**SECURITIESAND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

 

**FORM10-Q**

 

**ý****        ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the Quarterly PeriodEnded September 30, 2007**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

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

 

| **California**                                                                       | ** ** | **000-51678**             | ** ** | **68-0479553**            |
|--------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|
| (State or other  jurisdiction of                                                     |       | (Commission File  Number) |       | (IRS Employer ID  Number) |
| incorporation or  organization)                                                      |       |                      |       |                      |
|                                                                                 |       |                      |       |                      |
| **1360 E.  Lassen Avenue, Chico, California**                                        | ** ** | **95973**                 |
| (Address of principal  executive offices)                                            |       | (Zip code)                |
|                                                                                 |       |                      |       |                      |
|                                                                                 |       | **(530)  899-2344**       |       |                      |
| (Registrant’s telephone  number, including area code)                           |
|                                                                                 |       |                      |       |                      |
| **2041  Forest Avenue, Chico, California 95928**                                     |
| (Former name, former  address and former fiscal year, if changed since last report.) |

 

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days. Yes  x     No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Exchange Act Rule 12-b-2.

 

| Large  accelerated filer    o |   | Accelerated  filer    x |   | Non-accelerated  filer    o |
|---------------------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule12b-2. Yes  o     No  x

 

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

 

No par value Common Stock — 7,616,566 shares outstanding at October 31, 2007.

 

 

 

 

**PART I - FINANCIAL INFORMATION**

**Item 1**

 

**COMMUNITY VALLEY BANCORP**

**CONSOLIDATED BALANCE SHEET (Unaudited)**

(dollars in thousands)

 
| ** **                                                                                                                                                              | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ASSETS                                                                                                                                                                  |       |                   |       |                  |       |
| Cash and due  from banks                                                                                                                                                |       | $                      | 17,351     |                  | $          | 20,558 |   |
| Federal funds  sold                                                                                                                                                     |       | 34,460                 |       | 42,070                |       |
| Total cash &  cash equivalents                                                                                                                                      |       | 51,811                 |       | 62,628                |       |
|                                                                                                                                                                    |       |                   |       |                  |       |
| Interest-bearing  deposits in banks                                                                                                                                     |       | 3,259                  |       | 2,278                 |       |
| Investment  securities (fair value of $6,366 at September 30, 2007 and $ 5,109 at  December 31, 2006)                                                              |       | 6,366                  |       | 5,127                 |       |
| Loans held for  sale at lower of cost or market                                                                                                                         |       | 722                    |       | 790                   |       |
| Loans, less  allowance for loan losses of $5,372 at September 30, 2007 and $ 5,274 at  December 31, 2006                                                           |       | 468,633                |       | 442,251               |       |
| Premises and  equipment, net                                                                                                                                            |       | 17,904                 |       | 15,359                |       |
| Accrued interest  receivable and other assets                                                                                                                           |       | 23,620                 |       | 21,604                |       |
| Total assets                                                                                                                                                            |       | $                      | 572,315    |                  | $          | 550,037 |   |
| ** **                                                                                                                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                              |       |                   |       |                  |       |
|                                                                                                                                                                    |       |                   |       |                  |       |
| Deposits:                                                                                                                                                               |       |                   |       |                  |       |
| Non-interest  bearing                                                                                                                                                   |       | $                      | 76,538     |                  | $          | 76,988 |   |
| Interest bearing                                                                                                                                                        |       | 416,039                |       | 407,868               |       |
| Total deposits                                                                                                                                                          |       | 492,577                |       | 484,856               |       |
|                                                                                                                                                                    |       |                   |       |                  |       |
| Note payable                                                                                                                                                            |       | 1,125                  |       | 1,217                 |       |
| Junior  subordinated debentures                                                                                                                                         |       | 16,496                 |       | 8,248                 |       |
| Accrued interest  payable and other liabilities                                                                                                                         |       | 11,850                 |       | 9,989                 |       |
| Total liabilities                                                                                                                                                       |       | $                      | 522,048    |                  | $          | 504,310 |   |
| ** **                                                                                                                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| Commitments and  contingencies                                                                                                                                          |       |                   |       |                  |       |
|                                                                                                                                                                    |       |                   |       |                  |       |
| Shareholders’  equity                                                                                                                                              |       |                   |       |                  |       |
| Common stock -  no par value; 20,000,000 shares authorized; issued and outstanding -  7,615,766 shares at September 30, 2007 and 7,394,664 shares at December 31,  2006 |       | 10,948                 |       | 9,727                 |       |
|                                                                                                                                                                    |       |                   |       |                  |       |
| Unallocated ESOP  shares 130,863 shares at September 30, 2007 and 155,258 shares at December  31, 2006 (at cost)                                                        |       | (1,427                 | )          | (1,514                | )          |
| Retained  Earnings                                                                                                                                                      |       | 40,739                 |       | 37,505                |       |
| Accumulated  other comprehensive income, net                                                                                                                            |       | 7                      |       | 9                     |       |
|                                                                                                                                                                    |       |                   |       |                  |       |
| Total  shareholders’ equity                                                                                                                                        |       | 50,267                 |       | 45,727                |       |
| Total  liabilities and shareholders’ equity                                                                                                                        |       | $                      | 572,315    |                  | $          | 550,037 |   |

 

See Notes toUnaudited Condensed Consolidated Financial Statements

2

****

**COMMUNITYVALLEY BANCORP**

**CONSOLIDATED  STATEMENTS OF INCOME (Unaudited)**

(dollars inthousands, except per share data)

** **
| ** **                                            | ** ** | **For the  periods ended September 30th,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **Three  Months**                          | ** ** | **Nine  Months** | ** ** |
| ** **                                            | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income:                                      |       |                                       |       |   |   |   |   |   |   |
| Interest and  fees on loans                           |       | $                                          | 10,450     |   | $ | 10,414 |   | $ | 30,539 |   | $ | 29,203 |   |
| Interest on  federal funds sold                       |       | 518                                        |       | 166 |   | 1,815 |   | 521 |   |
| Interest on  deposits in banks                        |       | 90                                         |       | 36 |   | 139 |   | 143 |   |
| Interest on  investment securities:                   |       |                                       |       |   |   |   |   |   |   |
| Taxable                                               |       | 53                                         |       | 37 |   | 147 |   | 131 |   |
| Exempt from  federal income tax                       |       | 16                                         |       | 17 |   | 49 |   | 49 |   |
| Dividends                                             |       | 0                                          |       | — |   | 15 |   | 8 |   |
| Total interest  income                                |       | 11,127                                     |       | 10,670 |   | 32,703 |   | 30,055 |   |
| ** **                                            | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  expense:                                    |       |                                       |       |   |   |   |   |   |   |
| Interest expense  on deposits                         |       | 3,204                                      |       | 2,346 |   | 9,625 |   | 5,900 |   |
| Interest expense  on junior subordinated debentures   |       | 322                                        |       | 192 |   | 694 |   | 544 |   |
| Interest expense  on notes payble                     |       | 21                                         |       | 23 |   | 72 |   | 60 |   |
| Total interest  expense                               |       | 3,547                                      |       | 2,561 |   | 10,391 |   | 6,504 |   |
| Net interest  income before provision for loan losses |       | 7,580                                      |       | 8,109 |   | 22,312 |   | 23,551 |   |
| Provision for  loan losses                            |       | 75                                         |       | 225 |   | 150 |   | 675 |   |
| Net interest  income after provision for loan losses  |       | 7,505                                      |       | 7,884 |   | 22,162 |   | 22,876 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Non-interest  income                                  |       | 2,653                                      |       | 1,523 |   | 6,341 |   | 4,884 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Non-interest  expenses:                               |       |                                       |       |   |   |   |   |   |   |
| Salaries and  employee benefits                       |       | 3,827                                      |       | 3,804 |   | 11,779 |   | 11,292 |   |
| Occupancy                                             |       | 476                                        |       | 393 |   | 1,418 |   | 1,032 |   |
| Furniture and  equipment                              |       | 586                                        |       | 483 |   | 1,665 |   | 1,422 |   |
| Other expense                                         |       | 1,680                                      |       | 1,590 |   | 5,071 |   | 4,319 |   |
| Total  non-interest expense                           |       | 6,569                                      |       | 6,270 |   | 19,933 |   | 18,065 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Income before  provision for income taxes             |       | 3,589                                      |       | 3,137 |   | 8,570 |   | 9,695 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Provision for  income taxes                           |       | 1,411                                      |       | 1,404 |   | 3,499 |   | 4,103 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Net income                                            |       | $                                          | 2,178      |   | $ | 1,733 |   | $ | 5,071 |   | $ | 5,592 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Basic earnings  per share                             |       | $                                          | 0.29       |   | $ | 0.24 |   | $ | 0.69 |   | $ | 0.77 |   |
| Diluted earnings  per share                           |       | $                                          | 0.29       |   | $ | 0.23 |   | $ | 0.67 |   | $ | 0.73 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Cash dividends  per share                             |       | $                                          | 0.08       |   | $ | 0.07 |   | $ | 0.24 |   | $ | 0.18 |   |

 

See Notes to UnauditedCondensed Consolidated Financial Statements

3

----

 

