rates. On a quarter over quarter basis for the period ending March 31, 2005 netinterest income has increased $1,318,000 over the same time period in 2004.  Interest income from earning assets has increasedby $1,147,000. Changes in the volume of earning assets, primarily loans, haveresulted in an increase in interest income of $1,332,000 while interest incomefrom changes in rates has decreased by $1,000. Changes in the volume of interest bearing liabilities, primarily theincrease in balances of demand deposits and time deposits, has resulted in anet increase of interest expense of $159,000.

 

**Table Three:  Analysis of Volume and Rate Changes on NetInterest Income and Expenses**

 

(In thousands) Three Months Ended March 31, 2005 over 2004

Increase (decrease) due to change in:

 
| ** **                            | ** ** | **Volume** | ** ** | **Rate (3)** | ** ** | **Net Change** | ** ** |
|---------------------------------------|------------|------------|------------|--------------|------------|----------------|------------|
| Interest-earning  assets:             | ** ** | ** ** | ** ** | ** **   | ** ** | ** **     | ** ** |
| Net loans (1)                         |       | $          | 1,332      |         | $          | (1             | )          | $ | 1,331 |   |
| Taxable  investment securities        |       | 24         |       | (4           | )          | 20             |       |
| Tax exempt  investment securities (2) |       | 18         |       | (1           | )          | 17             |       |
| Federal funds  sold                   |       | (28        | )          | 138          |       | 110            |       |
| Interest bearing  deposits in banks   |       | 4          |       | (2           | )          | 2              |       |
| Total                                 |       | 1,349      |       | 130          |       | 1,479          |       |
|                                  |       |       |       |         |       |           |       |
| Interest-bearing  liabilities:        |       |       |       |         |       |           |       |
| NOW and MMDA  deposits                |       | 26         |       | (58          | )          | (32            | )          |
| Savings deposits                      |       | 11         |       | (1           | )          | 10             |       |
| Time deposits                         |       | 113        |       | 36           |       | 149            |       |
| Other borrowings                      |       | 3          |       | 29           |       | 32             |       |
| Total                                 |       | 153        |       | 6            |       | 159            |       |
| Interest  differential                |       | $          | 1,196      |         | $          | 124            |       | $ | 1,320 |   |

 

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(1)   The averagebalance of non-accruing loans is not significant as a percentage of total loansand is included in net loans.

(2)   Does not include taxable-equivalentadjustments that primarily relate to income on certain securities that isexempt from federal income taxes.

(3)   Therate/volume variance has been included in the rate variance.

 

14

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## **Non-interest Income**

 

Table Four below provides a summary of the components of noninterestincome for the periods indicated (dollars in thousands):

 

**Table Four: Components of Noninterest Income**

 

Three Months Ended March 31,

 
| ** **                           | ** ** | **2005** | ** ** | **% of Avg.  Assets -  Annualized** | ** ** | **2004** | ** ** | **% of Avg.  Assets –  Annualized** | ** ** |
|--------------------------------------|------------|----------|------------|-------------------------------------|------------|----------|------------|------------------------------------------|------------|
|                                 |       |     |       |                                |       |     |       |                                     |       |
| Service charges  on deposit accounts |       | $        | 539        |                                | 0.48       | %        | $          | 453                                      |       | 0.47 | % |
| Loan servicing  fees                 |       | 98       |       | 0.09                                | %          | 92       |       | 0.09                                     | %          |
| Fees -  alternative investment sales |       | 159      |       | 0.14                                | %          | 137      |       | 0.14                                     | %          |
| Merchant fee  income                 |       | 78       |       | 0.07                                | %          | 84       |       | 0.09                                     | %          |
| Gain on the sale  of loans           |       | 473      |       | 0.42                                | %          | 246      |       | 0.25                                     | %          |
| Other                                |       | 289      |       | 0.26                                | %          | 217      |       | 0.22                                     | %          |
|                                 |       |     |       |                                |       |     |       |                                     |       |
| Total  non-interest income           |       | $        | 1,636      |                                | 1.45       | %        | $          | 1,229                                    |       | 1.26 | % |

 

