**SECURITIES AND EXCHANGECOMMISSIONWASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                        | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**   |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
|                                                         |       |                                                                                                      |
| **For the  Quarterly Period Ended March 31, 2008** |
|                                                         |       |                                                                                                      |
| **o**                                                        | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

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

 

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

** **

**(530)899-2344**

(Registrant’stelephone number, including area code)

 

**notapplicable**

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

 

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

 

Yes  x  No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicate by check mark whether the registrant is ashell company (as defined in Exchange Act Rule 12b-2. Yes  o  No  x

 

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

 

No par value Common Stock — 6,663,836 shares outstanding at May 8, 2008.

 

 

 

PART 1-FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

COMMUNITY VALLEY BANCORP

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

 
| **(dollars in thousands)**                                                                                                                               | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ASSETS                                                                                                                                                             | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Cash  and due from banks                                                                                                                                           |       | $                            | 22,176     |                            | $          | 31,714 |   |
| Federal  funds sold & other                                                                                                                                    |       | 57,700                       |       | 54,290                          |       |
| Total cash & cash  equivalents                                                                                                                                 |       | 79,876                       |       | 86,004                          |       |
|                                                                                                                                                               |       |                         |       |                            |       |
| Interest-bearing  deposits in banks                                                                                                                                |       | 5,636                        |       | 4,250                           |       |
| Investment securities  (fair value of $8,991 at March 31, 2008 and $6,270 at December 31, 2007)                                                     |       | 8,979                        |       | 6,264                           |       |
| Loans  held for sale at lower of cost or market                                                                                                                    |       | 220                          |       | —                          |       |
| Loans, less allowance  for loan losses of $6,025 at March 31, 2008 and $5,232 at December 31, 2007                                                                 |       | 451,553                      |       | 441,350                         |       |
| Premises  and equipment, net                                                                                                                                       |       | 8,737                        |       | 17,905                          |       |
| Bank  owned life insurance                                                                                                                                         |       | 10,296                       |       | 10,201                          |       |
| Accrued  interest receivable and other assets                                                                                                                      |       | 13,774                       |       | 14,646                          |       |
| Total assets                                                                                                                                                       |       | $                            | 579,071    |                            | $          | 580,620 |   |
|                                                                                                                                                               |       |                         |       |                            |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                                         |       |                         |       |                            |       |
|                                                                                                                                                               |       |                         |       |                            |       |
| Deposits:                                                                                                                                                          |       |                         |       |                            |       |
| Non-interest bearing                                                                                                                                               |       | $                            | 72,124     |                            | $          | 77,574 |   |
| Interest bearing                                                                                                                                                   |       | 429,870                      |       | 423,417                         |       |
| Total deposits                                                                                                                                                     |       | 501,994                      |       | 500,991                         |       |
|                                                                                                                                                               |       |                         |       |                            |       |
| ESOP  note payable                                                                                                                                                 |       | 1,057                        |       | 1,093                           |       |
| Junior  subordinated debentures                                                                                                                                    |       | 8,248                        |       | 16,496                          |       |
| Accrued  interest payable and other liabilities                                                                                                                    |       | 16,142                       |       | 11,066                          |       |
| Total liabilities                                                                                                                                                  |       | 527,441                      |       | 529,646                         |       |
|                                                                                                                                                               |       |                         |       |                            |       |
| Commitments  and contingencies                                                                                                                                     |       |                         |       |                            |       |
|                                                                                                                                                               |       |                         |       |                            |       |
| Shareholders’  equity                                                                                                                                         |       |                         |       |                            |       |
| Common stock - no par  value; 20,000,000 shares authorized; issued and outstanding - 7,663,775 shares  at March 31, 2008 and 7,607,908 shares at December 31, 2007 |       | 11,360                       |       | 10,910                          |       |
|                                                                                                                                                               |       |                         |       |                            |       |
| Unallocated ESOP shares  122,826 shares at March 31, 2008 and 126,590 shares at December 31, 2007 (at  cost)                                                       |       | (1,390                       | )          | (1,407                          | )          |
| Retained Earnings                                                                                                                                                  |       | 41,604                       |       | 41,454                          |       |
| Accumulated other  comprehensive income, net                                                                                                                       |       | 56                           |       | 17                              |       |
|                                                                                                                                                               |       |                         |       |                            |       |
| Total shareholders’  equity                                                                                                                                   |       | 51,630                       |       | 50,974                          |       |
| Total liabilities and  shareholders’ equity                                                                                                                   |       | $                            | 579,071    |                            | $          | 580,620 |   |

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

2

 

COMMUNITY VALLEYBANCORP

CONDENSEDCONSOLIDATED STATEMENT OF INCOME(Unaudited)

 

(dollars in thousands, except per share data)

 
| ** **                                            | ** ** | **For the period ended** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | **March 31,**                      | ** ** |
| ** **                                            | ** ** | **2008**                                | ** ** | **2007** | ** ** |
| Interest income:                                 |       |                                    |       |   |   |
| Interest and fees on  loans                           | ** ** | $                                       | 8,945      | ** ** | $ | 9,931 | ** ** |
| Interest on federal  funds sold                       | ** ** | 314                                     | ** ** | 595 | ** ** |
| Interest on deposits in  banks                        | ** ** | 235                                     | ** ** | 24 | ** ** |
| Interest on investment  securities:                   | ** ** |                                    | ** ** |   | ** ** |
| Taxable                                               | ** ** | 101                                     | ** ** | 49 | ** ** |
| Exempt from federal  income tax                       | ** ** | 16                                      | ** ** | 16 | ** ** |
| Total interest income                                 | ** ** | 9,611                                   | ** ** | 10,615 | ** ** |
|                                                  | ** ** |                                    | ** ** |   | ** ** |
| Interest expense:                                     | ** ** |                                    | ** ** |   | ** ** |
| Interest expense on  deposits                         | ** ** | 2,784                                   | ** ** | 3,173 | ** ** |
| Interest expense on  junior subordinated debentures   | ** ** | 137                                     | ** ** | 185 | ** ** |
| Interest expense on  notes payble                     | ** ** | 19                                      | ** ** | 23 | ** ** |
| Total interest expense                                | ** ** | 2,940                                   | ** ** | 3,381 | ** ** |
| Net interest income  before provision for loan losses | ** ** | 6,671                                   | ** ** | 7,234 | ** ** |
| Provision for loan  losses                            | ** ** | 225                                     | ** ** | 75 | ** ** |
| Net interest income  after provision for loan losses  | ** ** | 6,446                                   | ** ** | 7,159 | ** ** |
|                                                  | ** ** |                                    | ** ** |   | ** ** |
| Non-interest income                                   | ** ** | 1,959                                   | ** ** | 1,714 | ** ** |
|                                                  | ** ** |                                    | ** ** |   | ** ** |
| Non-interest expenses:                                | ** ** |                                    | ** ** |   | ** ** |
| Salaries and employee  benefits                       | ** ** | 3,697                                   | ** ** | 4,017 | ** ** |
| Occupancy                                             | ** ** | 675                                     | ** ** | 488 | ** ** |
| Furniture and equipment                               | ** ** | 641                                     | ** ** | 545 | ** ** |
| Other expense                                         | ** ** | 1,979                                   | ** ** | 1,655 | ** ** |
| Total non-interest expense                            | ** ** | 6,992                                   | ** ** | 6,705 | ** ** |
|                                                  | ** ** |                                    | ** ** |   | ** ** |
| Income before provision  for income taxes             | ** ** | 1,413                                   | ** ** | 2,168 | ** ** |
|                                                  | ** ** |                                    | ** ** |   | ** ** |
| Provision for income  taxes                           | ** ** | 589                                     | ** ** | 918 | ** ** |
|                                                  | ** ** |                                    | ** ** |   | ** ** |
| Net income                                            |       | $                                       | 824        |   | $ | 1,250 | ** ** |
|                                                  |       |                                    |       |   | ** ** |
| Basic earnings per  share                             |       | $                                       | 0.11       |   | $ | 0.17 | ** ** |
| Diluted earnings per  share                           |       | $                                       | 0.11       |   | $ | 0.17 | ** ** |
|                                                  |       |                                    |       |   | ** ** |
| Cash dividends per  share                             |       | $                                       | 0.08       |   | $ | 0.08 | ** ** |

 

See Notes toUnaudited Condensed Consolidated Financial Statements

 

3

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COMMUNITY VALLEYBANCORP

CONDENSEDCONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousandsexcept share data)