COMMUNITYVALLEY BANCORP

CONDENSEDCONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Inthousands except number of shares)

 
| ** **                                                                     | ** ** |              | ** ** | ** ** | ** ** | **Unallocated** | ** ** | ** **        | ** ** | **Accumulated  Other** | ** ** | **Total**         | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------|------------|------------|------------|-----------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------|------------|
| ** **                                                                     | ** ** | **Common  Stock** | ** ** | **ESOP**   | ** ** | **Retained**    | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                     | ** ** | **Shares**        | ** ** | **Amount** | ** ** | **shares**      | ** ** | **Earnings**      | ** ** | **Income /  (Loss)**   | ** ** | **Equity**        | ** ** | **Income** | ** ** |
| Balance, January  1, 2006                                                      |       | 7,408,047         |       | $          | 9,051      |            | $          | (1,391            | )          | $                      | 33,908     |              | $          | (13        | )          | $ | 41,555 |   |   |   |
|                                                                           |       |              |       |       |       |            |       |              |       |                   |       |              |       |       |       |
| Comprehensive  income                                                          |       |              |       |       |       |            |       |              |       |                   |       |              |       |       |       |
| Net income                                                                     |       |              |       |       |       |            |       | 7,151             |       |                   |       | 7,151             |       | 7,151      |       |
| Other  comprehensive income                                                    |       |              |       |       |       |            |       |              |       |                   |       |              |       |       |       |
| Net change in  unrealized gains on available-for-sale investment securities    |       |              |       |       |       |            |       |              |       | 22                     |       | 22                |       | 22         |       |
| Total  comprehensive income                                                    |       |              |       |       |       |            |       |              |       |                   |       |              |       | 7,173      |       |
|                                                                           |       |              |       |       |       |            |       |              |       |                   |       |              |       |       |       |
| Exercise of stock  options and related tax benefit                             |       | 130,567           |       | 1,000      |       |            |       |              |       |                   |       | 1,000             |       |       |       |
| Retirement of  common stock                                                    |       | (143,950          | )          | (877       | )          |            |       | (1,621            | )          |                   |       | (2,498            | )          |       |       |
| Amortization of  stock compensation — ESOP shares                         |       |              |       | 378        |       | 231             |       |              |       |                   |       | 609               |       |       |       |
| Shares acquired  or redeemed by ESOP                                           |       |              |       |       |       | (354            | )          |              |       |                   |       | (354              | )          |       |       |
| Cash dividends-  $.26 per share                                                |       |              |       |       |       |            |       | (1,933            | )          |                   |       | (1,933            | )          |       |       |
| Stock based  compensation expense                                              |       |              |       | 175        |       |            |       |              |       |                   |       | 175               |       |       |       |
| Balance, December  31, 2006                                                    |       | 7,394,664         |       | 9,727      |       | (1,514          | )          | 37,505            |       | 9                      |       | 45,727            |       |       |       |
|                                                                           |       |              |       |       |       |            |       |              |       |                   |       |              |       |       |       |
| Comprehensive  income                                                          |       |              |       |       |       |            |       |              |       |                   |       |              |       |       |       |
| Net income                                                                     |       |              |       |       |       |            |       | 5,071             |       |                   |       | 5,071             |       | 5,071      |       |
| Other  comprehensive income                                                    |       |              |       |       |       |            |       |              |       |                   |       |              |       |       |       |
| Net change in  unrealized (losses) on available-for-sale investment securities |       |              |       |       |       |            |       |              |       | (2                     | )          | (2                | )          | (2         | )          |
| Total  comprehensive income                                                    |       |              |       |       |       |            |       |              |       |                   |       |              |       | 5,069      |       |
|                                                                           |       |              |       |       |       |            |       |              |       |                   |       |              |       |       |       |
| Exercise of stock  options and related tax benefit                             |       | 224,902           |       | 1,049      |       |            |       |              |       |                   |       | 1,049             |       |       |       |
| Retirement of  common stock                                                    |       | (3,800            | )          | (25        | )          |            |       | (20               | )          |                   |       | (45               | )          |       |       |
| Amortization of  stock compensation — ESOP shares                         |       |              |       | 84         |       | 87              |       |              |       |                   |       | 171               |       |       |       |
| Cash dividends-  $.24 per share                                                |       |              |       |       |       |            |       | (1,817            | )          |                   |       | (1,817            | )          |       |       |
| Stock based  compensation expense                                              |       |              |       | 113        |       |            |       |              |       |                   |       | 113               |       |       |       |
| Balance,  September 30, 2007                                                   |       | 7,615,766         |       | $          | 10,948     |            | $          | (1,427            | )          | $                      | 40,739     |              | $          | 7          |       | $ | 50,267 |   |   |   |

 

SeeNotes to Unaudited Condensed Consolidated Financial Statements

4

----

 

COMMUNITYVALLEY BANCORP

CONDENSEDCONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(Inthousands)

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)**                                                         | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                             |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 5,071      |   | $ | 5,592 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                 |       |   |   |
| Provision for  loan losses                                                         |       | 150                                  |       | 675 |   |
| Increase in  deferred loan origination costs                                       |       | (260                                 | )          | (176 | ) |
| Depreciation and  amortization, net                                                |       | 1,505                                |       | 1,218 |   |
| Loss on  disposition of Bank premises and equipment                                |       | 29                                   |       | 11 |   |
| Net decrease in  loans held for sale                                               |       | 68                                   |       | 298 |   |
| Increase in cash  surrender value of bank-owned life insurance, net                |       | (302                                 | )          | (258 | ) |
| Tax benefit from  exercise of stock options                                        |       | (413                                 | )          | (381 | ) |
| Non-cash  compensation expense associated with the ESOP                            |       | 171                                  |       | 404 |   |
| Share based  compensation expense associated with the stock options                |       | 113                                  |       | 129 |   |
| Decrease in  accrued interest receivable and other assets                          |       | (267                                 | )          | (428 | ) |
| Increase in  accrued interest payable and other liabilities                        |       | 1,809                                |       | 308 |   |
| Provision for  deferred tax benefit                                                |       | (1,032                               | )          | (10 | ) |
| Net cash  provided by operating activities                                         |       | 6,642                                |       | 7,382 |   |
|                                                                               |       |                                 |       |   |   |
| Cash flows from  investing activities:                                             |       |                                 |       |   |   |
| (Increase) decrease  in interest-bearing deposits in banks                         |       | (981                                 | )          | 2,972 |   |
| Proceeds from  matured or called available-for-sale investment securities          |       | 1,000                                |       | 1,000 |   |
| Proceeds from  principal payments on available-for-sale investment sercurities     |       | 70                                   |       | 20 |   |
| Proceeds from matured  or called held-to-maturity investment securities            |       | —                               |       | 246 |   |
| Proceeds from  principal payments of held-to-maturity investment securities        |       | 116                                  |       | 176 |   |
| Purchase of  available-for-sale investment securities                              |       | (2,437                               | )          | — |   |
| Purchases of  premises and equipment                                               |       | (4,092                               | )          | (4,365 | ) |
| Proceeds from  sale of premises and equipment                                      |       | 19                                   |       | (2 | ) |
| Net increase in  loans                                                             |       | (26,238                              | )          | (60,797 | ) |
| Net cash used in  investing activities                                             |       | (32,543                              | )          | (60,750 | ) |
|                                                                               |       |                                 |       |   |   |
| Cash flows from  financing activities:                                             |       |                                 |       |   |   |
| Net increase (decrease)  in demand, interest-bearing and savings deposits          |       | 21,576                               |       | (22,034 | ) |
| Net (decrease)  increase in time deposits                                          |       | (13,855                              | )          | 54,446 |   |
| (Repayment)  proceeds from note payable                                            |       | —                               |       | (800 | ) |
| Repayment of  ESOP note payable                                                    |       | (92                                  | )          | (92 | ) |
| Proceeds from  ESOP loan                                                           |       | —                               |       | 354 |   |
| Purchase of  unallocated ESOP shares                                               |       | —                               |       | (354 | ) |
| Payment of cash  dividends                                                         |       | (1,800                               | )          | (1,116 | ) |
| Tax benefit from  the exercise of stock options                                    |       | 413                                  |       | 381 |   |
| Proceeds from  exercise of stock options                                           |       | 638                                  |       | 383 |   |
| Payment of note  payable                                                           |       |                                 |       |   |   |
| Repurchase of  common stock                                                        |       | (44                                  | )          | (937 | ) |
| Proceeds from  issuance of junior subordinated debentures                          |       | 8,248                                |       | — |   |
| Net cash  provided by financing activities                                         |       | 15,084                               |       | 30,231 |   |
|                                                                               |       |                                 |       |   |   |
| Decrease in cash  and cash equivalents                                             |       | (10,817                              | )          | (23,137 | ) |
|                                                                               |       |                                 |       |   |   |
| Cash and cash  equivalents at beginning of year                                    |       | 62,628                               |       | 48,003 |   |
|                                                                               |       |                                 |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                                    | 51,811     |   | $ | 24,866 |   |

 

See Notes to UnauditedCondensed Consolidated Financial Statements

5

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Community Valley Bancorp

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

**1. BASISOF PRESENTATION**

Theaccompanying unaudited condensed consolidated financial statements of CommunityValley Bancorp and subsidiaries (the “Company”) have been prepared pursuant tothe rules and regulations of the Securities Exchange Commission (the “SEC”) andthe instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,certain information and footnote disclosures required by accounting principlesgenerally accepted in the United States of America for annual financialstatements are not included herein, however the Company believes that thedisclosures made are adequate to make the information not misleading. In theopinion of management, all adjustments (which consist solely of normalrecurring adjustments) considered necessary for a fair presentation of theresults for the interim periods presented have been included. These interimconsolidated financial statements should be read in conjunction with thefinancial statements and related notes contained in the Company’s 2006 AnnualReport to Shareholders on Form 10-K.

Thecondensed consolidated financial statements include the accounts of the Companyand its wholly owned subsidiaries, Butte Community Bank (the “Bank”) and BCBInsurance Agency, LLC. All significant inter-company balances and transactionshave been eliminated in consolidation. The Company has also established twowholly-owned unconsolidated subsidiaries, Community Valley Bancorp Trust I andII (the “Trusts”), both of which are Delaware statutory business trusts, formedfor the sole purpose of issuing trust preferred securities. The results ofoperations for the three-month and nine month periods ended September 30, 2007may not necessarily be indicative of the operating results for the full year2007.