Non-interest income was up $407,000 (33.1%) to $1,636,000for the three months ended March 31, 2005 as compared to $1,229,000 for thethree months ended March 31, 2004.  Increasesin non-interest income were realized in fees from service charges (up 19%),loan servicing fees (up 6.5%), fees from alternative investment sales (up 16%),gains on the sale of loans (up 92.3%) and other income (up 33.1%).  Merchant fee income declined by (7.7%) forthe three months ended March 31, 2005 as compared to March 31, 2004.  The increase in service charge income was theresult of additional deposit accounts opened during the first quarter and theestablishment of the four new branches opened during 2004 and early 2005 in RedBluff, Marysville, Colusa and Corning.  Loanservicing fees increased as more loans were sold in the secondary market forwhich the Company retains servicing rights. The Alternative Investment Department, which sells third-party mutualfunds and annuities, experienced an increase in fees due to an increase insales during the first quarter.  Gains onsales of loans increased as our Government Lending and Mortgage LendingDivisions sold a greater number of loans in the secondary market.

 

15

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**Non-interest Expense**

 

Non-interest expense increased$1,087,000 (28.7%) to $4,874,000 in the first quarter of 2005 versus $3,787,000in the first quarter of 2004.  On aquarter over quarter basis, full time equivalent employees increased by 38 to219 (21.0%).  Salary and employeebenefits increased $757,000 (33.2%) resulting from normal cost of livingraises, commissions paid to Butte Community Bank’s Real Estate Loan agents andstaffing additions made during the year as the Company continues to grow.  Benefit costs and employer taxes increasedcommensurate with the salaries.  On aquarter over quarter basis, occupancy expenses were higher by $41,000 (17%).  This increase in costs is associated with theopening of the Red Bluff, Marysville and Colusa offices in 2004 and the openingof the Corning office in March of 2005, and is related to building leases,utilities, janitorial services and property taxes.   Fixed asset expense was $391,000 in the firstquarter of 2005 compared to $373,000 in the same period of 2004, representing a4.8% increase.   This increase relates tothe furniture fixtures and equipment needed to open the four offices mentionedabove. Other expenses increased $268,000 (29.9%) in the first quarter of 2005versus the first quarter of 2004.   This increase was attributed to highertelephone, postage and insurance costs as well as increased advertising andpromotion costs associated with the new offices.

 

**Provision for Loan Losses**

 

The Company provided$225,000 for loan losses for the both the first quarter of 2005 and 2004.  Net loan charge-offs for the three monthsended March 31, 2005 were $1,000 as compared to $10,000 in net recoveries forthe three months ended March 31, 2004. Management assesses its loan quality on a monthly basis to maintain anadequate allowance for loan losses.  TheCompany’s loan portfolio composition, non-performing assets and allowance forloan losses are further discussed under the Balance Sheet Analysis sectionbelow.

 

**Provision for Income Taxes**

 

The effective tax ratefor the first quarter of 2005 was 40.5%, up slightly from the 39.7% for thesame period in 2004.

 

**Balance Sheet Analysis**

 

The Company’s totalassets were $458,713,000 at March 31, 2005 as compared to $449,675,000 atDecember 31, 2004, representing an increase of 2.0%.  The average balance of total assets for the threemonths ended March 31, 2005 was $449,807,000, which represents an increase of $59,698,000(15.3%) over the $390,109,000 during the three-month period ended March 31, 2004.

 

## **Loans**

## ** **

The Company concentratesits lending activities in the following principal areas: 1) commercial; 2) realestate mortgage; 3) residential real estate and real estate construction (bothcommercial and residential); 4) agriculture; and 5) consumer loans.  Commercial and residential real estate loansare generally secured by improved property, with original maturities of 3-10years.  At March 31, 2005, theseprincipal areas accounted for approximately 17%, 44%, 25%, 6% and 8%,respectively, of the Company’s loan portfolio.    The mix at December 31, 2004 was 17%, 43%, 26%,6% and 8%.  Continuing strong economicactivity in the Company’s market area, new borrowers developed through theCompany’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 ($1,212,000 or 2.1%), consumer loans($1,836,000 or 7.0%), commercial and residential real estate loans ($5,354,000or 3.6%) and decreases in real estate construction loans ($2,187,000 or 2.5%)and agricultural loans ($1,023,000 or 7.0%). Table Five below summarizes the composition of the loan portfolio as of March31, 2005 and December 31, 2004.  Realestate construction loans and agricultural loans totals are typically lower inthe first quarter because of weather conditions.