** **
| ** **                                                                  | ** ** | ** **            | ** ** | ** **      | ** ** | ** **           | ** ** | **Accumulated Other**   | ** ** | ** **             | ** ** | ** **        | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|-----------------|------------|----------------------|------------|------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                  | ** ** | ** **            | ** ** | ** **      | ** ** | ** **           | ** ** | **Comprehensive**            | ** ** | **Total**              | ** ** | ** **        | ** ** |
| ** **                                                                  | ** ** | **Common Stock** | ** ** | **Unallocated** | ** ** | **Retained**         | ** ** | **Income, net of** | ** ** | **Shareholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                  | ** ** | **Shares**            | ** ** | **Amount**      | ** ** | **ESOP shares** | ** ** | **Earnings**                 | ** ** | **taxes**              | ** ** | **Equity**        | ** ** | **Income** | ** ** |
| Balance,  January 1, 2007                                                   |       | 7,394,664             |       | $               | 9,727      |                 | $          | (1,514                       | )          | $                      | 37,505     |              | $          | 9 |   | $ | 45,727 |   |   |   |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       |   |   |
| Comprehensive  income                                                       |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       |   |   |
| Net income                                                                  |       |                  |       |            |       |                 |       | 6,459                        |       |                   |       | 6,459             |       | 6,459 |   |
| Other comprehensive  income                                                 |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       |   |   |
| Net change in unrealized  gains on available-for-sale investment securities |       |                  |       |            |       |                 |       |                         |       | 8                      |       | 8                 |       | 8 |   |
| Total comprehensive  income                                                 |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       | 6,467 |   |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       |   |   |
| Exercise  of stock options and related tax benefit                          |       | 232,108               |       | 1,104           |       |                 |       |                         |       |                   |       | 1,104             |       |   |   |
| Amortization  of stock compensation – ESOP shares                      |       |                  |       | 65              |       | 107                  |       |                         |       |                   |       | 172               |       |   |   |
| Cash  dividends- $.32 per share                                             |       |                  |       |            |       |                 |       | (2,425                       | )          |                   |       | (2,425            | )          |   |   |
| Stock  based compensation expense                                           |       |                  |       | 139             |       |                 |       |                         |       |                   |       | 139               |       |   |   |
| Retirement  of common stock                                                 |       | (18,864               | )          | (125            | )          |                 |       | (85                          | )          |                   |       | (210              | )          |   |   |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       |   |   |
| Balance,  December 31, 2007                                                 |       | 7,607,908             |       | 10,910          |       | (1,407               | )          | 41,454                       |       | 17                     |       | 50,974            |       |   |   |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       |   |   |
| Comprehensive  income                                                       |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       |   |   |
| Net income                                                                  |       |                  |       |            |       |                 |       | 824                          |       |                   |       | 824               |       | 824 |   |
| Other comprehensive  income                                                 |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       |   |   |
| Net change in unrealized  gains on available-for-sale investment securities |       |                  |       |            |       |                 |       |                         |       | 39                     |       | 39                |       | 39 |   |
| Total comprehensive  income                                                 |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       | 863 |   |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       |   |   |
| Exercise  of stock options and related tax benefit                          |       | 67,934                |       | 467             |       |                 |       |                         |       |                   |       | 467               |       |   |   |
| Amortization  of stock compensation – ESOP shares                      |       |                  |       | 21              |       | 17                   |       |                         |       |                   |       | 38                |       |   |   |
| Cash dividends- $.08 per  share                                             |       |                  |       |            |       |                 |       | (614                         | )          |                   |       | (614              | )          |   |   |
| Stock based compensation  expense                                           |       |                  |       | 21              |       |                 |       |                         |       |                   |       | 21                |       |   |   |
| Retirement  of common stock                                                 |       | (12,067               | )          | (59             | )          |                 |       | (60                          | )          |                   |       | (119              | )          |   |   |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                   |       |              |       |   |   |
| Balance,  March 31, 2008                                                    |       | 7,663,775             |       | $               | 11,360     |                 | $          | (1,390                       | )          | $                      | 41,604     |              | $          | 56 |   | $ | 51,630 |   |   |   |

 

See Notes toUnaudited Condensed Consolidated Financial Statements

 

4

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COMMUNITY VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS             (Unaudited**)**

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **March 31,**               | ** ** |
| **(dollars in thousands)**                                           | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Cash flows from  operating activities: Net income                              |       | $                                | 824        |   | $ | 1,250 |   |
| Adjustments to  reconcile net income to net cash provided by                   |       |                             |       |   |   |
| operating activities:                                                          |       |                             |       |   |   |
| Provision for loan  losses                                                     |       | 225                              |       | 75 |   |
| Decrease in deferred  loan origination fees                                    |       | (107                             | )          | (142 | ) |
| Depreciation and  amortization, net                                            |       | 574                              |       | 486 |   |
| (Gain) loss on  disposition of Bank premises and equipment                     |       | (4                               | )          | 20 |   |
| Net increase in loans  held for sale                                           |       | (220                             | )          | (1,008 | ) |
| Increase in cash  surrender value of bank-owned life                           |       |                             |       |   |   |
| insurance, net                                                                 |       | (95                              | )          | (94 | ) |
| Excess tax benefit from  exercise of stock options                             |       | (145                             | )          | (183 | ) |
| Non-cash compensation  expense associated with the ESOP                        |       | 38                               |       | 54 |   |
| Stock based  compensation                                                      |       | 21                               |       | 42 |   |
| Increase in accrued  interest receivable and other assets                      |       | (459                             | )          | (78 | ) |
| Increase in accrued  interest payable and other liabilities                    |       | 5,651                            |       | 481 |   |
| Provision for deferred  income taxes                                           |       | (300                             | )          | — |   |
| Net cash provided by  operating activities                                     |       | 6,003                            |       | 903 |   |
|                                                                           |       |                             |       |   |   |
| Cash  flows from investing activities:                                         |       |                             |       |   |   |
| (Increase) decrease in  interest-bearing deposits in banks                     |       | (1,386                           | )          | 594 |   |
| Proceeds from matured  or called available-for-sale investment securities      |       | 1,000                            |       | 1,000 |   |
| Proceeds from principal  payments on available-for-sale investment sercurities |       | 75                               |       | 3 |   |
| Proceeds from matured  or called held-to-maturity investment securities        |       | 1,000                            |       | — |   |
| Proceeds from principal  payments of held-to-maturity investment securities    |       | 36                               |       | 61 |   |
| Purchase of  available-for-sale investment securities                          |       | (3,010                           | )          | (1,000 | ) |
| Purchases of premises  and equipment                                           |       | (160                             | )          | (1,483 | ) |
| Proceeds from sale of  premises and equipment                                  |       | 9,700                            |       | — |   |
| Net increase in loans                                                          |       | (11,844                          | )          | (5,245 | ) |
| Net cash used in  investing activities                                         |       | (4,589                           | )          | (6,070 | ) |
|                                                                           |       |                             |       |   |   |
| Cash  flows from financing activities:                                         |       |                             |       |   |   |
| Net increase in demand,  interest-bearing and savings deposits                 |       | 2,812                            |       | 31,618 |   |
| Net decrease in time  deposits                                                 |       | (1,809                           | )          | (10,939 | ) |
| Repayment of ESOP note  payable                                                |       | (36                              | )          | (31 | ) |
| Payment of cash  dividends                                                     |       | (609                             | )          | (591 | ) |
| Tax benefit from the  exercise of stock options                                |       | 145                              |       | 183 |   |
| Proceeds from exercise  of stock options                                       |       | 322                              |       | 256 |   |
| Retirement of common  stock                                                    |       | (119                             | )          | — |   |
| Repayment of junior  subordinated debentures                                   |       | (8,248                           | )          | — |   |
| Net cash (used in)  provided by financing activities                           |       | (7,542                           | )          | 20,496 |   |
|                                                                           |       |                             |       |   |   |
| (Decrease) increase in  cash and cash equivalents                              |       | (6,128                           | )          | 15,329 |   |
|                                                                           |       |                             |       |   |   |
| Cash  and cash equivalents at beginning of year                                |       | 86,004                           |       | 62,628 |   |
|                                                                           |       |                             |       |   |   |
| Cash  and cash equivalents at end of period                                    |       | $                                | 79,876     |   | $ | 77,957 |   |

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

5

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**Community Valley Bancorp and Subsidiaries**

 

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

1.   BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidatedfinancial statements of Community Valley Bancorp and subsidiaries (the “Company”)have been prepared pursuant to the rules and regulations of the SecuritiesExchange Commission (the “SEC”) and the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly, certain information and footnote disclosuresrequired by accounting principles generally accepted in the United States ofAmerica for annual financial statements are not included herein, however theCompany believes that the disclosures made are adequate to make the informationnot misleading. In the opinion of management, all adjustments (which consistsolely of normal recurring adjustments) considered necessary for a fairpresentation of the results for the interim periods presented have beenincluded. These interim consolidated financial statements should be read inconjunction with the financial statements and related notes contained in theCompany’s 2007 Annual Report to Shareholders on Form 10-K.

 

The condensed consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiaries, ButteCommunity Bank (the “Bank”) and BCB Insurance Agency, LLC. All significantinter-company balances and transactions have been eliminated in consolidation.The Company has also established two wholly-owned unconsolidated subsidiaries,Community Valley Bancorp Trust I and II (the “Trusts”), both of which areDelaware statutory business trusts, formed for the sole purpose of issuingtrust preferred securities. The results of operations for the three-month andnine month periods ended March 31, 2008 may not necessarily be indicativeof the operating results for the full year 2008.

 

Managementhas determined that because all of the commercial banking products and servicesoffered by the Company are available in each branch of the bank, all branches arelocated within the same economic environment and management does not allocateresources 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 requires managementto make estimates and assumptions.  These estimates and assumptions affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results could differ from these estimates.

 

2. EARNINGS PER SHARE COMPUTATION

 

Basic earnings per share are computed by dividing netincome by the weighted average common shares outstanding for the period(7,522,758 shares for the three month period ended March 31, 2008 and7,288,480 shares for the three month period ended March 31, 2007). Dilutedearnings per share reflect the potential dilution that could occur ifoutstanding stock options were exercised using the treasury stock method.Diluted earnings per share is computed by dividing net income by the weightedaverage common shares outstanding for the period plus the dilutive effect ofoptions (144,104 shares for the three-month period ended March 31, 2008and 279,479 shares for the three-month period ended March 31, 2007).

 

3. COMPREHENSIVE INCOME

 

Comprehensive income is reported in addition to netincome for all periods presented. Comprehensive income is made up of net incomeplus other comprehensive income or loss. The Company’s only source of comprehensiveincome or loss is comprised of changes in unrealized gains or losses, net oftaxes, on available-for-sale securities, adjusted for the effect of realizedgain or losses on available-for-sale securities, net of taxes.

 

6

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## ** **

## **4. STOCK –BASED COMPENSATION**

## ** **

The Company issues stockoptions under two stock-based compensation plans, the Community Valley Bancorp1997 and 2000 Stock Option Plans. The Plans do not provide for the settlementof awards in cash and new shares are issued upon exercise of the options.  The Plans require that the option price maynot be less than the fair market value of the stock at the date the option isgranted, and that the stock must be paid in full at the time the option isexercised. The options expire on a date determined by the Board of Directors,but not later than ten years from the date of grant. The vesting period isdetermined by the Board of Directors and is generally over five years; however,nonstatutory options granted during 1997 vested immediately. Under the 1997plan, 22,674 shares of common stock remain reserved for issuance to employees,and the related options are exercisable until their expiration. However, no newoptions will be granted under this plan. Under the Company’s 2000 stock optionplan, 374,313 shares of common stock remain reserved for issuance to employeesand directors, of which 85,877 shares are available for future grants.  There were no options granted during the threemonths ended March 31, 2008 or 2007.