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

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

**2.EARNINGS PER SHARE COMPUTATION**

Basicearnings per share are computed by dividing net income by the weighted averagecommon shares outstanding for the period (7,479,267 and 7,394,309 shares forthe three and nine month periods ended September 30, 2007 and 7,302,769 and7,276,991 shares for the three month and nine month periods ended September 30,2006). Diluted earnings per share reflect the potential dilution that couldoccur if outstanding stock options were exercised using the treasury stockmethod. Diluted earnings per share is computed by dividing net income by theweighted average common shares outstanding for the period plus the dilutiveeffect of options (152,285 and 212,600 shares for the three and nine monthperiods ended September 30, 2007 and 399,415 and 406,098 shares for the threeand nine month periods ended September 30, 2006).

**3.COMPREHENSIVE INCOME**

Comprehensiveincome is reported in addition to net income for all periods presented.Comprehensive income is made up of net income plus other comprehensive incomeor loss. The Company’s only source of comprehensive income or loss, iscomprised of changes in unrealized gains or losses, net of taxes, onavailable-for-sale securities, adjusted for the effect of realized gains orlosses on available-for-sale securities, net of taxes.

 

6

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**4. STOCK—BASED COMPENSATION**

The Company issues stock options under twostock-based compensation plans, the Community Valley Bancorp 1997 and 2000Stock Option Plans. The plans require that the option price may not be lessthan the fair market value of the stock at the date the option is granted, andthat the stock must be paid in full at the time the option is exercised. Theoptions expire on a date determined by the Board of Directors, but not laterthan ten years from the date of grant. The vesting period is determined by theBoard of Directors and is generally over five years; however, nonstatutoryoptions granted during 1997 vested immediately. Under the 1997 plan, 22,774shares of common stock remain reserved for issuance to employees, and therelated options are exercisable until their expiration. However, no new optionswill be granted under this plan. Under the Company’s 2000 stock option plan,469,353 shares of common stock remain reserved for issuance to employees anddirectors, of which 65,877 shares are available for future grants.

 

Stockoption activity for the interim 2007 period is summarized below:

 
| **2007**                                            | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------------------|------------|------------|------------|---------------------------------------|------------|------------------------------------------|------------|--------------------------------|------------|
| Outstanding at  January 1                           |       | 719,183    |       | $                                     | 5.97       |                                     | 5.25 years |                           | $          | 7,867,000 |   |
| Exercised                                           |       | (224,902   | )          | $                                     | 2.84       |                                     |       |                           |       |   |
| Granted                                             |       | 1,000      |       | $                                     | 13.95      |                                     |       |                           |       |   |
| Cancelled/Expired                                   |       | (3,154     | )          | $                                     | 9.23       |                                     |       |                           |       |   |
| Outstanding at  September 30                        |       | 492,127    |       | $                                     | 7.79       |                                     | 4.4 years  |                           | $          | 2,717,255 |   |
| Options vested  or expected to vest at September 30 |       | 482,284    |       | $                                     | 7.64       |                                     | 4.3 years  |                           | $          | 2,662,910 |   |
| Exercisable at  September 30                        |       | 388,435    |       | $                                     | 6.47       |                                     | 3.7 years  |                           | $          | 2,575,240 |   |

 

 

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

 

7

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**5.COMMITMENTS AND CONTINGENCIES**

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

In thenormal course of business, there are various outstanding commitments to extendcredit which are not reflected in the financial statements, including loancommitments of $154,665,000 and $186,299,000 and stand-by letters of credit of$6,774,000 and $5,139,000 at September 30, 2007 and December 31, 2006,respectively.

Of theloan commitments outstanding at September 30, 2007, $73,564,000 are real estateconstruction loan commitments that are expected to fund within the next twelvemonths. The remaining commitments primarily relate to revolving lines of creditor other commercial loans, and many of these are expected to expire withoutbeing drawn upon. Therefore, the total commitments do not necessarily representfuture cash requirements. Each loan commitment and the amount and type of collateralobtained, if any, are evaluated on an individual basis. Collateral held varies,but may include real property, bank deposits, debt or equity securities orbusiness assets.

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

## **6.  INCOME TAXES**

 

In June 2006, the Financial Accounting StandardsBoard (FASB) issued Financial Accounting Standards Interpretation No. 48 (FIN48), *Accounting for Uncertainty in IncomeTaxes—an Interpretation of FASB statement No. 109*.  FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes*. FIN 48 alsoprescribes a recognition threshold and measurement standard for the financialstatement recognition and measurement of an income tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosures and transitions. The Company has adopted FIN 48 as ofJanuary 1, 2007.

 

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

 

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

 

****7.  STOCK REPURCHASE****

 

****In March 2007, the Board of Directors of the Companyapproved the adoption of a program to effect repurchases of the Company’scommon stock.  The program allowed forrepurchase of up to approximately $6,000,000 of the Company’s outstandingshares of common stock.  The stockrepurchase plan does not include specific price targets or timetables and maybe suspended at any time by the Board of Directors.****

 

****As of September 30, 2007 the Company had repurchaseda total of $3,800 shares in open market transactions through brokers, at anaverage price of $11.63 for a total cost of $45,000.****

 

 

8

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**8. NEW ACCOUNTING PRONOUNCEMENTS**

 

*Fair Value Option for FinancialAssets and Financial Liabilities*

 

In February 2007, the FASBissued Statement No. 159 (SFAS 159), *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an Amendment of FASBStatement No. 115*.  Thisstandard permits an entity to choose to measure many financial instruments andcertain other items at fair value at specified election dates.  The entity will report unrealized gains andlosses on items for which the fair value option has been elected in earnings ateach subsequent reporting date.  The fairvalue option: (a) may be applied instrument by instrument, with a few exceptions,such as investments otherwise accounted for by the equity method; (b) isirrevocable (unless a new election date occurs); and (c) is applied only toentire instruments and not to portions of instruments.  The provisions of SFAS 159 are effective asof the beginning of an entity’s first fiscal year that begins after November15, 2007.  Management did not elect toearly adopt SFAS 159.

 

*Accounting for DeferredCompensation and Postretirement Benefit Aspects of Collateral AssignmentSplit-Dollar Life Insurance Arrangements*

 

In March 2007, the EmergingIssues Task Force (EITF) reached a final consensus on Issue No. 06-10(EITF 06-10), *Accounting for Collateral AssignmentSplit-Dollar Life Insurance Arrangements.*  EITF 06-10 requires employers to recognize aliability for the post-retirement benefit related to collateral assignmentsplit-dollar life insurance arrangements in accordance with SFAS No. 106or APB Opinion No. 12. EITF 06-10 also requires employers to recognize andmeasure an asset based on the nature and substance of the collateral assignment split-dollarlife insurance arrangement. The provisions of EITF 06-10 are effective for theCompany on January 1, 2008, with earlier application permitted, and are tobe applied as a change in accounting principle either through a cumulative-effectadjustment to retained earnings or other components of equity or net assets inthe statement of financial position as of the beginning of the year ofadoption; or as a change in accounting principle through retrospectiveapplication to all prior periods. The Company does not expect adoption of EITF06-10 to have a significant impact on its consolidated financial statements,results of operations or liquidity.

 

 

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

Thefollowing is Community Valley Bancorp’s (the “Company”) management’s discussionand analysis of the significant changes in balance sheet accounts for September30, 2007 and December 31, 2006 and income and expense accounts for the threeand nine month periods ended September 30, 2007 and 2006. The discussion isdesigned to provide a better understanding of significant trends related to theCompany’s financial condition, results of operations, liquidity, capitalresources and interest rate sensitivity.

Inaddition to the historical information contained herein, this report on Form10-Q contains certain forward-looking statements. The reader of this reportshould understand that all such forward-looking statements are subject to variousuncertainties and risks that could affect their outcome. The Company’s actualresults could differ materially from those suggested by such forward-lookingstatements. Factors that could cause or contribute to such differences include,but are not limited to, variances in the actual versus projected growth inassets, return on assets, loan losses, expenses, rates charged on loans andearned on securities investments, rates paid on deposits, competition effects,fee and other noninterest income earned, general economic conditions,nationally, regionally and in the operating market areas of the Company and itssubsidiaries, changes in the regulatory environment, changes in businessconditions and inflation, changes in securities markets, data processing problems,a decline in real estate values in the Company’s market area,  the effectsof terrorism, including the events of September 11, 2001 and thereafter, andthe conduct of the war on terrorism by the United States and its allies, aswell as other factors. This entire report should be read putting suchforward-looking statements in context.

**General Development of Business**

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

 

9

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

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

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

OnJuly 10, 2007 the Company formed a wholly-owned unconsolidated subsidiary,Community Valley Bancorp Trust II (the “Trust”), a Delaware statutory businesstrust, for the purpose of issuing trust preferred securities.  This trust was formed to issue trust preferredsecurities to replace the Community Valley Bancorp Trust I securities when thefirst redemption period becomes available for the Trust I securities in January2008.

**Critical Accounting Policies**

*General*

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

*Allowance for Loan Losses (ALL)*

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

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

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

 

10

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Forindividually impaired loans, SFAS No. 114 provides guidance on the acceptablemethods to measure impairment. Specifically, SFAS No. 114 states that whena loan is impaired, the Company should measure impairment based on the presentvalue of expected future principal and interest cash flows discounted at theloan’s effective interest rate, except that as a practical expedient, acreditor may measure impairment based on a loan’s observable market price orthe fair value of collateral, if the loan is collateral dependent. Whendeveloping the estimate of future cash flows for a loan, the Company considersall available information reflecting past events and current conditions,including the effect of existing environmental factors.