 

16

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**Table Five: Loan Portfolio Composition**

 
| **(In thousands)**         | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------|------------|---------------------|------------|------------------------|------------|
| Commercial                 |       | $                   | 59,874     |                   | $          | 58,662 |   |
| Real estate:               |       |                |       |                   |       |
| Mortgage                   |       | 152,230             |       | 146,876                |       |
| Construction               |       | 88,456              |       | 90,643                 |       |
|                       |       |                |       |                   |       |
| Agriculture                |       | 21,154              |       | 22,177                 |       |
| Consumer                   |       | 28,055              |       | 26,219                 |       |
| Total loans                |       | 349,769             |       | 344,577                |       |
| Allowance for  loan Losses |       | (4,605              | )          | (4,381                 | )          |
| Deferred loan  fees, net   |       | (840                | )          | (1,022                 | )          |
| Total net loans            |       | $                   | 344,324    |                   | $          | 339,174 |   |

 

The majority of theCompany’s loans are direct loans made to individuals and local businesses.  The Company relies substantially on localpromotional activity and personal contacts by bank officers, directors andemployees to compete with other financial institutions.  The Company makes loans to borrowers whoseapplications include a sound purpose and a viable primary repayment source,generally supported by a secondary source of repayment.

 

Commercial loans consistof credit lines for operating needs, loans for equipment purchases, workingcapital, and various other business loan products.  Consumer loans include a range of traditionalconsumer loan products such as personal lines of credit and loans to financepurchases of autos, boats, recreational vehicles, mobile homes and variousother consumer items.

 

Real estate constructionloans are generally composed of commitments to customers within the Company’sservice area for construction of both commercial properties and custom andsemi-custom single-family residences. Other real estate loans consist primarily of loans secured by firsttrust deeds on commercial and residential properties typically with maturitiesfrom 3 to 10 years and original loan to value ratios generally from 65% to80%.  Agriculture loans consist primarilyof crop loans to farmers of peaches, prunes, walnuts, and almonds.  In general, except in the case of loans withSBA or FMHA guarantees, the Company does not make long-term mortgage loans;however, Butte Community Bank has a residential lending division to assistcustomers in securing most forms of longer term single-family mortgagefinancing.

 

## **Risk Elements**

 

The Company assesses andmanages credit risk on an ongoing basis through a total credit culture thatemphasizes excellent credit quality, extensive internal monitoring andestablished 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 is critical for profitabilityand growth.  Management strives tocontinue its emphasis on credit quality in the loan approval process, activecredit administration and regular monitoring. With this in mind, management has designed and implemented acomprehensive loan review and grading system that functions to continuallyassess the credit risk inherent in the loan portfolio.

 

Ultimately, underlyingtrends in economic and business cycles may influence credit quality.  The Company’s business is concentrated in theButte, Sutter, Tehama, Shasta, Yuba and Colusa County areas. The economy ofthese six counties is diversified with professional services, manufacturing,agriculture and real estate investment and construction.

 

17

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Special emphasis isplaced within the communities in which the Company has offices (Chico,Paradise, Magalia, Oroville, Yuba City, Red Bluff, Marysville, Colusa andCorning).  The Company also maintainsloan production offices in the cities of Citrus Heights and Redding.  Single-family residential construction is theprimary lending product from the Citrus Heights location serving the greaterSacramento area.  The primary focus ofthe loan production office in Redding is commercial loans with an emphasis on SmallBusiness Administration (SBA) loans and other government loan programs.

 

The Company hassignificant extensions of credit and commitments to extend credit that aresecured by real estate.  The ultimaterepayment of these loans is generally dependent on personal or business cashflows or the sale or refinancing of the real estate.  The Company monitors the effects of currentand expected market conditions and other factors on the collectability of realestate loans.  The more significantfactors management considers involve the following:  lease, absorption and sale rates; real estatevalues and rates of return; operating expenses; inflation; and sufficiency ofcollateral independent of the real estate including, in limited instances,personal guarantees.