 

Stock option activity for the interim 2008 period issummarized as follows:

 
| ** **                                      | ** ** | ** ** | ** ** | ** **              | ** ** | **Weighted**    | ** ** | ** **                   | ** ** |
|-------------------------------------------------|------------|------------|------------|-------------------------|------------|-----------------|------------|------------------------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | **Weighted**            | ** ** | **Average**     | ** ** | ** **                   | ** ** |
| ** **                                      | ** ** | ** ** | ** ** | **Average**             | ** ** | **Contractual** | ** ** | **Aggregate Intrinsic** | ** ** |
| **2008**                                        | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** | **Term**        | ** ** | **Value**                    | ** ** |
| Outstanding at January  1                       |       | 476,921    |       | $                       | 7.76       |            | 4.1 years  |                         | $          | 1,617,000 |   |
| Exercised                                       |       | (67,934    | )          | $                       | 2.16       |            |       |                         |       |   |
| Granted                                         |       | —     |       | $                       | 0.00       |            |       |                         |       |   |
| Cancelled/Expired                               |       | (12,000    | )          | $                       | 12.38      |            |       |                         |       |   |
| Outstanding at March 31                         |       | 396,987    |       | $                       | 8.13       |            | 4.1 years  |                         | $          | 1,789,000 |   |
| Options  vested or expected to vest at March 31 |       | 389,047    |       | $                       | 7.97       |            | 4.3 years  |                         | $          | 1,753,000 |   |
| Exercisable at March 31                         |       | 343,181    |       | $                       | 7.14       |            | 3.6 years  |                         | $          | 1,780,000 |   |

 

## **5.  COMMITMENTS AND CONTINGENCIES**

## ** **

The Company is party to claims and legal proceedingsarising in the ordinary course of business. In the opinion of the Company’smanagement, the amount of ultimate liability with respect to such proceedingswill not have a material adverse effect on the financial condition or result ofoperations of the Company taken as a whole.

 

In the normal course of business, there are variousoutstanding commitments to extend credit which are not reflected in thefinancial statements, including loan commitments of $174,000,000 and $184,000,000 and stand-by letters ofcredit of $6,700,000 at both March 31, 2008 and December 31, 2007.

 

Of the loan commitments outstanding at March 31,2008, $80,589,000 is real estate construction loan commitments that areexpected to fund within the next twelve months. The remaining commitmentsprimarily relate to revolving lines of credit or other commercial loans, andmany of these are expected to expire without being drawn upon. Therefore, thetotal commitments do not necessarily represent future cash requirements. Eachloan commitment and the amount and type of collateral obtained, if any, areevaluated on an individual basis. Collateral held varies, but may include realproperty, bank deposits, debt or equity securities or business assets.

 

7

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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 of the liability related tothese stand-by letters of credit, which represents the fees received forissuing the guarantees, was not significant at March 31, 2008 and December 31,2007.  The Company recognizes these feesas revenues over the term of the commitment or when the commitment is used.

 

## **6.  INCOME TAXES**

## ** **

The Company files its income taxes on a consolidated basis with itssubsidiaries. The allocation of income tax expense (benefit) represents eachentity’s proportionate share of the consolidated provision for income taxes.

 

The Company accounts for income taxes using the liability or balancesheet method. Under this method, deferred tax assets and liabilities arerecognized for the tax consequences of temporary differences between thereported amounts of assets and liabilities and their tax bases. Deferred taxassets and liabilities are adjusted for the effects of changes in tax laws andrates on the date of enactment. On the consolidated balance sheet, net deferredtax assets are included in accrued interest receivable and other assets.

 

Accounting for Uncertainty in Income Taxes

 

## **Accountingfor uncertainty in income taxes - The benefit of a tax position is recognizedin the financial statements in the period during which, based on all availableevidence, management believes it is more likely than not that the position willbe sustained upon examination, including the resolution of appeals orlitigation processes, if any.  Tax positions that meet themore-likely-than-not recognition threshold are measured as the largest amountof tax benefit that is more than 50 percent likely of being realized uponsettlement with the applicable taxing authority.  The portion of the benefits associated withtax positions taken that exceeds the amount measured as described above isreflected as a liability for unrecognized tax benefits in the accompanyingbalance sheet along with any associated interest and penalties that would bepayable to the taxing authorities upon examination.  The Company recognizes accrued interest andpenalties related to unrecognized tax benefits, if applicable, as a component ofinterest expense in the consolidated statements of income. **Therehave been no significant changes to unrecognized tax benefits or accruedinterest and penalties for the three months ended March 31, 2008.

## ** **

## **7.  FAIR VALUEMEASUREMENTS**

## ** **

On January 1, 2008, the Company adoptedFinancial Accounting Standards Board (FASB) Statement No. 157 (SFAS 157), *Fair Value Measurements.*SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value under GAAP, and expandsdisclosures about fair value measurement. Upon adoption of SFAS No. 157,there was no cumulative effect adjustment to beginning retained earnings and noimpact on the financial statements in the first quarter of 2008.

 

The following tables presents information about theCompany’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of March 31, 2008. They indicate the fair value hierarchy of the valuation techniquesutilized by the Company to determine such fair value. In general, fair valuesdetermined by Level 1 inputs utilize quoted prices (unadjusted) in activemarkets for identical assets or liabilities that the Company has the ability toaccess.

 

Fair values determined by Level 2 inputs utilizeinputs other than quoted prices included in Level 1 that are observable for theasset or liability, either directly or indirectly. Level 2 inputs includequoted prices for similar assets and liabilities in active markets, and inputsother than quoted prices that are observable for the asset or liability, suchas interest rates and yield curves that are observable at commonly quotedintervals. Level 3 inputs are unobservable inputs for the asset or liability,and include situations where there is little, if any, market activity for theasset or liability. In certain cases, the inputs used to measure fair value mayfall into different levels of the fair value hierarchy. In such cases, thelevel in the fair value hierarchy within which the fair value measurement inits entirety falls has been determined based on the lowest level input that issignificant to the fair value measurement in its entirety. The Company’sassessment of the significance of a particular input to the fair valuemeasurement in its entirety requires judgment, and considers factors specificto the asset or liability.

 

8

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Assets and liabilitiesmeasured at fair value on a recurring basis are summarized below:

 
| ** **                                                     | ** ** | ** **                   | ** ** | **Fair Value Measurements**            | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | ** **                   | ** ** | **at March 31, 2008, Using** | ** ** |
| ** **                                                     | ** ** | ** **                   | ** ** | **Quoted Prices in**                   | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                                                     | ** ** | ** **                   | ** ** | **Active Markets for**                 | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                                     | ** ** | **Fair Value**          | ** ** | **Identical Assets**                        | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                                                | ** ** | **March 31, 2008** | ** ** | **(Level 1)**                               | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                                                           |       |                         |       |                                             |       |   |   |   |   |
| Available-for-sale  securities                                 |       | 6,669                        |       | 6,669                                            |       |   |   |   |   |
| Mortgage  Servicing Rights                                     |       | 8                            |       |                                             |       | 8 |   |   |   |
|                                                           |       |                         |       |                                             |       |   |   |   |   |
| Total  assets measured at fair value on a recurring basis      |       | $                            | 6,677      |                                             | $          | 6,669 |   | $ | 8 |   | $ | — |   |
|                                                           |       |                         |       |                                             |       |   |   |   |   |
| Junior  subordinated debentures, at fair value                 |       | $                            | 8,248      |                                             |       |   | $ | 8,248 |   |   |   |
|                                                           |       |                         |       |                                             |       |   |   |   |   |
| Total  liabilities measured at fair value on a recurring basis |       | $                            | 8,248      |                                             | $          | — |   | $ | 8,248 |   | $ | — |   |

 

The following methods wereused to estimate the fair value of each class of financial instrument above:

 

***Securities***- Fair values for investment securities arebased on quoted market prices.

 

***Mortgage Servicing Rights —***The fair value of mortgageservicing rights is estimated using a discounted cash flow model.

 

***Junior Subordinated Debentures***—The fair value of juniorsubordinated debentures is estimated using a discounted cash flow model.

 

Assets measured at fairvalue on a non recurring basis are summarized below:

 
| ** **                                                    | ** ** | ** **                   | ** ** | **Fair Value Measurements**            | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                   | ** ** | **at March 31, 2008, Using** | ** ** |
| ** **                                                    | ** ** | ** **                   | ** ** | **Quoted Prices in**                   | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                                                    | ** ** | ** **                   | ** ** | **Active Markets for**                 | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                                    | ** ** | **Fair Value**          | ** ** | **Identical Assets**                        | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                                               | ** ** | **March 31, 2008** | ** ** | **(Level 1)**                               | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                                                          |       |                         |       |                                             |       |   |   |   |   |
| Impaired  Loans                                               |       | $                            | 378        |                                             | $          | — |   | $ | 378 |   | — |   |
|                                                          |       |                         |       |                                             |       |   |   |   |   |
| Total  assets measured at fair value on a non recurring basis |       | $                            | 378        |                                             | $          | — |   | $ | 378 |   | $ | — |   |
|                                                               |            |                              |            |                                                  |            |  |  |  |  |  |  |  |  |

 

The following methods wereused to estimate the fair value of each class of financial instrument above:

 

***Impaired Loans******—***The fair value of impaired loans is based on thefair value of the collateral for all collateral dependent loans and for otherimpaired loans is estimated using a discounted cash flow model.

 

9

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**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 March 31,2008 and December 31, 2007 and income and expense accounts for the threemonth periods ended March 31, 2008 and 2007.

 

Thediscussion is designed to provide a better understanding of significant trendsrelated to the Company’s financial condition, results of operations, liquidity,capital resources and interest rate sensitivity.   In addition to the historical informationcontained herein, this report on Form 10-Q contains certainforward-looking statements.  The readerof this report should understand that all such forward-looking statements aresubject to various uncertainties and risks that could affect theiroutcome.   The Company’s actual resultscould differ materially from those suggested by such forward-lookingstatements.  Factors that couldcause or contribute to such differences include, but are not limited to,variances in the actual versus projected growth in assets, return on assets,loan losses, expenses, rates charged on loans and earned on securitiesinvestments, rates paid on deposits, competition effects, fee and othernoninterest income earned, general economic conditions, nationally, regionallyand in the operating market areas of the Company and its subsidiaries, changesin the regulatory environment, changes in business conditions and inflation,changes in securities markets, data processing problems, a decline in real estatevalues in the Company’s market area,  the effects of terrorism, including the eventsof September 11, 2001 and thereafter, and the conduct of the war onterrorism by the United States and its allies, as well as otherfactors. This entirereport should be read putting such forward-looking statements in context.