*Loan Sales and Servicing*

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

*Stock-Based Compensation Expense*

OnJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards No. 123(R),*Share Based Payment*(“SFAS 123(R)”). Under SFAS No.123(R), compensation expense is recognized foroptions granted prior to the adoption date in an amount equal to the fair valueof the unvested amounts over their remaining vesting period, based on the grantdate fair value estimated in accordance with SFAS No. 123, *Accountingfor Stock Based Compensation* and compensation expense for all share based payments granted afteradoption based on the grant date fair values estimated in accordance with SFASNo. 123(R) . The estimates of the grant date fair values are based on an optionpricing model that uses assumptions based on the expected option life, thelevel of estimated forfeitures, expected stock volatility and the risk-freeinterest rate. The calculation of the fair value of share based payments is bynature inexact, and represents management’s best estimate of the grant datefair value of the share based payments.  See Note 4 tothe Unaudited Condensed Consolidated Financial Statements for additionalinformation related to stock-based compensation.

 

*Revenue recognition*

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

*IncomeTaxes*

TheCompany accounts for income taxes under the asset and liability method. Underthe asset and liability method, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases. Deferred tax assets and liabilities are measuredusing currently 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 berealized and our net income will be reduced. Effective January 1, 2007 theCompany adopted Financial Accounting Standards Interpretation No. 48(FIN 48), *Accounting for Uncertainty inIncome Taxes—an Interpretation of FASB statement No. 109*.   TheCompany previously recognized income tax positions based on management’sestimate of whether it is reasonably possible that a liability has beenincurred for unrecognized income tax benefits by applying FASB Statement No. 5,*Accounting for Contingencies*.  The provisions of FIN 48 have been applied toall tax positions of the Company as of January 1, 2007.

 

 

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**Overview**

TheCompany recorded net income of $2,178,000 for the quarter ended September 30,2007, which was a 25.7% increase from the $1,733,000 reported for the sameperiod of 2006. Diluted earnings per share for the third quarter of 2007 were$0.29, compared to the $0.23 recorded in the third quarter of 2006. Theannualized return on average equity (ROAE) and annualized return on averageassets (ROAA) for the third quarter of 2007 were 17.36% and 1.51%,respectively, as compared to 14.98% and 1.31%, respectively, for the sameperiod in 2006. The primary reasons for the increase in net income for thequarter ended September 30, 2007 was the gain realized from the sale ofmortgage servicing rights which resulted in a pre tax net gain of approximately$730,000. We experienced a compression of the net interest margin of 94 basispoints as yields on earning assets decreased 45 basis points while rates paidon interest bearing liabilities increased 57 basis points.  This was partially mitigated by the 8.6%increase in the volume of average earning assets.  Also contributing to the decrease in netincome was  the slowdown in the realestate construction market and increased non-interest expenses associated withnew branches in Redding and Anderson as well as the new administrativeheadquarters in Chico. These increases were partially offset by the reductionin the provision for loan losses and higher non interest income, primarily fromthe gain noted above and services charges on deposit accounts.

Netincome for the nine months ended September 30, 2007 was $5,071,000 which was adecrease of 9.3% from the $5,592,000 reported for the same period of 2006.Diluted earnings per share for the nine months ended September 30, 2007 were$0.67, compared to the $0.73 recorded for the same period 2006. The annualizedreturn on average equity (ROAE) and annualized return on average assets (ROAA)for the nine months ended 2007 were 14.15% and 1.19%, respectively, as comparedto 16.86% and 1.46%, respectively, for the same period in 2006. The primaryreasons for the decrease in net income for the nine month period is generallyconsistent with the discussion above for the third quarter as the net interestmargin decreased 93 basis points from September 30, 2006 and increases in noninterest expenses, partially offset by the gain on the sale of the mortgageservicing rights and the increases in service charges.

Totalassets of the Company increased by $22,278,000 4.1% from $550,037,000 atDecember 31, 2006 to $572,315,000 at September 30, 2007. Net loans increased to$469,355,000, up $26,315,000, 5.9% from the ending balances on December 31,2006. Deposit balances at September 30, 2007 increased to $492,577,000 up$7,721,000, 1.6% from December 31, 2006.

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

**Table One:  Components of Net Income**

** **

| ** **                                                       | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(In thousands, except percentages)**                           | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                             |       |                                  |       |                                 |       |   |   |   |   |
| Net interest  income                                             |       | $                                     | 7,580      |                                 | $          | 8,109 |   | $ | 22,312 |   | $ | 23,551 |   |
| Provision for  loan losses                                       |       | (75                                   | )          | (225                                 | )          | (150 | ) | (675 | ) |
| Non-interest  income                                             |       | 2,653                                 |       | 1,523                                |       | 6,341 |   | 4,884 |   |
| Non-interest  expense                                            |       | (6,569                                | )          | (6,270                               | )          | (19,933 | ) | (18,065 | ) |
| Provision for  income taxes                                      |       | (1,411                                | )          | (1,404                               | )          | (3,499 | ) | (4,103 | ) |
|                                                             |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                                       |       | $                                     | 2,178      |                                 | $          | 1,733 |   | $ | 5,071 |   | $ | 5,592 |   |
|                                                             |       |                                  |       |                                 |       |   |   |   |   |
| Average total  assets (In millions)                              |       | $                                     | 573.6      |                                 | $          | 523.4 |   | $ | 568.8 |   | $ | 512.6 |   |
| Net income  (annualized) as a percentage of average total assets |       | 1.51                                  | %          | 1.31                                 | %          | 1.19 | % | 1.46 | % |

 

 

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**Results of Operations**

**Net Interest Income and Net Interest Margin**

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

The Company’s net interestmargin was 5.80% for the three months ended September 30, 2007 and 5.82% forthe nine month period ending September 30, 2007 compared to 6.74% and 6.75% forthe same periods in the prior year.  Netinterest income decreased $529,000 (6.5%) for the third quarter of 2007compared to the same period in 2006.  Net interest income decreased$1,239,000 (5.3%) for the nine months ended September 30, 2007 over the sameperiod in 2006. The primary reason for this decrease was the compression of thenet interest margin, and the growth in interest bearing liabilities, partiallyoffset by the growth in the average earning assets in the current periodscompared to the same periods in 2006.

Theaverage balances of interest bearing liabilities of $434,870,000 were $49,851,000(12.9%) higher in the third quarter of 2007 versus the same quarter in2006.  As interest bearing liability balances increased, rates paid onthese liabilities also increased by 57 basis points on a quarter over quarterbasis.  As a result of both the increase in  interest rates and the volume and mix ofinterest bearing liabilities, interest expense was $986,000 (38.5%) higher inthe third quarter versus the same period in 2006.  The average balances of interest bearingliabilities were $59,437,000 (15.9%) higher in the nine-month period endedSeptember 30, 2007 versus the same period in 2006.  Rates paid on interest bearing liabilitiesincreased 88 basis points compared to the nine month period ended September 30,2006.

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

TableThree, Analysis of Volume and Rate changes on Net Interest Income, analyzes thechanges in net interest income for the three and nine month periods endedSeptember 30, 2007 compared to September 30, 2006 that are reported in TableTwo.  The analysis shows the impact ofvolume and rate changes on the major categories of assets and liabilitiesbetween these periods.  The tableexplains what portion of the difference or variance in interest income orexpense between these periods for each major category of assets or liabilitiesis due to changes in the balances (volume) or to changes in rates.

Forexample, Table Two shows that interest income from loans for the three monthsended September 30, 2007 decreased by $169,000 from $10,414,000 at September30, 2006 to $10,245,000.  The averagebalance of loans increased from $455,586,000 to $465,502,000 and the interestrate earned decreased from 9.17% to 8.73%. Table Three shows the $169,000 decrease in interest income from loanswas actually the result of a $229,000 increase in interest income from thehigher balance of loans and $398,000 from the decrease in yields earned in thethird quarter of 2007 compared to the same period in 2006.

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

 

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** **

**TableTwo:  Analysis of Net Interest Margin**

** **
| **Three Months Ended September 30,**         | ** ** | **2007**        | ** ** | **2006**     | ** ** |
|----------------------------------------------|------------|-----------------|------------|--------------|------------|
| **(In thousands, except  percentages)**      | ** ** | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield** | ** ** | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield** | ** ** |
| Assets:                                      |       |            |       |         |       |   |   |   |   |   |   |   |   |
| Earning assets                               |       |            |       |         |       |   |   |   |   |   |   |   |   |
| Loans                                        |       | $               | 465,502    |         | $          | 10,450 |   | 8.91 | % | $ | 455,586 |   | $ | 10,414 |   | 9.17 | % |
| Taxable  investment securities               |       | 3,912           |       | 53           |       | 5.38 | % | 3,860 |   | 37 |   | 3.84 | % |
| Tax-exempt  investment securities            |       | 1,350           |       | 16           |       | 4.70 | % | 1,349 |   | 17 |   | 5.05 | % |
| Federal funds  sold                          |       | 40,475          |       | 518          |       | 5.08 | % | 12,510 |   | 166 |   | 5.32 | % |
| Interest bearing  deposits in banks          |       | 7,015           |       | 90           |       | 5.09 | % | 3,783 |   | 36 |   | 3.82 | % |
| Total earning  assets                        |       | 518,254         |       | 11,127       |       | 8.52 | % | 477,088 |   | 10,670 |   | 8.97 | % |
| Cash & due  from banks                   |       | 16,860          |       |         |       |   |   | 18,109 |   |   |   |   |   |
| Other assets                                 |       | 38,484          |       |         |       |   |   | 28,213 |   |   |   |   |   |
| Average total  assets                        |       | $               | 573,598    |         |       |   |   |   | $ | 523,410 |   |   |   |   |   |
|                                         |       |            |       |         |       |   |   |   |   |   |   |   |   |
| Liabilities  & Shareholders’ Equity |       |            |       |         |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:               |       |            |       |         |       |   |   |   |   |   |   |   |   |
| NOW & MMDA                               |       | $               | 143,917    |         | $          | 369 |   | 1.02 | % | $ | 170,598 |   | $ | 446 |   | 1.05 | % |
| Savings                                      |       | 119,332         |       | 950          |       | 3.16 | % | 33,934 |   | 42 |   | 0.50 | % |
| Time deposits                                |       | 153,988         |       | 1,885        |       | 4.86 | % | 171,120 |   | 1,858 |   | 4.36 | % |
| Other borrowings                             |       | 17,633          |       | 343          |       | 7.72 | % | 9,367 |   | 215 |   | 9.21 | % |
| Total interest  bearing liabilities          |       | 434,870         |       | 3,547        |       | 3.24 | % | 385,019 |   | 2,561 |   | 2.67 | % |
| Demand deposits                              |       | 87,726          |       |         |       |   |   | 87,974 |   |   |   |   |   |
| Other  liabilities                           |       | 1,258           |       |         |       |   |   | 4,521 |   |   |   |   |   |
| Total  liabilities                           |       | 523,854         |       |         |       |   |   | 477,514 |   |   |   |   |   |
| Shareholders’  equity                   |       | 49,744          |       |         |       |   |   | 45,896 |   |   |   |   |   |
| Average  liabilities and equity              |       | $               | 573,598    |         |       |   |   |   | $ | 523,410 |   |   |   |   |   |
|                                         |       |            |       |         |       |   |   |   |   |   |   |   |   |
| Net interest  income & margin            |       |            |       | $            | 7,580      |   | 5.80 | % |   |   | $ | 8,109 |   | 6.74 | % |