 

In extending credit andcommitments to borrowers, the Company generally requires collateral and/orguarantees as security.  The repayment ofsuch loans is expected to come from cash flow or from proceeds from the sale ofselected assets of the borrowers.  TheCompany’s requirement for collateral and/or guarantees is determined on acase-by-case basis in connection with management’s evaluation of thecreditworthiness 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, a concentration exists inreal estate loans, which represented approximately 68.8% of the Company’s loanportfolio at March 31, 2005, which is basically the same, on a percentagebasis, as the 68.9% concentration level at December 31, 2004.  Management believes the concentration to haveno 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 noassurance that losses will not occur under such circumstances.  The Company’s loan policies and underwritingstandards include, but are not limited to, the following: (1) maintaining athorough understanding of the Company’s service area and originating asignificant majority of its loans within that area, (2) maintaining a thoroughunderstanding of borrowers’ knowledge, capacity, and market position in theirfield of expertise, (3) basing real estate loan approvals not only on marketdemand for the project, but also on the borrowers’ capacity to support theproject financially in the event it does not perform to expectations (whethersale or income performance), and (4) maintaining conforming and prudent loan tovalue and loan to cost ratios based on independent outside appraisals andongoing inspection and analysis by the Company’s lending officers.

 

## **Nonaccrual, Past Due and Restructured Loans**

 

Management generallyplaces loans on nonaccrual status when they become 90 days past due, unless theloan is well secured and in the process of collection.  Loans are charged off when, in the opinion ofmanagement, collection appears unlikely.

 

Table Six below sets forth nonaccrual loans as of March31, 2005 and December 31, 2004.  Therewere no loans past due 90 days or more and still accruing interest at March 31,2005 or December 31, 2004.

 

18

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**Table Six: Non-Performing Loans**

 
| **(In thousands)**          | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------|------------|---------------------|------------|------------------------|------------|
| Nonaccrual:                 |       |                |       |                   |       |
| Commercial                  |       | 0                   |       | 17                     |       |
| Real estate                 |       | 0                   |       |                   |       |
| Consumer and  other         |       | 0                   |       | 84                     |       |
| Total  non-performing loans |       | $                   | 0          |                   | $          | 101 |   |
|                             |            |                     |            |                        |            |  |  |

 

At March 31, 2005, there were no non-performing loans.   There were no loan concentrations in excessof 10% of total loans not otherwise disclosed as a category of loans as of March31, 2005 or December 31, 2004. Management is not aware of any potential problem loans, which wereaccruing and current at March 31, 2005, where serious doubt exists as to theability of the borrower to comply with the present repayment terms.

 

## **Allowance for Loan Losses Activity**

## ** **

We employ a systematicmethodology for determining the allowance for loan losses that includes amonthly review process and monthly adjustment of the allowance.  Ourprocess includes a periodic review of individual loans that have beenspecifically identified as problem loans or have characteristics which couldlead to impairment, as well as detailed reviews of other loans (eitherindividually or in pools).  While this methodology utilizes historical andother objective information, the establishment of the allowance for loan lossesand the classification of loans are, to some extent, based on management’sjudgment and experience.

 

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

 

Qualitative factorsinclude the general economic environment in our markets and, in particular, thestate of the agriculture industry and other key industries in the NorthernSacramento Valley.  The way a particular loan might be structured, theextent and nature of waivers of existing loan policies, loan concentrations andthe rate of portfolio growth are other qualitative factors that are considered.

 

Our methodology is, andhas been, consistently followed.  However, as we add new products,increase in complexity, and expand our geographic coverage, we expect toenhance our methodology to keep pace with the size and complexity of the loanportfolio.  On an ongoing basis we engage outside firms to independentlyassess our methodology, and to perform independent credit reviews of our loanportfolio.  The FDIC and the California Department of FinancialInstitutions review the allowance for loan losses as an integral part of theexamination processes.  Management believes that our current methodologyis appropriate given our size and level of complexity.  Further,management believes that the allowance for loan losses is adequate as of March31, 2005 to cover known and inherent risks in the loan portfolio. However, fluctuations in credit quality, or changes in economic conditions orother factors could cause management to increase or decrease the allowance forloan losses as necessary.

 

19

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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 loan lossestotaled $4,605,000 or 1.31% of total loans at March 31, 2005 and $4,381,000 or1.27% at December 31, 2004.  Netcharge-offs to average loans for the first quarter of 2005 were zero andwere  .004% for the same period in theprior year.

 

Table Seven below summarizes, for the periodsindicated, the activity in the allowance for loan losses.