 

## **General Development of Business**

## ** **

TheCompany is a financial holding company (“FHC”) registered and authorized toengage in the activities permitted under the Bank Holding Company Act of 1956,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 financial holding company, the Companyis subject to the Federal Holding Company Act and to supervision by the boardof Governors of the Federal Reserve System (“FRB”).** **Its principal office is located at1360 East Lassen Avenue, Chico, California 95973 and its telephone number is(530) 899-2344.

 

TheCompany owns 100% of the issued and outstanding common shares of ButteCommunity Bank.  Butte Community Bank wasincorporated and commenced business in Paradise and Oroville, California in1990.  Butte Community Bank operatesfifteen full service offices within its primary service areas of Butte, Sutter,Yuba, Tehama, and Shasta Counties.  The Bankalso maintains Loan Production Offices in Citrus Heights and Gridley. ButteCommunity Bank’s primary business is serving the commercial banking needs ofsmall to mid-sized businesses and consumers within those counties.  Butte Community Bank accepts checking andsavings deposits, offers money market deposit accounts and certificates ofdeposit, makes secured and unsecured commercial, secured real estate, and otherinstallment and term loans and offers other customary banking services.

 

On December 1,2004, the Company formed a wholly-owned subsidiary, CVB Insurance Agency LLCfor the purpose of providing insurance related services. The name was changedto Butte Community Insurance Agency LLC in April, 2006.

 

In July 2007,the Company formed a wholly-owned unconsolidated subsidiary, Community ValleyBancorp Trust II (the “Trust”), a Delaware statutory business trust, for thepurpose of issuing trust preferred securities. Community Valley Bancorp Trust I was dissolved in January 2008 whenthe Trust I securities were redeemed.

 

10

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** **

**Critical Accounting Policies**

 

*General*

 

The Company’s significantaccounting principles are described in Note 1 of the consolidated financialstatements in the Company’s 2007 Annual Report to Shareholders on Form 10-Kand are essential to understanding Management’s Discussion and Analysis ofResults of Operations and Financial Condition. Community Valley Bancorp’sannual consolidated financial statements are prepared in accordance withaccounting 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.

 

*Allowancefor Loan Losses (ALL)*

 

The allowance for loanlosses is management’s best estimate of the probable losses that may besustained in our loan portfolio. The allowance is based on two basic principlesof accounting:  (1) SFAS No.5 which requires that losses be accruedwhen they are probable of occurring and estimable and (2) SFAS No. 114,which requires that losses be accrued on impaired loans based on thedifferences between the value of collateral, present value of future cash flowsor values that are observable in the secondary market and the loan balance.

 

The Company performsperiodic and systematic detailed evaluations of its lending portfolio toidentify and estimate the inherent risks and assess the overall collectibility.These evaluations include general conditions such as the portfolio composition,size and maturities of various segmented portions of the portfolio such assecured, unsecured, construction, and Small Business Administration (“SBA”).

 

Additional factorsinclude concentrations of borrowers, industries, geographical sectors, loanproduct, 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.

 

For individually impairedloans, SFAS No. 114 provides guidance on the acceptable methods to measureimpairment. Specifically, SFAS No. 114 states that when a loan isimpaired, the Company should measure impairment based on the present value ofexpected future principal and interest cash flows discounted at the loan’seffective interest rate, except that as a practical expedient, a creditor maymeasure impairment based on a loan’s observable market price or the fair valueof collateral, if the loan is collateral dependent. When developing theestimate of future cash flows for a loan, the Company considers all availableinformation reflecting past events and current conditions, including the effectof existing environmental factors.

 

11

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*LoanSales and Servicing*

 

The Company originatesgovernment guaranteed loans and mortgage loans that may be sold in thesecondary market.  The amounts of gains recorded on sales of loans and theinitial recording of servicing assets and interest only (I/O) strips is basedon the estimated fair values of the respective components.  In recordingthe initial value of the servicing assets and the fair value of the I/O stripsreceivable, the Company uses estimates which are based on management’sexpectations of future prepayments and discount rates.  Servicing assetsare amortized over the estimated life of the related loan.  I/O strips arenot significant at March 31, 2008.  These prepayment and discountrates were based on current market conditions and historical performance of thevarious pools of serviced loans.  If actual prepayments with respect tosold loans occur more quickly than projected the carrying value of theservicing assets may have to be adjusted through a charge to earnings.

 

*Stock-BasedCompensation*

 

The Companyrecognizes compensation expense in an amount equal to the fair value of theshare-based payments such as stock options granted to employees.  The Company records compensation expense (asprevious awards continue to vest) for the unvested portion of previouslygranted awards that were outstanding on January 1, 2006 and for all awardsgranted after that date as they vest.  The estimatesof the grant date fair values are based on an option pricing model that usesassumptions based on the expected option life, the level of estimated forfeitures,expected stock volatility and the risk-free interest rate. The calculation ofthe fair value of share based payments is by nature inexact, and representsmanagement’s best estimate of the grant date fair value of the share basedpayments. See Note 4 to the Unaudited Condensed Consolidated FinancialStatements for additional information related to stock-based compensation.

 

*Revenuerecognition*

 

The Company’s primarysource of revenue is interest income, which is the difference between theinterest income it receives on interest-earning assets and the interest expenseit pays on interest-bearing liabilities, and (ii) fee income, whichincludes fees earned on deposit services, income from SBA lending,electronic-based cash management services, mortgage brokerage fee income andmerchant credit card processing services.

 

Interest income isrecorded on an accrual basis. Note 1 to the Consolidated Financial Statementsin the Company’s 2007 Annual Report to Shareholders on Form 10-K offers anexplanation of the process for determining when the accrual of interest incomeis discontinued on an impaired loan.

 

*IncomeTaxes*

 

The Company accounts for income taxes under theasset and liability method. Under the asset and liability method, deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using currently enacted tax rates appliedto such taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date. If future income should prove non-existent or lessthan the amount of deferred tax assets within the tax years to which they maybe applied, the asset may not be realized and our net income will be reduced.

 

The provisions of Financial Accounting Standards Board(FASB) Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes* (FIN 48) have been applied toall tax positions of the Company as of January 1, 2007.  FIN 48 prescribes a recognition threshold andmeasurement standard for the financial statement recognition and measurement ofan income tax position taken or expected to be taken in a tax return.    Only tax positions that met themore-likely-than-not recognition threshold on January 1, 2007 were recognizedor continue to be recognized.

 

12

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The benefit of a tax position is recognized in thefinancial statements in the period during which, based on all availableevidence, management believes it is more likely than not that the position willbe sustained upon examination, including the resolution of appeals orlitigation processes, if any.  Tax positions taken are not offset oraggregated with other positions.  Taxpositions that meet the more-likely-than-not recognition threshold are measuredas the largest amount of tax benefit that is more than 50 percent likely ofbeing realized upon settlement with the applicable taxing authority.  The portion of the benefits associated withtax positions taken that exceeds the amount measured as described above isreflected as a liability for unrecognized tax benefits in the accompanyingbalance sheet along with any associated interest and penalties that would bepayable to the taxing authorities upon examination.  Interest expense and penalties associatedwith unrecognized tax benefits are classified as income tax expense in theconsolidated statement of income.

 

*FairValue*

 

Effective January 1,2008, we adopted SFAS No. 157,*FairValue Measurements,* which among other things, requires enhanceddisclosures about financial instruments carried at fair value. SFAS No. 157establishes a hierarchical disclosure framework associated with the level ofobservable pricing scenarios utilized in measuring financial instruments at fairvalue. The degree of judgment utilized in measuring the fair value of financialinstruments generally correlates to the level of the observable pricingscenario. Financial instruments with readily available active quoted prices orfor which fair value can be measured from actively quoted prices generally willhave a higher degree of observable pricing and a lesser degree of judgmentutilized in measuring fair value. Conversely, financial instruments rarelytraded or not quoted will generally have little or no observable pricing and ahigher degree of judgment utilized in measuring fair value. Observable pricingscenarios are impacted by a number of factors, including the type of financialinstrument, whether the financial instrument is new to the market and not yetestablished and the characteristics specific to the transaction.

 

See Note 7 of the*Notes to Condensed Consolidated Financial Statements* for additionalinformation about the financial instruments carried at fair value.

 

**Overview**

 

The Company recorded net income of $824,000 for the quarter ended March 31, 2008, which was a decrease of 34.1% from the $1,250,000 reported for the same period of 2007.  Diluted earnings per share for the First quarter of 2008 were $0.11, compared to the $0.17 recorded in the first quarter of 2007.  The annualized return on average equity (ROAE) and return on average assets (ROAA) for the first quarter of 2008 were 6.80% and .63%, respectively, as compared to 11.05% and .90%, respectively, for the same period in 2007.  The primary reasons for the decrease in net income for the first three months of 2008 were, the 300 basis point decrease in the prime rate over the past six months resulting in a compression of the net interest margin of 61 basis points on a quarter over quarter basis, the slowdown in the real estate construction market, and increased expenses associated with the new branches in Redding and Anderson and the new Administrative Headquarters.

 

Total assets of the Company decreased by $1,909,000 or (.33%) from December 31, 2007 to $579,071,000 at March 31, 2008.  Net loans increased to $451,773,000, up $10,423,000 (2.4%) from the ending balances on December 31, 2007.  Deposit balances at March 31, 2008 increased to $501,994,000, up $1,003,000 (.20%) from December 31, 2007.

 

13

 

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

 

**Table One:  Components of Net Income**

 
| ** **                                                       | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands, except percentages)**            | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                             |       |                                             |       |   |   |
| Net  interest income                                             |       | $                                                | 6,671      |   | $ | 7,234 |   |
| Provision  for loan losses                                       |       | (225                                             | )          | (75 | ) |
| Non-interest  income                                             |       | 1,959                                            |       | 1,714 |   |
| Non-interest  expense                                            |       | (6,992                                           | )          | (6,705 | ) |
| Provision  for income taxes                                      |       | (589                                             | )          | (918 | ) |
|                                                             |       |                                             |       |   |   |
| Net  income                                                      |       | $                                                | 824        |   | $ | 1,250 |   |
|                                                             |       |                                             |       |   |   |
| Average  total assets (In millions)                              |       | $                                                | 574.3      |   | $ | 562.1 |   |
| Net  income (annualized) as a percentage of average total assets |       | 0.58                                             | %          | 0.90 | % |

 

**Results of Operations**

 

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

## ** **

Net interest income representsthe excess of interest and fees earned on interest earning assets (loans,securities, federal funds sold and investments in time deposits) over theinterest paid on deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage ofaverage earning assets.