 

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(1)             Loan interest includes loan fees of$470,000 and $664,000 during the three months ended September 30, 2007 andSeptember 30, 2006, 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 bydividing net interest income by total average earning assets.

(4)             Average yield is calculated based onactual days in quarter (91 for September 30, 2007 and 91 for September 30,2006) and annualized to actual days in year (365 for 2007 and 2006).

 

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| **Nine months ended September 30,**          | ** ** | **2007**        | ** ** | **2006**     | ** ** |
|----------------------------------------------|------------|-----------------|------------|--------------|------------|
| **(In thousands, except percentages)**       | ** ** | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield** | ** ** | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield** | ** ** |
| Assets:                                      |       |            |       |         |       |   |   |   |   |   |   |   |   |
| Earning assets                               |       |            |       |         |       |   |   |   |   |   |   |   |   |
| Loans                                        |       | $               | 457,251    |         | $          | 30,539 |   | 8.93 | % | $ | 440,858 |   | $ | 29,203 |   | 8.86 | % |
| Taxable  investment securities               |       | 3,781           |       | 162          |       | 5.74 | % | 4,607 |   | 139 |   | 4.03 | % |
| Tax-exempt  investment securities            |       | 1,376           |       | 49           |       | 4.72 | % | 1,369 |   | 49 |   | 4.79 | % |
| Federal funds  sold                          |       | 46,909          |       | 1,815        |       | 5.17 | % | 14,697 |   | 521 |   | 4.74 | % |
| Interest bearing  deposits in banks          |       | 3,641           |       | 139          |       | 5.09 | % | 4,788 |   | 143 |   | 3.99 | % |
| Total earning  assets                        |       | 512,958         |       | 32,703       |       | 8.52 | % | 466,319 |   | 30,055 |   | 8.62 | % |
| Cash & due  from banks                   |       | 17,223          |       |         |       |   |   | 17,134 |   |   |   |   |   |
| Other assets                                 |       | 38,611          |       |         |       |   |   | 29,167 |   |   |   |   |   |
| Average total  assets                        |       | $               | 568,792    |         |       |   |   |   | $ | 512,620 |   |   |   |   |   |
|                                         |       |            |       |         |       |   |   |   |   |   |   |   |   |
| Liabilities  & Shareholders’ Equity |       |            |       |         |       |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:               |       |            |       |         |       |   |   |   |   |   |   |   |   |
| NOW & MMDA                               |       | $               | 148,388    |         | $          | 1,163 |   | 1.05 | % | $ | 178,563 |   | $ | 1,308 |   | 0.98 | % |
| Savings                                      |       | 113,902         |       | 2,764        |       | 3.24 | % | 35,470 |   | 130 |   | 0.49 | % |
| Time deposits                                |       | 158,941         |       | 5,698        |       | 4.79 | % | 150,388 |   | 4,462 |   | 3.97 | % |
| Other borrowings                             |       | 11,914          |       | 766          |       | 8.60 | % | 9,287 |   | 604 |   | 8.70 | % |
| Total interest  bearing liabilities          |       | 433,145         |       | 10,391       |       | 3.21 | % | 373,708 |   | 6,504 |   | 2.33 | % |
| Demand deposits                              |       | 80,870          |       |         |       |   |   | 88,489 |   |   |   |   |   |
| Other  liabilities                           |       | 10,116          |       |         |       |   |   | 6,067 |   |   |   |   |   |
| Total  liabilities                           |       | 524,131         |       |         |       |   |   | 468,264 |   |   |   |   |   |
| Shareholders’  equity                   |       | 44,661          |       |         |       |   |   | 44,356 |   |   |   |   |   |
| Average  liabilities and equity              |       | $               | 568,792    |         |       |   |   |   | $ | 512,620 |   |   |   |   |   |
|                                         |       |            |       |         |       |   |   |   |   |   |   |   |   |
| Net interest  income & margin            |       |            |       | $            | 22,312     |   | 5.82 | % |   |   | $ | 23,551 |   | 6.75 | % |

 

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(1)             Loan interest includes loan fees of$1,507,000 and $1,909,000 during the nine months ended September 30, 2007 andSeptember 30, 2006, 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 bydividing net interest income by total average earning assets.

(4)             Average yield is calculated based onactual days in quarter (181 for September 30, 2007 and September 30, 2006) andannualized to actual days in year (365 for 2007 and 2006).

 

TableThree sets forth a summary of the changes in interest income and interestexpense from changes in average asset and liability balances (volume) andchanges in average interest rates.  On a quarter over quarter basis forthe period ending September 30, 2007 net interest income has decreased $529,000over the same time period in 2006.  Interest income from earning assetshas increased by $457,000. Changes in the volume of earning assets, primarilyloans, have resulted in an increase in interest income of $636,000 whileinterest income from changes in rates has decreased by $384,000.  Interestexpense for the third quarter of 2007 was $986,000 more than the same period in2006.  Changes in the volume of interestbearing liabilities, primarily the change in mix with an increase in balancesof savings deposits and other borrowings and decreases in NOW, MMDA and timedeposits, has resulted in a net increase of interest expense of $41,000.  Increases in average rates paid, primarilysavings and time deposits have resulted in an interest expense increase of$945,000.

On ayear-to-date basis through September 30, 2007, net interest income hasdecreased $1,239,000 over the total at September 30, 2006.  Interest income from earning assets hasincreased by $2,648,000.  Changes in thevolume of earning assets, primarily loans and Federal funds sold have resultedin an increase in interest income of $2,169,000 while interest income fromchanges in rates has increased by $479,000.  Interest expense for the nine month period ending September 30, 2007 was$3,887,000 more than the total at September 30, 2006.  Changes in the volume of interest bearingliabilities, primarily the increase in balances of savings and time depositsand other borrowings, have resulted in a net increase of interest expense of$491,000.  Increases in average ratespaid, primarily on savings and time deposits have resulted in an interestexpense increase of $3,396,000.

 

15

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**TableThree:  Analysis of Volume and Rate Changes on Net Interest Income andExpenses**

 

| **Three Months Ended September 30, 2007 over 2006** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|-----------------|------------|
| **(In thousands)**                                  | ** ** | **Volume** | ** ** | **Rate**   | ** ** | **Net Change**  | ** ** |
| Increase  (decrease) due to change in:              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** ** |
| Interest-earning  assets:                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** ** |
| Net loans (1)                                       |       | 229        |       | (193       | )          | 36              |       |
| Taxable  investment securities                      |       | 1          |       | 15         |       | 16              |       |
| Tax exempt  investment securities (2)               |       | 0          |       | (1         | )          | (1              | )          |
| Federal funds  sold                                 |       | 375        |       | (23        | )          | 352             |       |
| Interest bearing  deposits in banks                 |       | 31         |       | 23         |       | 54              |       |
| Total                                               |       | 636        |       | (179       | )          | 457             |       |
|                                                |       |       |       |       |       |            |       |
| Interest-bearing  liabilities:                      |       |       |       |       |       |            |       |
| NOW and MMDA  deposits                              |       | (71        | )          | (6         | )          | (77             | )          |
| Savings deposits                                    |       | 108        |       | 800        |       | 908             |       |
| Time deposits                                       |       | (188       | )          | 215        |       | 27              |       |
| Other borrowings                                    |       | 192        |       | (64        | )          | 128             |       |
| Total                                               |       | 41         |       | 945        |       | 986             |       |
| Interest  differential                              |       | 595        |       | (1,124     | )          | (529            | )          |
|                                                |       |       |       |       |       |            |       |
| **Nine  Months Ended September 30, 2007 over 2006** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** ** |
| **(In  thousands)**                                 | ** ** | **Volume** | ** ** | **Rate**   | ** ** | **Net  Change** | ** ** |
| Increase  (decrease) due to change in:              |       |       |       |       |       |            |       |
| Interest-earning  assets:                           |       |       |       |       |       |            |       |
| Net loans (1)                                       |       | 1,086      |       | 250        |       | 1,336           |       |
| Taxable  investment securities                      |       | (25        | )          | 48         |       | 23              |       |
| Tax exempt  investment securities (2)               |       | 0          |       | (1         | )          | (0              | )          |
| Federal funds  sold                                 |       | 1,142      |       | 152        |       | 1,294           |       |
| Interest bearing  deposits in banks                 |       | (34        | )          | 30         |       | (4              | )          |
| Total                                               |       | 2,169      |       | 479        |       | 2,648           |       |
|                                                |       |       |       |       |       |            |       |
| Interest-bearing  liabilities:                      |       |       |       |       |       |            |       |
| NOW and MMDA  deposits                              |       | (221       | )          | 76         |       | (145            | )          |
| Savings deposits                                    |       | 287        |       | 2,347      |       | 2,634           |       |
| Time deposits                                       |       | 254        |       | 982        |       | 1,236           |       |
| Other borrowings                                    |       | 171        |       | (9         | )          | 162             |       |
| Total                                               |       | 491        |       | 3,396      |       | 3,887           |       |
| Interest  differential                              |       | 1,678      |       | (2,917     | )          | (1,239          | )          |

 

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(1)             The average balance of non-accruing loansis not significant as a percentage of total loans and, as such, has beenincluded in net loans.