 

**Table Seven: Allowance for Loan Losses**

 
| ** **                                                                | ** ** | **Three Months  Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(In thousands, except for percentages)**                                | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|                                                                      |       |                               |       |   |   |
| Average loans  outstanding                                                |       | $                                  | 348,003    |   | $ | 278,557 |   |
|                                                                      |       |                               |       |   |   |
| Allowance for  possible loan losses at beginning of period                |       | $                                  | 4,381      |   | $ | 3,587 |   |
|                                                                      |       |                               |       |   |   |
| Loans charged  off:                                                       |       |                               |       |   |   |
| Commercial                                                                |       | —                             |       |   |   |
| Real estate                                                               |       | —                             |       | — |   |
| Consumer                                                                  |       | (1                                 | )          | (7 | ) |
| Total                                                                     |       | (1                                 | )          | (7 | ) |
| Recoveries of  loans previously charged off:                              |       |                               |       |   |   |
| Commercial                                                                |       | —                             |       | — |   |
| Real estate                                                               |       | —                             |       | — |   |
| Consumer                                                                  |       | —                             |       | 17 |   |
| Total                                                                     |       | —                             |       | 17 |   |
| Net loan charge  offs                                                     |       | (1                                 | )          | 10 |   |
|                                                                      |       |                               |       |   |   |
| Additions to  allowance charged to operating expenses                     |       | 225                                |       | 225 |   |
| Allowance for  loan losses at end of period                               |       | $                                  | 4,605      |   | $ | 3,822 |   |
| Ratio of net  charge-offs to average loans outstanding                    |       | .000                               | %          | .004 | % |
| Provision for  possible loan losses to average loans outstanding          |       | .065                               | %          | .081 | % |
| Allowance for  loan losses to loans net of deferred fees at end of period |       | 1.31                               | %          | 1.35 | % |

 

It is the policy of management to maintain theallowance for loan losses at a level adequate for known and inherent risks inthe portfolio.  Based on informationcurrently available to analyze inherent credit risk, including economic

 

20

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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 based ondifferences 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, 2005 andDecember 31, 2004, the Company did not have any other real estate (“ORE”)properties.

 

**Deposits**

 

At March 31, 2005, total deposits were $406,840,000representing an increase of $7,781,000 (1.9%) over the December 31, 2004balance of $399,059,000.

 

**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 23, 2004, April 23,2004, and July 23, 2004, $.075 per share on October 22, 2004 and January 28,2005.  The payment of dividends in thefuture is subject to the discretion of the Board of Directors of the Companyand will depend on earnings, the financial condition of the Company and otherrelevant factors.

 

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, 2005, shareholders’equity was $35,906,000, representing an increase of $1,375,000 (4.0%) from $34,531,000at December 31, 2004.  The increase is primarilythe result of the net income from the period offset by the cash dividendsdiscussed above.  The Bank’s ratio oftotal risk-based capital to risk adjusted assets was 11.3% at March 31, 2005 whichwas unchanged from December 31, 2004. Tier 1 risk-based capital to risk-adjusted assets was 10.1% at March 31,2005 and 10.2% at December 31, 2004.

 

Table Eight below lists the Company and the Bankcapital ratios at March 31, 2005 and December 31, 2004, as well as the minimumratios required under regulatory definitions of capital adequacy. 

 

21

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

 
| **Capital to Risk-Adjusted Assets** | ** ** | **At March 31,  2005** | ** ** | **At December 31,  2004** | ** ** | **Minimum  Regulatory Requirement** | ** ** |
|-------------------------------------|------------|------------------------|------------|---------------------------|------------|-------------------------------------|------------|
| **Company**                         |       |                   |       |                      |       |                                |       |
| ** **                          |       |                   |       |                      |       |                                |       |
| Leverage ratio                      |       | 9.8                    | %          | 9.5                       | %          | 4.0                                 | %          |
|                                |       |                   |       |                      |       |                                |       |
| Tier 1  Risk-Based Capital          |       | 11.4                   | %          | 11.3                      | %          | 4.0                                 | %          |
|                                |       |                   |       |                      |       |                                |       |
| Total Risk-Based  Capital           |       | 12.6                   | %          | 12.5                      | %          | 8.0                                 | %          |
|                                |       |                   |       |                      |       |                                |       |
| **Bank**                            |       |                   |       |                      |       |                                |       |
| ** **                          |       |                   |       |                      |       |                                |       |
| Leverage ratio                      |       | 8.7                    | %          | 8.6                       | %          | 4.0                                 | %          |
|                                |       |                   |       |                      |       |                                |       |
| Tier 1  Risk-Based Capital          |       | 10.1                   | %          | 10.2                      | %          | 4.0                                 | %          |
|                                |       |                   |       |                      |       |                                |       |
| Total Risk-Based  Capital           |       | 11.3                   | %          | 11.3                      | %          | 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, 2005 and December31, 2004.  The Bank was considered “well-capitalized”by regulatory standards, at March 31, 2005 and December 31, 2004.