 

The Company’s netinterest margin was 5.17% for the three months ended March 31, 2008 whichwas down 61 basis points from 5.78% for the three month period ending March 31,2007.  Net interest income decreased $563,000(7.8%) for the three months ended March 31, 2008 over the same period in2007.  The primary reason for thisdecrease was the compression of the net interest margin as a result of 300basis points decrease in rates and because the repricing of our interestbearing liabilities tends to lag behind our interest bearing assets.

 

The averagebalances of interest bearing liabilities were $3,145,000 (.73%) higher in thefirst quarter of 2008 versus the same quarter in 2007. Rates paid on theseliabilities decreased 46 basis points on a quarter over quarter basis.  The average balances of interest earningassets were $11,744,000 (2.31%) higher in the first quarter of 2008 versus thesame quarter in 2007.

 

Rates earned onthese assets were 104 basis points less at the end of the first quarter of 2008than they were at the end of the first quarter in 2007.  Primarily as a result of the decrease ininterest rates, interest income was $1,004,000 (9.5%) lower and interest expensewas $441,000 (13%) lower in the first quarter of 2008 versus the prior yearperiod.  After another 25 basis pointdecrease in rates at the end of April, management expects to see a leveling offof interest rates for the remainder of this year although no assurances can begiven that this will actually happen.

 

Table Two,Analysis of Net Interest Margin, and Table Three, Analysis of Volume and RateChanges on Net Interest Income and Expenses, are provided to enable the readerto understand the components and past trends of the Company’s interest incomeand expense.  Table Two provides ananalysis of net interest margin setting forth average assets, liabilities andshareholders’ equity; interest income earned and interest expense paid andaverage rates earned and paid; and the net interest margin.

 

14

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**TableTwo:  Analysis of Net Interest Margin**

 

 
| **Three months ended March 31,**  | ** ** | **2008**             | ** ** | **2007**     | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|--------------|------------|
| **(In thousands, except percentages)** | ** ** | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield** | ** ** | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield** | ** ** |
| Assets:                                               |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Earning  assets                                       |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Loans (1)                                             |       | $                    | 449,986    |         | $          | 8,945 |   | 8.00 | % | $ | 454,342 |   | $ | 9,931 |   | 8.86 | % |
| Taxable investment  securities                        |       | 5,312                |       | 101          |       | 7.66 | % | 3,793 |   | 49 |   | 5.24 | % |
| Tax-exempt investment  securities (2)                 |       | 1,383                |       | 16           |       | 4.70 | % | 1,389 |   | 16 |   | 4.67 | % |
| Federal  funds sold & other                       |       | 43,011               |       | 314          |       | 2.93 | % | 45,807 |   | 595 |   | 5.27 | % |
| Interest  bearing deposits in banks                   |       | 19,393               |       | 235          |       | 4.87 | % | 2,010 |   | 24 |   | 4.84 | % |
| Total  earning assets                                 |       | 519,085              |       | 9,611        |       | 7.45 | % | 507,341 |   | 10,615 |   | 8.49 | % |
| Cash &  due from banks                            |       | 16,641               |       |         |       |   |   | 17,673 |   |   |   |   |   |
| Other  assets                                         |       | 38,572               |       |         |       |   |   | 37,127 |   |   |   |   |   |
| Average  total assets                                 |       | $                    | 574,298    |         |       |   |   |   | $ | 562,141 |   |   |   |   |   |
|                                                  |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Liabilities  & Shareholders’ Equity          |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Interest  bearing liabilities:                        |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| NOW & MMDA                                        |       | $                    | 150,340    |         | $          | 334 |   | 0.89 | % | $ | 153,002 |   | $ | 409 |   | 1.08 | % |
| Savings                                               |       | 114,788              |       | 603          |       | 2.11 | % | 103,684 |   | 847 |   | 3.31 | % |
| Time deposits                                         |       | 158,178              |       | 1,847        |       | 4.70 | % | 163,896 |   | 1,917 |   | 4.74 | % |
| Other borrowings                                      |       | 9,866                |       | 156          |       | 6.38 | % | 9,445 |   | 208 |   | 8.93 | % |
| Total  interest bearing liabilities                   |       | 433,172              |       | 2,940        |       | 2.73 | % | 430,027 |   | 3,381 |   | 3.19 | % |
| Demand  deposits                                      |       | 75,608               |       |         |       |   |   | 76,003 |   |   |   |   |   |
| Other  liabilities                                    |       | 12,515               |       |         |       |   |   | 9,502 |   |   |   |   |   |
| Total  liabilities                                    |       | 521,295              |       |         |       |   |   | 515,532 |   |   |   |   |   |
| Shareholders’  equity                            |       | 53,003               |       |         |       |   |   | 46,609 |   |   |   |   |   |
| Average  liabilities and equity                       |       | $                    | 574,298    |         |       |   |   |   | $ | 562,141 |   |   |   |   |   |
|                                                  |       |                 |       |         |       |   |   |   |   |   |   |   |   |
| Net  interest income & margin (3)                 |       |                 |       | $            | 6,671      |   | 5.17 | % |   |   | $ | 7,234 |   | 5.78 | % |

 

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(1) Loan interest includes loan fees of $470,000 and $492,000 during thequarters ended March 31, 2008 and March 31, 2007, respectively. 

(2) Does not include taxable-equivalent adjustments that primarily relate toincome on certain securities that are exempt from federal income taxes.

(3) Net interest margin is computed by dividing net intereest income bytotal average earning assets.

(4)  Average yield iscalculated based on actual days in quarter (91 for for March 31, 2008 and 90for March 30, 2007) and annualized to actual days in year (366 for 2008 and 365for 2007).

 

Table Three setsforth a summary of the changes in interest income and interest expense fromchanges in average asset and liability balances (volume) and changes in averageinterest rates.  On a quarter overquarter basis net interest income has decreased $563,000.  Interest income from earning assets hasdecreased by $1,004,000. Changes in the volume of earning assets, primarilyinterest bearing deposits in banks, have resulted in an increase in interestincome of $96,000 while interest income from changes in rates has decreased by$1,100,000.  Interest expense for thefirst quarter of 2008 was $441,000 less than the same period in 2007.  Changes in the volume of interest bearingliabilities, primarily the increase in balances of savings deposits, hasresulted in a net increase of interest expense of $26,000.  Decreases in average rates paid, primarily onsavings deposits, NOW and money market accounts and junior subordinateddebentures have resulted in a decrease in interest expense decrease of$467,000.

 

15

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

 

 
| **Three Months Ended March 31, 2008 over 2007** | ** ** | ** ** | ** ** | ** **        | ** ** | ** **          | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|---------------------|------------|
| **(In thousands)**                                                            | ** ** | **Volume** | ** ** | **Rate (3)** | ** ** | **Net Change** | ** ** |
| Increase (decrease) due to change in:                     | ** ** | ** ** | ** ** | ** **        | ** ** | ** **          | ** ** |
| Interest-earning assets:                                                      | ** ** | ** ** | ** ** | ** **        | ** ** | ** **          | ** ** |
| Net loans (1)                                                                      |       | $          | (96        | )                 | $          | (889                | )          | $ | (985 | ) |
| Taxable investment  securities                                                     |       | 20         |       | 33                |       | 53                  |       |
| Tax exempt investment  securities (2)                                              |       | (0         | )          | —            |       | 0                   |       |
| Federal funds sold                                                                 |       | (37        | )          | (245              | )          | (282                | )          |
| Interest bearing  deposits in banks                                                |       | 209        |       | 1                 |       | 210                 |       |
| Total                                                                              |       | 96         |       | (1,100            | )          | (1,004              | )          |
| Interest-bearing  liabilities:                                                     |       |       |       |              |       |                |       |
| NOW and MMDA deposits                                                              |       | (7         | )          | (68               | )          | (75                 | )          |
| Savings deposits                                                                   |       | 91         |       | (335              | )          | (244                | )          |
| Time deposits                                                                      |       | (67        | )          | (3                | )          | (70                 | )          |
| Other borrowings                                                                   |       | 9          |       | (61               | )          | (52                 | )          |
| Total                                                                              |       | 26         |       | (467              | )          | (441                | )          |
| Interest  differential                                                             |       | $          | 70         |              | $          | (633                | )          | $ | (563 | ) |

 

----

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

(2) Does not include taxable-equivalent adjustments that primarily relate toincome on certain securities that is exempt from federal income taxes.