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

(3)             The rate/volume variance has beenincluded in the rate variance.

 

16

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**Non-interest Income**

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

**Table Four:  Components ofNon-interest Income**

| **Three months ended September 30,** | ** ** | **2007** | ** ** | **% of Avg.  Assets**  | ** ** | **2006** | ** ** | **% of Avg.  Assets**  | ** ** |
|--------------------------------------|------------|----------|------------|------------------------|------------|----------|------------|------------------------|------------|
| Service charges  on deposit accounts |       | $        | 928        |                   | 0.63       | %        | $          | 726                    |       | 0.55 | % |
| Loan servicing  fees                 |       | 125      |       | 0.09                   | %          | 104      |       | 0.08                   | %          |
| Fees -  alternative investment sales |       | 108      |       | 0.07                   | %          | 80       |       | 0.06                   | %          |
| Merchant fee  income                 |       | 106      |       | 0.07                   | %          | 101      |       | 0.08                   | %          |
| Gain on the sale  of loans           |       | 206      |       | 0.14                   | %          | 180      |       | 0.14                   | %          |
| Other                                |       | 1,180    |       | 0.80                   | %          | 332      |       | 0.25                   | %          |
| Total  non-interest income           |       | $        | 2,653      |                   | 1.80       | %        | $          | 1,523                  |       | 1.16 | % |
|                                 |       |     |       |                   |       |     |       |                   |       |
|                                 |       |     |       |                   |       |     |       |                   |       |
| **Nine  months ended September 30,** | ** ** | **2007** | ** ** | **% of  Avg.  Assets** | ** ** | **2006** | ** ** | **% of  Avg.  Assets** | ** ** |
| Service charges  on deposit accounts |       | $        | 2,526      |                   | 0.59       | %        | $          | 1,983                  |       | 0.39 | % |
| Loan servicing  fees                 |       | 334      |       | 0.08                   | %          | 315      |       | 0.06                   | %          |
| Fees -  alternative investment sales |       | 262      |       | 0.06                   | %          | 235      |       | 0.05                   | %          |
| Merchant fee  income                 |       | 306      |       | 0.07                   | %          | 288      |       | 0.06                   | %          |
| Gain on the sale  of loans           |       | 936      |       | 0.22                   | %          | 1,112    |       | 0.22                   | %          |
| Other                                |       | 1,977    |       | 0.46                   | %          | 951      |       | 0.19                   | %          |
| Total  non-interest income           |       | $        | 6,341      |                   | 1.48       | %        | $          | 4,884                  |       | 0.97 | % |

 

Non-interestincome increased by $1,130,000 (74.3%) to $2,653,000 for the three months endedSeptember 30, 2007 as compared to $1,523,000 for the three months endedSeptember 30, 2006.  Increases in non-interest income were realized infees from service charges (up 28.0%), loan servicing fees (up 20.2%), fees fromalternative investment sales (up 35.0%), merchant fee income (up 5.0%), gainson the sale of loans (up 14.4%), and other income (up 255.4%).    The increase in service charge incomewas the result of additional deposit accounts opened during the third quarterthroughout our system of branches. Loan servicing fees increased slightlyas the volume of loans sold in the secondary market for which the Companyretains servicing rights increased. The Alternative Investment Department,which sells third-party mutual funds and annuities, experienced an increase infees of $28,000 due to a higher volume of sales during the third quarter.Merchant fee income was higher in the third quarter due to an increase in thevolume of credit card sales.  Gains onsales of loans into the secondary market increased compared to the thirdquarter of 2006 as the loans sold by our Government Lending Divisionincreased.  Increases in the “Other”category were a result of  the gainrealized on the sale of mortgage servicing rights discussed earlier whichresulted in a pre tax net gain of approximately $730,000 as well as   increased fees from ATM transactions,commissions earned on sales of insurance policies and fees paid for payrollprocessing through our Business Services Division.

Non-interestincome increased by $1,457,000 (29.8%) to $6,341,000 for the nine months endedSeptember 30, 2007 as compared to $4,884,000 for the nine months endedSeptember 30, 2006.  Increases in non-interest income were realized infees from service charges (up 27.4%), loan servicing fees (up 6.0%), fees fromalternative investment sales        (up11.5%), merchant fee income (up 6.3%) and other income (up 108.9%).    There was a decrease in the gains onthe sale of loans (down 18.8%). The increase in service charge income was theresult of additional deposit accounts opened during the first nine months ofthe year throughout our system of branches.  Loan servicing fees increasedslightly as the volume of Government guaranteed loans sold in the secondary marketfor which the Company retains servicing rights increased.  Fees from the sales of alternativeinvestments and merchant fee income increased due to a higher volume of salesduring the first nine months of 2007 as compared to the same time frame in 2006.  Increases in the “Other” category were aresult of the sale of the mortgage servicing rights mentioned above as well asthe increases in fees from ATM transactions, commissions earned on sales ofinsurance policies and fees paid for payroll processing through our BusinessServices Division.    Gains on salesof loans into the secondary market decreased during the first nine months of2007 as compared to the same period in 2006 as the loans sold by our Governmentand Mortgage Lending Divisions were of a lesser total value generating lessincome.

 

17

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**Non-interest Expense**

Non-interestexpense increased $299,000 (4.8%) from $6,270,000 in the third quarter of 2006to $6,569,000 in the third quarter of 2007.  Salary and employee benefitsincreased slightly by $23,000 (0.60%) resulting from normal cost of livingraises, commissions paid and staffing additions made during the year as theCompany continues to grow.  Benefit costs and employer taxes increasedcommensurate with the salaries. Bonus accruals which were less than thebudgeted amount also contributed to the lower employee expenses. On a quarterover quarter basis, occupancy expenses were higher by $83,000 (21.1%) which isrelated to additional building depreciation, utilities, janitorial services andproperty taxes.  Furniture and equipment expense was $586,000 in the thirdquarter of 2007 compared to $483,000 in the same period of 2006, representing a21.3% increase.  This increase relates to the depreciation recorded on thenew administrative headquarters, the purchase of new technology software andhardware as well as additional furniture and fixtures associated with theopening of the second Redding branch and the branch in Anderson.  Other expenses increased $90,000 from$1,590,000 to $1,680,000 in the third quarter of 2007 versus the third quarterof 2006.  This increase was attributed tohigher telephone, postage and insurance costs as well as increased advertisingand promotion costs associated with the new offices.

Non-interestexpense increased $1,868,000 (10.3%) from $18,065,000 in the first nine monthsof 2006 to $19,933,000 in the first nine months of 2007.  Salaries and benefits increased by $487,000(4.3%) due to cost of living raises added benefit costs and employer taxesassociated with the staffing additions made during the year as the Companycontinues to grow.  On a year over yearbasis, full time equivalent employees increased by 6 to 264.  Occupancy expense was up $386,000 (37.4%)from the first nine months of 2006 to the first nine months of 2007 due toincreases in utilities, landscape maintenance, janitorial services and propertytaxes. Furniture and equipment expense was up $103,000 (21.3%) from the firstnine months of 2006 to the first nine months of 2007 due to the new facilitiesdiscussed above and  increases indepreciation from purchases of equipment and associated maintenancecontracts.  Other expenses increased by$752,000 (17.4%).  This increase wasattributable to higher telephone, postage and insurance costs as well asincreased advertising and promotion costs.

**Provision for Loan Losses**

TheCompany allocated $75,000 to the provision for loan losses in the third quarterof 2007.   In the third quarter of 2006the Company provided $225,000 for loan losses.  Net loan charge-offs forthe third quarter of 2007 and 2006 were $11,000 and $36,000 respectively.  For the first nine months of 2007, theCompany made provisions for loan losses of $150,000 which compared to $675,000for the first nine months of 2006.  Netloan charge-offs for the nine months ended September 30, 2007 and September 30,2006 were $19,000 and $45,000 respectively.  Management assesses its loan quality on a monthly basis to maintain anadequate allowance for loan losses.  The Company’s loan portfoliocomposition, non-performing assets and allowance for loan losses are furtherdiscussed under the Balance Sheet Analysis section below.

**Provision for Income Taxes**

Theeffective tax rate for the third quarter and first nine months of 2007 remainedfairly consistent at 39.3% and 40.8%, versus 44.8% and 42.3% for the sameperiods in 2006.

**Balance Sheet Analysis**

TheCompany’s total assets were $572,315,000 at September 30, 2007 up $22,278,000(4.1%) from $550,037,000 at December 31, 2006.  On a year over year basis,the average balance of total assets for the nine months ended September 30,2007 was $568,792,000, which represents an increase of $56,172,000 (11.0%) overthe $512,620,000 during the nine-month period ended September 30, 2006.