 

**Item 3.  Quantitative and Qualitative Disclosures aboutMarket 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 of Directorshas overall responsibility for the interest rate risk management policies.  The Bank has an Asset and LiabilityManagement Committee (ALCO) that establishes and monitors guidelines to controlthe sensitivity of earnings to changes in interest rates.

 

*Asset/LiabilityManagement*.  Activitiesinvolved in asset/liability management include, but are not limited to,lending, accepting and placing deposits, investing in securities, using trustpreferred securities and borrowings. Interest rate risk is the primary market risk associated withasset/liability management.  Sensitivityof earnings to interest rate changes arises when yields on assets change in adifferent time period or in a different amount from that of interest costs onliabilities.  To mitigate interest raterisk, the structure of the balance sheet is managed with the goal thatmovements of interest rates on assets and liabilities are correlated andcontributes to earnings even in periods of volatile interest rates.  The asset/liability management policy setslimits on the acceptable amount of variance in net interest margin and marketvalue of equity under changing interest environments.  The Company uses simulation models toforecast earnings, net interest margin and market value of equity.

 

22

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Simulation of earnings isthe primary tool used to measure the sensitivity of earnings to interest ratechanges.  Using computer-modelingtechniques, the Company is able to estimate the potential impact of changing interestrates on earnings.  A balance sheetforecast is prepared monthly using inputs of actual loans, securities andinterest bearing liability (i.e. deposits/borrowings) positions as thebeginning base.  The forecast balancesheet is processed against seven interest rate scenarios.  These scenarios include a 100, 200 and 300basis point rising rate forecast, a flat rate forecast and a 100, 200 and 300basis point falling rate forecast which take place within a one year timeframe.  The net interest income ismeasured during the year assuming a gradual change in rates over thetwelve-month horizon.  The Company’s netinterest income, as forecast below, was modeled utilizing a forecast balancesheet projected from balances as of the date indicated.

 

Table Nine below summarizesthe effect on net interest income (NII) of a ±200 basis point change ininterest rates as measured against a constant rate (no change) scenario.  The results shown in Table nine for the twoperiods, fall within the parameters of the Bank’s policy for interest raterisk.

 

**Table Nine:  Interest Rate Risk Simulation of Net Interestas of March 31, 2005 and December 31, 2004 (Unaudited)**

 
| **(In thousands)**                       | ** ** | **$ Change in NII  from Current  12 Month Horizon  March 31, 2005** | ** ** | **$ Change in NII  from Current  12 Month Horizon  December 31, 2004** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Variation from a  constant rate scenario |       |                                                                     |       |                                                                        |       |
| +200bp                                   |       | $                                                                        | 1,960      |                                                                        | $          | 1,513 |   |
| - 200bp                                  |       | $                                                                        | (819       | )                                                                           | $          | 395 |   |

 

Assumptions are inherently uncertain, and, consequently, the modelcannot precisely measure net interest income or precisely predict the impact ofchanges in interest rates on net interest income. Actual results will differfrom simulated results due to timing, magnitude and frequency of interest ratechanges, as well as changes in market conditions and management strategies whichmight moderate the negative consequences of interest rate deviations. In themodel above, the simulation shows that the Company is asset sensitive over theone-year horizon as increasing rates have a positive impact on net interestincome and declining rates have a negative impact.

 

**Inflation**

 

The impact of inflation on a financial institution differssignificantly from that exerted on manufacturing, or other commercial concerns,primarily because its assets and liabilities are largely monetary.  In general, inflation primarily affects theCompany and it subsidiaries through its effect on market rates of interest,which affects the Company’s ability to attract loan customers.  Inflation affects the growth of total assetsby increasing the level of loan demand, and potentially adversely affectscapital adequacy because loan growth in inflationary periods can increase atrates higher than the rate capital grows through retention of earnings, whichmay be generated in the future.  Inaddition to its effects on interest rates, inflation increases overalloperating expenses.  Inflation has nothad a material effect upon the results of operations of the Company and itssubsidiaries during the periods ended March 31, 2005, and 2004.