 

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

 

## **Non-interest Income**

## ** **

Table Four below providesa summary of the components of noninterest income for the periods indicated(dollars in thousands) (percent of assets annualized):

 

**Table Four: Components of Noninterest Income**

 
| ** **                                           | ** ** | ** ** | ** ** | **% of Avg.** | ** ** | ** ** | ** ** | **% of Avg.** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------|------------|------------|------------|-------------------------|------------|
| **Three months ended March 31,** | ** ** | **2008**   | ** ** | **Assets**              | ** ** | **2007**   | ** ** | **Assets**              | ** ** |
| Service  charges on deposit accounts                 |       | $          | 856        |                    | 0.60       | %          | $          | 725                     |       | 0.52 | % |
| Loan  servicing fees                                 |       | 111        |       | 0.08                    | %          | 104        |       | 0.08                    | %          |
| Fees  - alternative investment sales                 |       | 145        |       | 0.10                    | %          | 86         |       | 0.06                    | %          |
| Merchant  fee income                                 |       | 101        |       | 0.07                    | %          | 93         |       | 0.07                    | %          |
| Gain  on the sale of loans                           |       | 228        |       | 0.16                    | %          | 329        |       | 0.24                    | %          |
| Other                                                |       | 518        |       | 0.36                    | %          | 377        |       | 0.27                    | %          |
| Total non-interest  income                           |       | $          | 1,959      |                    | 1.37       | %          | $          | 1,714                   |       | 1.24 | % |

 

## **Non-interestincome increased $231,000 (14.3%) to $1,959,000 for the three months ended March 31,2008 as compared to $1,714,000 for the three months ended March 31, 2007.Increases in non-interest income were realized in fees from service charges (up18.2%), loan servicing fees (up 6.7%) fees from alternative investment sales(up 68.6%), merchant fee income (up 8.6%), and other (up 30.9%).  This was offset by a decrease in the gain onsale of loans (down 7.6%).**

## ** **

## **Theincrease in service charge income was the result of additional deposit accountsopened during the first quarter of 2008 and fees resulting from our overdraftprivilege deposit product.  TheInvestment Department, which sells third-party mutual funds and annuities,experienced an increase in fees due to a higher volume of sales during thefirst quarter of 2008 as deposit interest rates dropped resulting in customersseeking higher returns in the equities markets. Increases in the “Other” category were a result of increased fees fromATM transactions, commissions earned on the sales of insurance policies andfees paid for payroll processing through our Business Services Division.  The gain on sale of loans was the onlydecrease in non-interest income items as the level of loans sold into thesecondary market decreased as refinancing and new housing construction activityslowed.**

## ** **

16

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**Non-interest Expense**

 

Non-interest expenseincreased $287,000 (4.3%) to $6,992,000 in the first quarter of 2008 versus$6,705,000 in the first quarter of 2007.   Salary and employee benefits declined by $320,000 (8.9%) as a result ofstaff attrition and lower expenses related to bonus accruals and retirementprograms.  On a quarter over quarterbasis, occupancy expenses were higher by $187,000 (38.3%) which is related torent expense on the seven buildings which were sold in January 2008 andleased back by the Company.   Furnitureand equipment expense was $641,000 in the first quarter of 2008 compared to$545,000 in the same period of 2007, representing a 17.6% increase.   This increase relates to the depreciationrecorded on the purchase of new technology software and hardware as well asadditional furniture and fixtures at the new Redding and Anderson branches andthe new Administrative Headquarters that were not operational during the firstquarter of 2007.  Other expenses increased$324,000 (19.6%) in the first quarter of 2008 versus the first quarter of2007.   The majority of this increase wasattributable to the costs associated with a campaign designed to acquire lowcost deposit accounts.

 

## **Provision for Loan Losses**

## ** **

The Company provided$225,000 for loan losses for the first quarter of 2008 which was $150,000 morethan the amount in the first quarter of 2007. Loan charge offsfor the first quarter ending March 31, 2008 were $12,000 and there were nocharge offs for the period ended March 31, 2007.  Management assesses its loan quality on amonthly basis to determine the level of provision necessary to maintain anadequate allowance for loan losses.  TheCompany’s loan portfolio composition, non-performing assets and allowance forloan losses are further discussed under the Balance Sheet Analysis sectionbelow.

 

**Provision for Income Taxes**

 

The effective tax ratefor the first quarter of 2008 was 41.7% consistent with the 42.3% for the sameperiod in 2007.

 

**Balance Sheet Analysis**

 

The Company’s totalassets were $579,071,000 at March 31, 2008 as compared to $580,620,000 at December 31,2007, representing a decrease of $1,549,000 (.27%).  The average balance of total assets for thethree months ended March 31, 2008 was $574,298,000, which represents anincrease of $12,157,000 (2.2%) over the $562,141,000 for the three-month periodended March 31, 2007.

 

## **Loans**

## ** **

The Company concentratesits lending activities in the following principal areas: 1) commercial; 2) realestate; 3) residential real estate and real estate construction (bothcommercial and residential); 4) agriculture; and 5) consumer loans.  Commercial and residential real estate loansare generally secured by improved property, with original maturities of 3-10years.  At March 31, 2008, theseprincipal areas accounted for approximately 16%, 48%, 18%, 6% and 12%,respectively, of the Company’s loan portfolio.    The mix at December 31, 2007 was 17%,47%, 18%, 6% and 12%.    While the localeconomy has stabilized from the peak of 2005 and 2006 we are not experiencingthe significant downturn being observed in other areas of California.  New borrowers developed through the Company’smarketing efforts and credit extensions expanded to existing borrowers, offsetby normal loan pay-downs and payoffs, resulted in net increases in loanbalances for commercial real estate ($8,900,000 or 4.3%),   real estate construction of ($433,000 or..53%), agricultural loans ($2,719,000 or 10.7%), and consumer ($1,814,000 or3.4%).   A decrease was noted incommercial loans ($2,977,000 or 3.8%). Table Five below summarizes the composition of the loan portfolio as of March 31,2008 and December 31, 2007.

 

17

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**Table Five: Loan Portfolio Composition**

 
| **(In thousands)**    | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|----------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Commercial                 |       | $                            | 74,703     |                            | $          | 77,680 |   |
| Real  estate:              |       |                         |       |                            |       |
| Mortgage                   |       | 217,431                      |       | 208,531                         |       |
| Construction               |       | 82,324                       |       | 81,891                          |       |
|                       |       |                         |       |                            |       |
| Agriculture                |       | 28,086                       |       | 25,367                          |       |
| Consumer                   |       | 55,615                       |       | 53,801                          |       |
| Total  loans               |       | 458,159                      |       | 447,270                         |       |
| Allowance  for loan losses |       | (6,025                       | )          | (5,232                          | )          |
| Deferred  loan fees, net   |       | (581                         | )          | (688                            | )          |
| Total  net loans           |       | $                            | 451,553    |                            | $          | 441,350 |   |

 

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

 

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

 

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

 

## **Risk Elements**

## ** **

The Company assesses andmanages credit risk on an ongoing basis through a credit culture thatemphasizes excellent credit quality, extensive internal monitoring andestablished formal lending policies. Additionally, the Company contracts with an outside loan reviewconsultant to periodically review the existing loan portfolio.  Management believes its ability to identifyand assess risk and return characteristics of the Company’s loan portfolio iscritical for profitability and growth.  Managementstrives to continue its emphasis on credit quality in the loan approvalprocess, active credit administration and regular monitoring.  With this in mind, management has designedand implemented a comprehensive loan review and grading system that functionsto continually assess the credit risk inherent in the loan portfolio.

 

Ultimately, underlyingtrends in economic and business cycles may influence credit quality.  The Company’s business is concentrated in theButte, Sutter and Shasta County Areas. The economy of these three counties isdiversified with professional services, manufacturing, agriculture and realestate investment and construction.

 

Special emphasis isplaced within the communities in which the Company has branches (Chico,Paradise, Magalia, Oroville, Yuba City, Red Bluff, Marysville, Colusa, Corningand Redding).  The Company also maintainsloan production offices in the cities of Citrus Heights and Gridley.Single-family residential construction is the primary lending product from theCitrus Heights location serving the greater Sacramento area.  The primary focus of the loan productionoffice in Gridley is commercial and agricultural loans.

 

18

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TheCompany has significant extensions of credit and commitments to extend creditthat are secured by real estate.  Theultimate repayment of these loans is generally dependent on personal orbusiness cash flows or the sale or refinancing of the real estate.  The Company monitors the effects of currentand expected market conditions and other factors on the collectability of realestate loans.  The more significantfactors management considers involve the following:  lease, absorption and sale rates; real estatevalues and rates of return; operating expenses; inflation; and sufficiency ofcollateral independent of the real estate including, in limited instances,personal guarantees.

 

Inextending credit and commitments to borrowers, the Company generally requirescollateral and/or guarantees as security. The repayment of such loans is expected to come from cash flow or fromproceeds from the sale of selected assets of the borrowers.  The Company’s requirement for collateraland/or guarantees is determined on a case-by-case basis in connection withmanagement’s evaluation of the creditworthiness of the borrower.  Collateral held varies but may includeaccounts receivable, inventory, property, plant and equipment, income-producingproperties, residences and other real property. The Company secures its collateral by perfecting its security interestin business assets, obtaining deeds of trust, or outright possession amongother means.

 

## **Inmanagement’s judgment, a concentration exists in real estate loans, whichrepresented approximately 65.4% of the Company’s loan portfolio at March 31,2008, which is a slight increase from the 64.9% concentration level at December 31,2007.  Management believes theconcentration has taken on more risk due to the decline in real estate valuesalthough we have not seen the drastic decline experienced in other areas ofCalifornia.  We are monitoring realestate values very closely and if we determine values in the Company’s primarymarket areas are deteriorating more, this could have an adverse impact on thecollectability of these loans and require an increase in the provision for loanlosses which could adversely affect the Company’s future prospects, results ofoperations, profitability and stock price. Management believes that its lending policies and underwriting standardswill tend to minimize losses in an economic downturn; however, there is noassurance that losses will not occur under such circumstances.  The Company’s loan policies and underwritingstandards include, but are not limited to, the following: (1) maintaininga thorough understanding of the Company’s service area and originating asignificant majority of its loans within that area, (2) maintaining athorough understanding of borrowers’ knowledge, capacity, and market positionin their field of expertise, (3) basing real estate loan approvals notonly on market demand for the project, but also on the borrowers’ capacity tosupport 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.  Loans are charged off when, in the opinion ofmanagement, collection appears unlikely.

 

Table Six belowsets forth nonaccrual loans as of March 31, 2008 and December 31,2007.  There were no loans past due 90days or more and still accruing interest at March 31, 2008 or December 31,2007.

 

**Table Six:  Non-Performing Loans**

 
| **(In thousands)**     | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Nonaccrual:                 |       |                         |       |                            |       |
| Commercial                  |       | $                            | 197        |                            | $          | — |   |
| Real estate                 |       | 1,233                        |       | 253                             |       |
| Consumer and other          |       | 58                           |       | —                          |       |
| Total  non-performing loans |       | $                            | 1,488      |                            | $          | 253 |   |

 

19

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At March 31,2008, there were six non-performing loans which were considered to beimpaired.  The first one is a consumer loan for $58,000 which has beenbrought current subsequent to the end of the first quarter.  There were three real estate loans reportablefor a total of $1,233,085.  Two of theseloans have been paid into a current position with the remaining loan of $126,694resulting in a foreclosure of the property and subsequent placement into theclassification of “ORE” (Other Real Estate). There were two non-performing commercial loans of which one has an SBAguarantee.  We are anticipating a loss ofbetween $15,000 and $20,000 on the sale of the collateral from this loan.  The other commercial loan is not expected toresult in a loss. There were no loan concentrations in excess of 10% of totalloans not otherwise disclosed as a category of loans as of March 31, 2008or December 31, 2007.  Management isnot aware of any potential problem loans, which were accruing and current at March 31,2008, where serious doubt exists as to the ability of the borrower to complywith the present repayment terms.