 

18

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**Loans**

TheCompany concentrates its lending activities in the following principal areas:1) commercial; 2) real estate mortgage; 3) residential real estate and realestate construction (both commercial and residential); 4) agriculture; and 5)consumer loans.  Commercial and residential real estate loans aregenerally secured by improved property, with original maturities of 3-10years.  At September 30, 2007, these principal areas accounted forapproximately 15%, 48%, 18%, 8% and 11%, respectively, of the Company’s loanportfolio.  The mix at December 31, 2006 was 15%, 46%, 23%, 6% and10%.  Continuing strong economic activity in the Company’s market area,new borrowers developed through the Company’s marketing efforts and creditlines expanded to existing borrowers, offset by normal loan pay-downs andpayoffs, resulted in net increases in loan balances from December 31, 2006 forcommercial loans of $7,511,000 or (11.5%), commercial and residential mortgagereal estate loans of $18,930,000 or (9.1%), agricultural loans of $10,938,000or (42.5%) ,consumer loans of $7,781,000 or (17.8%).  Real estate construction loans decreased$18,939,000 or (17.9%) over the same period.  Table Five below summarizesthe composition of the loan portfolio as of September 30, 2007 and December 31,2006.

**Table Five: Loan Portfolio Composition**

| **(In thousands)**         | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| Commercial                 |       | $                      | 72,752     |                  | $          | 65,241 |   |
| Real estate:               |       |                   |       |                  |       |
| Mortgage                   |       | 227,032                |       | 208,102               |       |
| Construction               |       | 86,510                 |       | 105,449               |       |
|                       |       |                   |       |                  |       |
| Agriculture                |       | 36,683                 |       | 25,745                |       |
| Consumer                   |       | 51,570                 |       | 43,789                |       |
| Total loans                |       | 474,547                |       | 448,326               |       |
| Allowance for  loan losses |       | (5,372                 | )          | (5,274                | )          |
| Deferred loan  fees, net   |       | (542                   | )          | (801                  | )          |
| Total net loans            |       | $                      | 468,633    |                  | $          | 442,251 |   |

 

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

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

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

 

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**Risk Elements**

TheCompany assesses and manages credit risk on an ongoing basis through a totalcredit culture that emphasizes excellent credit quality, extensive internalmonitoring and established formal lending policies.  Additionally, theCompany contracts with an outside loan review consultant to periodically reviewthe existing loan portfolio.  Management believes its ability to identifyand assess risk and return characteristics of the Company’s loan portfolio iscritical for profitability and growth.  Management strives to continue itsemphasis on credit quality in the loan approval process, active creditadministration and regular monitoring.  With this in mind, management hasdesigned and implemented a comprehensive loan review and grading system thatfunctions to continually assess the credit risk inherent in the loan portfolio.

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

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

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

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

Inmanagement’s judgment, a concentration exists in real estate loans, whichrepresented approximately 66.1% of the Company’s loan portfolio at September30, 2007, which is slightly less, on a percentage basis, than the 69.9%concentration level at December 31, 2006.  Management believes theconcentration to have no more than the normal risk of collectability; however,a substantial decline in the economy in general, or a decline in real estatevalues in the Company’s primary market areas in particular, could have anadverse impact on the collectability of these loans and require an increase inthe provision for loan losses which could adversely affect the Company’s futureprospects, results of operations, profitability and stock price. Management believes that its lending policies and underwriting standards willtend to minimize losses in an economic downturn; however, there is no assurancethat losses will not occur under such circumstances.  The Company’s loanpolicies and underwriting standards include, but are not limited to, thefollowing: (1) maintaining a thorough understanding of the Company’s servicearea and originating a significant majority of its loans within that area, (2)maintaining a thorough understanding of borrowers’ knowledge, capacity, andmarket position in their field of expertise, (3) basing real estate loanapprovals not only on market demand for the project, but also on the borrowers’capacity to support the project financially in the event it does not perform toexpectations (whether sale or income performance), and (4) maintainingconforming and prudent loan to value and loan to cost ratios based onindependent outside appraisals and ongoing inspection and analysis by theCompany’s lending officers.  The Companydoes not participate in any sub-prime lending activities.

**Nonaccrual, Past Due and Restructured Loans**

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

 

20

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Table Six below sets forth nonaccrual loans as ofSeptember 30, 2007 and December 31, 2006.  There were no loans past due 90 days or more and still accruing interestat December 31, 2006.

 

**Table Six:  Non-PerformingLoans**

 

| **(In thousands)**          | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------|------------|------------------------|------------|-----------------------|------------|
| Nonaccrual:                 |       |                   |       |                  |       |
| Commercial                  |       | $                      | —     |                  | $          | 1,502 |   |
| Real estate                 |       | 233                    |       | 780                   |       |
| Consumer and  other         |       | —                 |       | —                |       |
| Total  non-performing loans |       | $                      | 233        |                  | $          | 2,282 |   |

 

At September 30, 2007,there was one non-performing loan which was considered to be impaired. This loan is secured by real estate is in the process of foreclosure.  Management does not foresee a loss from this loan and there was no specificvaluation allowance on this impaired loan. There were no loan concentrations inexcess of 10% of total loans not otherwise disclosed as a category of loans asof September 30, 2007 or December 31, 2006.  Management is not aware ofany potential problem loans, which were accruing and current at September 30,2007, where serious doubt exists as to the ability of the borrower to complywith the present repayment terms.

 

**Allowance for Loan Losses Activity**

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

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

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

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

TheBoard of Directors of the Bank reviews the adequacy of the allowance for loanlosses at least quarterly to include consideration of the relative risks in theportfolio and current economic conditions.  The allowance is adjustedbased on that review if, in the judgment of the loan committee and management,changes are warranted.  The allowance for loan losses totaled $5,372,000or 1.15% of total loans at September 30, 2007 and $5,274,000 or 1.18% atDecember 31, 2006.  Net charge-offs for the quarter and nine month periodended September 30, 2007 were $10,000 and $18,000 respectively.

 

21

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

 

**Table Seven: Allowance for Loan Losses**
| ** **                                                                | ** ** | **Three Months  Ended  September 30,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| **(In thousands, except for percentages)**                                | ** ** | **2007**                               | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Average loans  outstanding                                                |       | $                                      | 465,502    |                                  | $          | 455,586 |   | $ | 457,251 |   | $ | 440,858 |   |
|                                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Allowance for  possible loan losses at beginning of period                |       | $                                      | 5,305      |                                  | $          | 5,184 |   | $ | 5,274 |   | $ | 4,716 |   |
|                                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Loans charged  off:                                                       |       |                                   |       |                                  |       |   |   |   |   |
| Commercial                                                                |       | (8                                     | )          | (35                                   | )          | (8 | ) | (35 | ) |
| Real estate                                                               |       |                                   |       |                                  |       | (8 | ) |   |   |
| Consumer                                                                  |       | (3                                     | )          | (1                                    | )          | (3 | ) | (11 | ) |
| Total                                                                     |       | (11                                    | )          | (36                                   | )          | (19 | ) | (46 | ) |
| Recoveries of  loans previously charged off:                              |       |                                   |       |                                  |       |   |   |   |   |
| Commercial                                                                |       |                                   |       |                                  |       |   |   |   |   |
| Real estate                                                               |       |                                   |       |                                  |       |   |   |   |   |
| Consumer                                                                  |       |                                   |       |                                  |       |   |   | 1 |   |
| Total                                                                     |       | —                                 |       | —                                |       | — |   | 1 |   |
| Net loan charge  offs                                                     |       | (11                                    | )          | (36                                   | )          | (19 | ) | (45 | ) |
|                                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Additions to  allowance charged to operating expenses                     |       | 75                                     |       | 225                                   |       | 150 |   | 675 |   |
| Allowance for  unfunded loan commitments                                  |       | 3                                      |       | (5                                    | )          | (33 | ) | 22 |   |
| Allowance for  loan losses at end of period                               |       | $                                      | 5,372      |                                  | $          | 5,368 |   | $ | 5,372 |   | $ | 5,368 |   |
|                                                                      |       |                                   |       |                                  |       |   |   |   |   |
| Ratio of net  charge-offs to average loans outstanding                    |       | 0.00                                   | %          | 0.00                                  | %          | 0.00 | % | 0.00 | % |
| Provision for  possible loan losses to average loans outstanding          |       | 0.02                                   | %          | 0.05                                  | %          | 0.03 | % | 0.15 | % |
| Allowance for  loan losses to loans net of deferred fees at end of period |       | 1.15                                   | %          | 1.16                                  | %          | 1.17 | % | 1.16 | % |

 

It isthe policy of management to maintain the allowance for loan losses at a leveladequate for known and inherent risks in the portfolio.  Based oninformation currently available to analyze inherent credit risk, includingeconomic factors, overall credit quality, historical delinquencies and ahistory of actual charge-offs, management believes that the provision for loanlosses and the allowance are adequate.  The Company generally makesmonthly allocations to the allowance for loan losses.  The budgetedallocation is based on estimates of loss risk and loan growth. Adjustments may be made based on differences from estimated loan growth, thetypes of loans constituting this growth, changes in risk ratings within theportfolio, and general economic conditions.  However, no prediction of theultimate level of loans charged off in future years can be made with anycertainty.

**Other Real Estate**

AtSeptember 30, 2007 and December 31, 2006, the Company did not have any otherreal estate (“ORE”) properties.

**Deposits**

AtSeptember 30, 2007, total deposits were $492,577,000 representing an increaseof $7,721,000 (1.6%) over the December 31, 2006 balance of $484,856,000. We have experienced a decrease in the level of our traditional certificates ofdeposit in the first nine months of 2007 (down $13.5 million) including $5.2million of high cost brokered certificates that have not been offered renewaloptions and have been returned upon maturing. Balances in our savings type liquid certificate of deposit product haveincreased by $40.9 million in the first nine months of 2007.  Non-interest bearing demand deposits haveremained consistent while interest bearing demand deposits have decreased by$19.2 million in the first nine months of 2007.

 

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**Capital Resources**

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

TheBoard of Directors of the Company authorized the payment of quarterly cashdividends totaling $0.26 per share for 2006 and $0.24 per share for the firstthree quarters of 2007.  The payment of dividends in the future is subjectto the discretion of the Board of Directors of the Company and will depend onearnings, the financial condition of the Company and other relevant factors.