 

23

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**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 to theCompany’s liquidity position.  Federalfunds lines, short-term investments and securities, and loan repaymentscontribute to liquidity, along with deposit increases, while loan funding anddeposit withdrawals decrease liquidity. The Company assesses the likelihood of projected funding requirements byreviewing historical funding patterns, current and forecasted economicconditions and individual client funding needs. Commitments to fund loans at March 31, 2005 and December 31, 2004 wereapproximately $152,100,000 and $153,570,000, respectively.  Such loans relate primarily to revolvinglines of credit and other commercial loans, and to real estate constructionloans.

 

The Company’s sources ofliquidity consist of cash and due from correspondent banks, overnight fundssold to correspondent banks, unpledged marketable investments and loans heldfor sale.  On March 31, 2005,consolidated liquid assets totaled $58.8 million or 12.8% of total assetscompared to $62.7 million or 13.9% of total assets on December 31, 2004.  In addition to liquid assets, the Companymaintains short-term lines of credit in the amount of $15,000,000 withcorrespondent banks.  There were noborrowings outstanding under these arrangements at March 31, 2005.    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 to economicfluctuations.  Accordingly, managementstrives to maintain a balanced position of liquid assets to volatile andcyclical deposits.

 

Liquidity is alsoaffected by portfolio maturities and the effect of interest rate fluctuationson the marketability of both assets and liabilities.  The Company can sell any of its unpledgedsecurities held in the available-for-sale category to meet liquidity needs.

 

## **Off-Balance Sheet Items**

## ** **

The Company has certainongoing commitments under operating leases. These commitments do not significantly impact operating results. As ofMarch 31, 2005 and December 31, 2004, commitments to extend credit and lettersof credit were the only financial instruments with off-balance sheet risk.  The Company has not entered into any contractsfor financial derivative instruments such as futures, swaps, options or similarinstruments.  Loan commitments andletters of credit were $152,100,000 and $153,570,000 at March 31, 2005 andDecember 31, 2004, respectively.  As apercentage of net loans, these off-balance sheet items represent 45.0% and52.3%, respectively. The fair value of the liability related to the letters ofcredit, which represents the fees received for issuing the guarantees, was notsignificant at March 31, 2005 and December 31, 2004.  The Company recognizes these fees as revenueover the term of the commitment or when the commitment is used.

 

**Item 4.  Controls and Procedures**

 

 (a) Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management as of the end of the Company’s fiscal quarter ended March 31, 2005. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

 

24

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(b) Internal Control Over Financial Reporting: An evaluation of any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the Company’s fiscal quarter ended March 31, 2005, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that no change identified in connection with such evaluation has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

## **PARTII – OTHER INFORMATION**

## ** **

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

 

On April 28, 2005 the Company announced its intent to file an application to NASDAQ with the intent of listing the shares of Community Valley Bancorp on the NASDAQ Small Cap Market.

 

Item 6.  Exhibits

 

 

(a)  Exhibits

 

Exhibit

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

 
|   (b) Reports  on Form 8-K                                                                                                                                                            |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                            |   |   |   |   |
| On January 31,  2005 the Company filed a Report on form 8-k announcing the financial results  for 2004.                                                                                         |
|                                                                                                                                                                                            |   |   |   |   |
| On February 2,  2005 the Company filed a Report on form 8-k amending the financial results  for 2004 originally released on January 31, 2005.                                                   |
|                                                                                                                                                                                            |   |   |   |   |
| On March 16,  2005, the Company filed a Report on form 8-k announcing a seven and one half  cent per share Cash Dividend for shareholders of record on March 31, 2005,  payable April 22, 2005. |

 

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 2, 2005 |   |   |   | By:                                | /s/ *Keith C. Robbins* |   |
|        |   |   |   |                               |
|        |   |   |   | Keith C. Robbins                   |
|        |   |   |   |                               |
|        |   |   |   | President, Chief Executive Officer |
|        |   |   |   |
|        |   |   |   |
| May 2, 2005 |   |   |   | By*:*                              | * /s/ John F. Coger* |   |
|        |   |   |   |                               |
|        |   |   |   | John F. Coger                      |
|        |   |   |   |                               |
|        |   |   |   | Executive Vice President, CFO, COO |
|             |        |        |        |                                    |  |  |  |  |

 

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