 

## **Allowance for Loan Losses Activity**

## ** **

We employ asystematic methodology for determining the allowance for loan losses thatincludes 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.

 

Our methodologyincorporates a variety of risk considerations, both quantitative andqualitative, in establishing an allowance for loan losses that managementbelieves is appropriate at each reporting date.

 

Quantitativefactors include our historical loss experience, delinquency and charge-offtrends, collateral values, changes in non-performing loans, and otherfactors.  Quantitative factors also incorporate known information aboutindividual loans, including borrowers’ sensitivity to interest rate movementsand borrowers’ sensitivity to quantifiable external factors including commodityprices as well as acts of nature (freezes, earthquakes, fires, etc.) that occurin a particular 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.

 

Our methodologyis, and has been, consistently followed.  However, as we add new products,increase in complexity, and expand our geographic coverage, we expect toenhance our methodology to keep pace with the size and complexity of the loanportfolio.  On an ongoing basis we engage outside firms to independentlyassess our methodology, and to perform independent credit reviews of our loanportfolio.  The FDIC and the California Department of FinancialInstitutions review the allowance for loan losses as an integral part of theexamination processes.  Management believes that our current methodologyis appropriate given our size and level of complexity.  Further,management believes that the allowance for loan losses is adequate as of March 31,2008 to cover known and inherent risks in the loan portfolio.  However,fluctuations in credit quality, or changes in economic conditions or otherfactors could cause management to increase or decrease the allowance for loanlosses as necessary.

 

The Board ofDirectors of the Bank reviews the adequacy of the allowance for loan losses atleast quarterly to include consideration of the relative risks in the portfolioand current economic conditions.  Theallowance is adjusted based on that review if, in the judgment of the loancommittee and management, changes are warranted.  The allowance for loan losses totaled$6,025,000 or 1.32% of total loans at March 31, 2008 and $5,232,000 or1.17% at December 31, 2007.  TheCompany has a separate reserve for unfunded loan commitments of $280,000 as of March 31,2008 and $860,000 as of December 31, 2007.

 

20

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

 

**TableSeven: Allowance for Loan Losses**

 
| ** **                                                                | ** ** | **Three Months  March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(In thousands, except for percentages)**            | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Average  loans outstanding                                                |       | $                                     | 449,986    |   | $ | 454,342 |   |
| Allowance  for possible loan losses at beginning of period                |       | $                                     | 6,092      |   | $ | 5,274 |   |
| Loans  charged off:                                                       |       |                                  |       |   |   |
| Commercial                                                                |       | (7                                    | )          | — |   |
| Real estate                                                               |       | —                                |       | — |   |
| Consumer                                                                  |       | (5                                    | )          | — |   |
| Total                                                                     |       | (12                                   | )          | — |   |
| Recoveries  of loans previously charged off:                              |       |                                  |       |   |   |
| Commercial                                                                |       | —                                |       | — |   |
| Real estate                                                               |       | —                                |       | — |   |
| Consumer                                                                  |       | —                                |       | — |   |
| Total                                                                     |       | —                                |       | — |   |
| Net  loan charge offs                                                     |       | (12                                   | )          | — |   |
|                                                                      |       |                                  |       |   |   |
| Additions  to allowance charged to operating expenses                     |       | 225                                   |       | 75 |   |
| Allowance  for unfunded loan commitments                                  |       | (280                                  | )          | — |   |
| Allowance  for loan losses at end of period                               |       | $                                     | 6,025      |   | $ | 5,349 |   |
| Ratio  of net charge-offs to average loans outstanding                    |       | 0.00                                  | %          | 0.00 | % |
| Provision  for possible loan losses to average loans outstanding          |       | 0.05                                  | %          | 0.02 | % |
| Allowance  for loan losses to loans net of deferred fees at end of period |       | 1.32                                  | %          | 1.19 | % |

 

21

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It isthe policy of management to maintain the allowance for loan losses at a leveladequate for known and inherent risks in the portfolio.  Based on information currently available toanalyze inherent credit risk, including economic factors, overall creditquality, historical delinquencies and a history of actual charge-offs,management believes that the provision for loan losses and the allowance areprudent and adequate.  The Companygenerally makes monthly allocations to the allowance for loan losses.  The budgeted allocation is based on estimatesof loss risk and loan growth. Adjustments may be made based on differences from estimated loan growth,the types of loans constituting this growth, changes in risk ratings within theportfolio, and general economic conditions. However, no prediction of the ultimate level of loans charged off infuture years can be made with any certainty.

 

**OtherReal Estate**

 

During the firstquarter ending March 31, 2008 the Company had acquired six single familyresidential lots as a result of the foreclosure on these properties.  These lots are classified as other realestate (“ORE”) and included in accrued interest receivable and other assets onthe Company’s balance sheet.  Two ofthese properties are currently being marketed through local realtychannels.  The other four properties areat a higher elevation and will be marketed for sale later this spring.  These properties will also be marketed forsale as soon as the snow melts.  At December 31,2007, the Company did not have any ORE properties.

 

## **Deposits**

## ** **

At March 31,2008, total deposits were $501,994,000 representing an increase of $1,003,000(.20%) over the December 31, 2007 balance of $500,991,000.  A change in the mix of deposits has occurredthroughout the first three months of 2008. Non-interest bearing deposits decreased $5 million (6.5%) from $77.6million at December 31, 2007. Interest bearing demand deposits increased $1.4 million (.94%) to $153.9million while savings deposits increased $7.1 million (6.4%).  Certificate of deposit balances decreased by$2 million (1.3%) to $157.5 million.

 

From May throughJuly 2008 approximately $96 million in certificate of deposit balanceswill mature and reprice.  We see this asan opportunity to dramatically decrease our interest expense as these depositscurrently have an average weighted yield of 4.95%.   With current certificate of deposit rates inthe 2.50% range, we anticipate reducing our offering rates by a minimum of 200basis points while still retaining these deposits.  A total of $4.9 million in brokered depositsmatured and were returned during the first quarter of 2008. Only $3.2 millionnow remain on deposit and will mature during 2008.

 

## **Capital Resources**

## ** **

The current andprojected capital position of the Company and the impact of capital plans andlong-term strategies are reviewed regularly by management. The Company’scapital position represents the level of capital available to support continuedoperations.

 

The Board ofDirectors of the Company authorized the payment of quarterly cash dividendstotaling $0.32 per share for 2007 and $0.8 per share for the first quarter of2008.  The payment of dividends in the future is subject to the discretionof the Board of Directors of the Company and will depend on earnings, thefinancial condition of the Company and other relevant factors.

 

The Company andits subsidiary Bank are subject to certain regulations issued by the Board ofGovernors of the Federal Reserve System and the FDIC which require maintenanceof certain levels of capital.  At March 31, 2008, shareholders’equity was $51,630,000, representing an increase of $656,000 (1.3%) from$50,974,000 at December 31, 2007.  The increase is primarily theresult of the exercise of stock options and net income from the period offsetby the stock based compensation expense recorded and cash dividends discussedabove.  The Company’s ratio of total risk-based capital to risk adjustedassets was 11.4% at March 31, 2008 and December 31, 2007.  Tier1 risk-based capital to risk-adjusted assets was 10.2% at March 31, 2008and 10.4% at December 31, 2007.

 

22

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Table Eight belowlists the Company and the Bank capital ratios at March 31, 2008 and December 31,2007, as well as the minimum ratios required under regulatory definitions ofcapital adequacy.

 

**Table Eight:  Capital Ratios**

 
| ** **                                         | ** ** | **At March 31,** | ** ** | **At December 31,** | ** ** | **Minimum Regulatory** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| **Capital to Risk-Adjusted Assets** | ** ** | **2008**                   | ** ** | **2007**                      | ** ** | **Requirement**             | ** ** |
|                                               |       |                       |       |                          |       |                        |       |
| Company                                            |       |                       |       |                          |       |                        |       |
| Leverage ratio                                     |       | 10.2                       | %          | 11.6                          | %          | 4.0                         | %          |
|                                               |       |                       |       |                          |       |                        |       |
| Tier 1 Risk-Based  Capital                         |       | 11.6                       | %          | 13.1                          | %          | 4.0                         | %          |
|                                               |       |                       |       |                          |       |                        |       |
| Total Risk-Based  Capital                          |       | 12.8                       | %          | 14.1                          | %          | 8.0                         | %          |
|                                               |       |                       |       |                          |       |                        |       |
| Bank                                               |       |                       |       |                          |       |                        |       |
| Leverage ratio                                     |       | 9.2                        | %          | 9.3                           | %          | 4.0                         | %          |
|                                               |       |                       |       |                          |       |                        |       |
| Tier 1 Risk-Based  Capital                         |       | 10.2                       | %          | 10.4                          | %          | 4.0                         | %          |
|                                               |       |                       |       |                          |       |                        |       |
| Total Risk-Based  Capital                          |       | 11.4                       | %          | 11.4                          | %          | 8.0                         | %          |

 

Capital ratios arereviewed on a regular basis to ensure that capital exceeds the prescribedregulatory minimums and is adequate to meet future needs.  All ratios are in excess of the regulatorydefinition of “Minimum” at March 31, 2008 and December 31, 2007.  The Bank was considered “well-capitalized” byregulatory standards, at March 31, 2008 and December 31, 2007.

 

Subsequent to March 31,2008 the Company issued a Tender Offer for 1 million shares of the Company’sCommon Stock at $13.00 per share.  Thisoffer was fully subscribed and funds were paid to shareholders in May 2008.The pro-forma capital ratios giving effect to the Tender Offerusing the March 31, 2008 capital and average asset numbers, and adjustingfor the reduction in capital of $13 million the Company’s ratio of total risk-based capital to riskadjusted assets would have been 10.3% and the Tier 1 risk-based capital torisk-adjusted assets would have been 9.1%.