TheCompany and its subsidiary Bank are subject to certain regulations issued bythe Board of Governors of the Federal Reserve System and the FDIC which requiremaintenance of certain levels of capital.  At September 30, 2007,shareholders’ equity was $50,267,000, representing an increase of $4,590,000(9.9%) from $45,727,000 at December 31, 2006.  The increase is primarilythe result of the net income, exercise of stock options and the stock basedcompensation from the period offset by cash dividends discussed above. The Bank’s ratio of total risk-based capital to risk adjusted assets was 11.1%at September 30, 2007 and December 31, 2006.  Tier 1 risk-based capital torisk-adjusted assets was 10.0% at September 30, 2007 and December 31, 2006.

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

**TableEight: Capital Ratios**
| **Capital to Risk-Adjusted Assets** | ** ** | **At September 30,  2007** | ** ** | **At December 31,  2006** | ** ** | **Minimum Regulatory  Requirement** | ** ** |
|-------------------------------------|------------|----------------------------|------------|---------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | ** **                 | ** ** | ** **                | ** ** | ** **                          | ** ** |
| Company                             |       |                       |       |                      |       |                                |       |
| Leverage ratio                      |       | 11.9                       | %          | 10.1                      | %          | 4.0                                 | %          |
|                                |       |                       |       |                      |       |                                |       |
| Tier 1  Risk-Based Capital          |       | 12.7                       | %          | 10.9                      | %          | 4.0                                 | %          |
|                                |       |                       |       |                      |       |                                |       |
| Total Risk-Based  Capital           |       | 13.7                       | %          | 11.9                      | %          | 8.0                                 | %          |
| ** **                          | ** ** | ** **                 | ** ** | ** **                | ** ** | ** **                          | ** ** |
| Bank                                |       |                       |       |                      |       |                                |       |
| Leverage ratio                      |       | 9.6                        | %          | 9.0                       | %          | 4.0                                 | %          |
|                                |       |                       |       |                      |       |                                |       |
| Tier 1  Risk-Based Capital          |       | 10.0                       | %          | 10.0                      | %          | 4.0                                 | %          |
|                                |       |                       |       |                      |       |                                |       |
| Total Risk-Based  Capital           |       | 11.1                       | %          | 11.1                      | %          | 8.0                                 | %          |

 

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

 

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**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.  The Company’s market risk arisesprimarily from interest rate risk inherent in its loan, investment and depositportfolios.  The goal for managing the assets and liabilities of theCompany is to maximize shareholder value and earnings while maintaining a highquality balance sheet without exposing the Company to undue interest rate risk.

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

*Asset/Liability Management*.  Activities involved in asset/liabilitymanagement include, but are not limited to, lending, accepting and placingdeposits, investing in securities, using trust preferred securities andborrowings.  Interest rate risk is the primary market risk associated withasset/liability management.  Sensitivity of earnings to interest ratechanges arises when yields on assets change in a different time period or in adifferent amount from that of interest costs on liabilities.  To mitigateinterest rate risk, the structure of the balance sheet is managed with the goalthat movements of interest rates on assets and liabilities are correlated andcontributes to earnings even in periods of volatile interest rates.  Theasset/liability management policy sets limits on the acceptable amount of variancein net interest margin and market value of equity under changing interestenvironments.  The Company uses simulation models to forecast earnings,net interest margin and market value of equity.

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

 The net interest income is measured during theyear assuming a gradual change in rates over the twelve-month horizon.  TheCompany’s net interest income, as forecast below, was modeled utilizing aforecast balance sheet projected from balances as of the date indicated.

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

**TableNine:  Interest Rate Risk Simulation of Net Interest as of September 30,2007 and December 31, 2006**

| **(In thousands)**                       | ** ** | **$ Change in NII  from Current  12 Month Horizon  September 30, 2007** | ** ** | **$ Change in NII  from Current  12 Month Horizon  December 31, 2006** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Variation from a  constant rate scenario |       |                                                                         |       |                                                                        |       |
| +200bp                                   |       | $                                                                            | 3,398      |                                                                        | $          | 3,752 |   |
| - 200bp                                  |       | $                                                                            | (3,979     | )                                                                           | $          | (4,211 | ) |

 

Assumptions are inherently uncertain, and,consequently, the model cannot precisely measure net interest income orprecisely predict the impact of changes in interest rates on net interestincome. Actual results will differ from simulated results due to timing,magnitude and frequency of interest rate changes, as well as changes in marketconditions and management strategies which might moderate the negativeconsequences of interest rate deviations. In the model above, the simulationshows that the Company is asset sensitive over the one-year horizon asincreasing rates have a positive impact on net interest income and decliningrates have a negative impact.

 

24

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**Inflation**

Theimpact of inflation on a financial institution differs significantly from thatexerted on manufacturing, or other commercial concerns, primarily because itsassets and liabilities are largely monetary.  In general, inflationprimarily affects the Company and it subsidiaries through its effect on marketrates of interest, which affects the Company’s ability to attract loancustomers.  Inflation affects the growth of total assets by increasing thelevel of loan demand, and potentially adversely affects capital adequacybecause loan growth in inflationary periods can increase at rates higher thanthe rate capital grows through retention of earnings, which may be generated inthe future.  In addition to its effects on interest rates, inflation increasesoverall operating expenses.  Inflation has not had a material effect uponthe results of operations of the Company and its subsidiaries during theperiods ended September 30, 2007, and 2006.

**Liquidity**

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

TheCompany’s sources of liquidity consist of cash and due from correspondentbanks, overnight funds sold to correspondent banks, unpledged marketableinvestments and loans held for sale.  On September 30, 2007, consolidatedliquid assets totaled $40.4 million or 7.1% of total assets compared to $64.3million or 11.7% of total assets on December 31, 2006.  In addition toliquid assets, the Company maintains short-term lines of credit in the amountof $15,000,000 with correspondent banks.  There were no borrowingsoutstanding under these arrangements at September 30, 2007.

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

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

**Off-Balance Sheet Items**

TheCompany has certain ongoing commitments under operating leases.  Thesecommitments do not significantly impact operating results. As of September 30,2007 and December 31, 2006, commitments to extend credit and letters of creditwere the only financial instruments with off-balance sheet risk.  TheCompany has not entered into any contracts for financial derivative instrumentssuch as futures, swaps, options or similar instruments.   Commitments to fund loans and stand-byletters of credit at September 30, 2007 and December 31, 2006 wereapproximately $161,439,000 and $191,438,000, respectively.  Such loansrelate primarily to revolving lines of credit and other commercial loans, andto real estate construction loans.  As apercentage of net loans, these off-balance sheet items represent 34.4% and43.3%, respectively.

**Other Matters**

**Item 4.  Controls and Procedures**

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

 

25

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(b)Internal Control Over Financial Reporting: An evaluation of any changes in theCompany’s internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)), that occurred during the Company’s fiscalquarter ended September 30, 2007, was carried out under the supervision andwith the participation of the Company’s Chief Executive Officer, ChiefFinancial Officer and other members of the Company’s senior management. TheCompany’s Chief Executive Officer and Chief Financial Officer concluded that nochange identified in connection with such evaluation has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

**Item 5.  Subsequent Events**

None.

 

**PART II — OTHER INFORMATION**

Item1.  Legal Proceedings.

None.

Item1A. Risk Factors

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

Item2.  Changes in Securities and Use of Proceeds.

TheBoard of Directors approved a plan at their March 2007 meeting to repurchase upto $6,000,000 of the outstanding common stock of the Company.  The plan states that stock repurchases may bemade from time to time on the open market or through privately negotiatedtransactions.   The timing of purchasesand the exact number of shares to be purchased depends on marketconditions.  The share repurchase plandoes not include specific price targets or timetables and may be suspended atany time.

Duringthe nine months ended September 30, 2007, 3,800 shares of common stock wererepurchased under the share repurchase program at an average weighted costof  $11.63 per share, totaling $44,168.

Shares repurchasedduring the third quarter ending September 30, 2007
| **Period**                        | ** ** | **(a) Total number of  Shares (or Units)  Purchased** | ** ** | **(b) Average Price  Paid per Share  (or Unit)** | ** ** | **(c) Total Number of Shares  (or Units) Purchased as Part of   Publicly Announced Plans or  Programs** | ** ** | **(d) Maximum Number (or  approximate dollar value)  of shares (or Units) that may  yet be purchased under the Plans or Programs** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| Month #1  07-01-07 to   07-31-07  |       | 800                                                   |       | $                                                | 10.82      |                                                                                                    | 800        |                                                                                                                               | $          | 5,991,347 |   |
| Month #2   08-01-07 to   08-31-07 |       | 3,000                                                 |       | $                                                | 11.84      |                                                                                                    | 3,000      |                                                                                                                               | $          | 5,955,832 |   |
| Month #3  09-01-07 to   09-30-07  |       | 0                                                     |       |                                             |       | 0                                                                                                       |       | $                                                                                                                                  | 5,955,832  |   |

 

26

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Item3.  Defaults Upon Senior Securities.

None.

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

None.

Item 5.  Other Information.

None

Item 6.  Exhibits

(a)  Exhibits

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

 

27

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**SIGNATURES**

 

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

 

 
|             |   | COMMUNITY VALLEY BANCORP            |
|------------------|--------|-------------------------------------|
|             |   |                                |
| November 7, 2007 |   | *By:  *                   | */s/ Keith C. Robbins* |
|             |   |                                |
|             |   | Keith C. Robbins                    |
|             |   |                                |
|             |   | President, Chief  Executive Officer |
|             |   |                                |
| November 7, 2007 |   |                                | *By:  * | */s/ John F. Coger* |
|             |   |                                |
|             |   | John F. Coger                       |
|             |   |                                |
|             |   | Executive Vice  President, CFO, COO |

 

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