 

**Item 3.  Quantitativeand Qualitative Disclosures about Market Risk**

 

**MarketRisk Management**

 

*Overview*. Market risk is the risk of loss from adverse changes in market pricesand rates.  The Company’s market riskarises primarily from interest rate risk inherent in its loan, investment anddeposit portfolios.  The goal formanaging the assets and liabilities of the Company is to maximize shareholdervalue and earnings while maintaining a high quality balance sheet withoutexposing the Company to undue interest rate risk.

 

TheBoard of Directors has overall responsibility for the interest rate riskmanagement policies.  The Bank has anAsset and Liability Management Committee (ALCO) that establishes and monitorsguidelines to control the sensitivity of earnings to changes in interest rates.

 

*Asset/LiabilityManagement*.  Activities involved in asset/liabilitymanagement include, but are not limited to, lending, accepting and placingdeposits, investing in securities, using trust preferred securities andborrowings.  Interest rate risk is theprimary market risk associated with asset/liability management.  Sensitivity of earnings to interest ratechanges arises when yields on assets change in a different time period or in adifferent amount from that of interest costs on liabilities.  To mitigate interest rate risk, the structureof the balance sheet is managed with the goal that movements of interest rateson assets and liabilities are correlated and contributes to earnings even inperiods of volatile interest rates.  Theasset/liability management policy sets limits on the acceptable amount ofvariance in net interest margin and market value of equity under changinginterest environments.  The Company usessimulation models to forecast earnings, net interest margin and market value ofequity.

 

Simulationof earnings is the primary tool used to measure the sensitivity of earnings tointerest rate changes.  Using computer-modelingtechniques, the Company is able to estimate the potential impact of changing interestrates on earnings.  A balance sheetforecast is prepared monthly using inputs of actual loans, securities andinterest bearing liability (i.e. deposits/borrowings) positions as thebeginning base.  The forecast balancesheet is processed against seven interest rate scenarios.  These scenarios include a 100, 200 and 300basis point rising rate forecast, a flat rate forecast and a 100, 200 and 300basis point falling rate forecast which take place within a one year timeframe.

 

23

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Thenet interest income is measured during the year assuming a gradual change inrates 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 Tablenine for the two periods, fall within the parameters of the Bank’s policy forinterest rate risk.

 

**Table Nine: Interest Rate Risk Simulation of Net Interest as of March 31, 2007and December 31, 2006**

 
| ** **                               | ** ** | **$ Change in NII** | ** ** | **$ Change in NII** | ** ** |
|------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **from Current**              | ** ** | **from Current**              | ** ** |
| ** **                               | ** ** | **12 Month**                  | ** ** | **12 Month**                  | ** ** |
| ** **                               | ** ** | **Horizon**                        | ** ** | **Horizon**                        | ** ** |
| **(In thousands)**                  | ** ** | **March 31, 2008**       | ** ** | **December 31,**              | ** ** |
| Variation  from a constant rate scenario |       |                               |       |                               |       |
| +200bp                                   |       | $                                  | 3,338      |                               | $          | 3,510 |   |
| - 200bp                                  |       | $                                  | (3,687     | )                                  | $          | (3,847 | ) |

 

Assumptions areinherently uncertain, and, consequently, the model cannot precisely measure netinterest income or precisely predict the impact of changes in interest rates onnet interest income. Actual results will differ from simulated results due totiming, magnitude and frequency of interest rate changes, as well as changes inmarket conditions 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.

 

## **Inflation**

## ** **

The impact ofinflation on a financial institution differs significantly from that exerted onmanufacturing, or other commercial concerns, primarily because its assets andliabilities are largely monetary.  Ingeneral, inflation primarily affects the Company and it subsidiaries throughits effect on market rates of interest, which affects the Company’s ability toattract loan customers.  Inflationaffects the growth of total assets by increasing the level of loan demand, andpotentially adversely affects capital adequacy because loan growth ininflationary periods can increase at rates higher than the rate that capitalgrows through retention of earnings, which may be generated in the future.  In addition to its effects on interest rates,inflation increases overall operating expenses. Inflation has not had a material effect upon the results of operationsof the Company and its subsidiaries during the three month periods ended March 31,2008, and 2007.

 

**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 assetsand liabilities contribute to the Company’s liquidity position.  Federal funds lines, short-term investmentsand securities, and loan repayments contribute to liquidity, along with depositincreases, while loan funding and deposit withdrawals decrease liquidity.  The Company assesses the likelihood ofprojected funding requirements by reviewing historical funding patterns,current and forecasted economic 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 March 31,2008, consolidated liquid assets totaled $80 million or 13.8% of total assetscompared to $86 million or 14.8% of total assets on December 31,2007.  In addition to liquid assets, theCompany maintains short-term lines of credit in the amount of $15,000,000 withcorrespondent banks.  There were noborrowings outstanding under these arrangements at March 31, 2008.

 

24

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TheBank also has informal agreements with various other banks to sellparticipations in loans, if necessary. The Company serves primarily a business and professional customer baseand, as such, its deposit base is susceptible to economic fluctuations.  Accordingly, management strives to maintain abalanced position of liquid assets to volatile and cyclical deposits.

 

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

 

## **Off-Balance Sheet Items**

## ** **

The Company hascertain ongoing commitments under operating leases.  These commitments do not significantly impactoperating results. As of March 31, 2006 and December 31, 2007,commitments to extend credit and letters of credit were the only financialinstruments with off-balance sheet risk. The Company has not entered into any contracts for financial derivativeinstruments such as futures, swaps, options or similar instruments.  Commitments to fund loans and stand-byletters of credit at March 31, 2008 and December 31, 2007 wereapproximately $180,454,000 and $190,394,000, respectively.  Such loans relate primarily to revolvinglines of credit and other commercial loans, and to real estate constructionloans.  As a percentage of net loans,these off-balance sheet items represent 40.0% and 43.1%, respectively.

 

**Item 4. Controls and Procedures**

 

(a) Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management as of the end of the Company’s fiscal quarter ended March 31, 2008. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

 

(b) Internal Control Over Financial Reporting: An evaluation of any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the Company’s fiscal quarter ended March 31, 2008, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that no change identified in connection with such evaluation has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

25

## ** **

## **PART II – OTHER INFORMATION**

## ** **

Item 1.  Legal Proceedings.

 

None

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, youshould carefully consider the factors discussed in Part I, “Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2007, which could materially affect our business, financial condition or futureresults. The risks described in our Annual Report on Form 10-K are not theonly risks facing our Company. Additional risks and uncertainties not currentlyknown to us or that we currently deem to be immaterial also may materiallyadversely affect our business, financial condition and/or operating results.”

 

Item 2.  Changes in Securities and Use of Proceeds.

 

The Board of Directorsapproved a plan at their March 27, 2007 meeting to repurchase up to$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.

 

During the three monthsended March 31, 2008, 12,067 shares of common stock were repurchased underthe share repurchase program at an average weighted cost of $9.84 per share,totaling $118,739.

 

Shares repurchased duringthe first quarter ending March 31, 2008.

 
| ** **  | ** ** | ** **                             | ** ** | ** **                      | ** ** | ** **                                                   | ** ** | **(d) Maximum Number (or**                     | ** **   |
|-------------|------------|----------------------------------------|------------|---------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------|--------------|
| ** **  | ** ** | ** **                             | ** ** | ** **                      | ** ** | **(c)Total Number of Shares**                 | ** ** | **approximate dollar value)**                       | ** **   |
| ** **  | ** ** | **(a) Total number of** | ** ** | **(b) Average Price** | ** ** | **(or Units) Purchased as Part of** | ** ** | **of shares (or Units) that may**    | ** **   |
| ** **  | ** ** | **Shares (or Units)**        | ** ** | **Paid per Share**    | ** ** | **Publicly Announced Plans or**               | ** ** | **yet be purchased under the Plans** | ** **   |
| **Period**  | ** ** | **Purchased**                          | ** ** | **(or Unit)**              | ** ** | **Programs**                                                 | ** ** | **or Programs**                                          | ** **   |
| ** **  | ** ** | ** **                             | ** ** | ** **                      | ** ** | ** **                                                   | ** ** | ** **                                                    | ** **   |
| Month #1    |       |                                   |       |                            |       |                                                         |       |                                                          |         |
| 01-01-08 to |       |                                   |       |                            |       |                                                         |       |                                                          |         |
| 01-31-08    |       | 12,067                                 |       | 9.8406                          |       | 12,067                                                       |       | $                                                             | 5,777,682.00 |   |
|        |       |                                   |       |                            |       |                                                         |       |                                                          |         |
| Month #2    |       |                                   |       |                            |       |                                                         |       |                                                          |         |
| 02-01-08 to |       |                                   |       |                            |       |                                                         |       |                                                          |         |
| 02-29-08    |       | 0                                      |       | 0.0000                          |       | 0                                                            |       | $                                                             | 5,777,682.00 |   |
|        |       |                                   |       |                            |       |                                                         |       |                                                          |         |
| Month #3    |       |                                   |       |                            |       |                                                         |       |                                                          |         |
| 03-01-08 to |       |                                   |       |                            |       |                                                         |       |                                                          |         |
| 03-31-08    |       | 0                                      |       | 0.0000                          |       | 0                                                            |       | $                                                             | 5,777,682.00 |   |

 

Item 3.  Defaults Upon Senior Securities.

 

None

 

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

 

None

 

Item 5.  Subsequent Event

 

During the month of April 2008the Company issued a Tender Offer for 1 million shares at $13.00 pershare.  This offer was fully subscribedand funds were paid to shareholders in May.

 

26

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Item 6.  Exhibits

 

(a)  Exhibits

 

Exhibit

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

 

27

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities and Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|             | COMMUNITY  VALLEY BANCORP           |
|------------------|-------------------------------------|
|             |                                |
| May 9, 2008 |                                | By: /s/ *Keith C. Robbins* |
|             |                                |
|             | Keith C. Robbins                    |
|             |                                |
|             | President, Chief  Executive Officer |
|                  |                                     |  |

 

 
| May 9, 2008 |                                               | By*: /s/ John F. Coger* |
|------------------|----------------------------------------------------|-------------------------|
|             |                                               |
|             | John F. Coger                                      |
|             | Executive Vice  President, Chief Financial Officer |
|             | and Chief  Operating Officer                       |

 

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