Table of Contents

 

 

 

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, 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 September 30, 2009**

 
| **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 E. Lassen Avenue, Chico, California** | ** ** | **95973**                 |
| (Address  of principal executive offices)    |       | (Zip  code)               |

 

**(530) 899-2344**

(Registrant’stelephone number, including area code)

 

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  x     No  o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes  o      No  o

 

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

 

| Large  accelerated filer  o |   | Accelerated  filer  o |
|---------------------------------------|--------|---------------------------------|
|                                  |   |                            |
| Non-accelerated  filer  o   |   | Smaller  reporting company x    |

 

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

 

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

 

No par value Common Stock — 6,699,603 shares outstanding at November 16, 2009.

 

 

 

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Table of Contents

 

**Table of Contents**

 
| PART I  |   |                                                                                                                            |   | 3      |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|         |   |                                                                                                                            |   |   |
|         |   | Item 1. Financial Statements (unaudited)                                                                                        |   | 3      |
|         |   |                                                                                                                            |   |   |
|         |   | Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations of Community Valley Bancorp |   | 15     |
|         |   |                                                                                                                            |   |   |
|         |   | Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                                             |   | 33     |
|         |   |                                                                                                                            |   |   |
|         |   | Item 4. Controls and Procedures                                                                                                 |   | 34     |
|         |   |                                                                                                                            |   |   |
| PART II |   |                                                                                                                            |   | 36     |
|         |   |                                                                                                                            |   |   |
|         |   | Item  1. Legal Proceedings                                                                                                      |   | 36     |
|         |   |                                                                                                                            |   |   |
|         |   | Item  1A. Risk Factors                                                                                                          |   | 36     |
|         |   |                                                                                                                            |   |   |
|         |   | Item 2. Changes in Securities and Use of Proceeds                                                                               |   | 36     |
|         |   |                                                                                                                            |   |   |
|         |   | Item 4. Submission of Matters to a Vote of Security  Holders                                                                    |   | 36     |
|         |   |                                                                                                                            |   |   |
|         |   | Item  5. Other Information                                                                                                      |   | 36     |
|         |   |                                                                                                                            |   |   |
|         |   | Item 6.  Exhibits                                                                                                               |   | 36     |
|         |   |                                                                                                                            |   |   |
|         |   | Signatures                                                                                                                      |   | 37     |
|         |   |                                                                                                                            |   |   |
|         |   | Ex. 31.1. Certification of  CEO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002                                  |   |   |
|         |   |                                                                                                                            |   |   |
|         |   | Ex. 31.2 Certification of  CFO Pursuant to Section 302 of the Sarbanes Oxley Act of 2002                                   |   |   |
|         |   |                                                                                                                            |   |   |
|         |   | Ex. 32.1 Certification of  CEO Pursuant to Section 906 of the Sarbanes Oxley Act of 2002                                   |   |   |
|         |   |                                                                                                                            |   |   |
|         |   | Ex. 32.2 Certification of  CFO Pursuant to Section 906 of the Sarbanes Oxley Act of 2002                                   |   |   |

 

2

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Table of Contents

 

**PART I - FINANCIAL INFORMATION**

**Item 1**

 

**COMMUNITY VALLEY BANCORP**

**CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)**

(dollars in thousands, except share data)

 
| ** **                                                                                                                                                                         | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ASSETS                                                                                                                                                                             |       |                        |       |                       |       |
| Cash and due  from banks                                                                                                                                                           |       | $                           | 12,703     |                       | $          | 21,743 |   |
| Federal funds  sold                                                                                                                                                                |       | 23,220                      |       | 36,605                     |       |
| Total  cash & cash equivalents                                                                                                                                            |       | 35,923                      |       | 58,348                     |       |
|                                                                                                                                                                               |       |                        |       |                       |       |
| Interest-bearing  deposits in banks                                                                                                                                                |       | 2,740                       |       | 2,576                      |       |
| Investment  securities (fair value of $5,716 at September 30, 2009, and $7,100 at  December 31, 2008)                                                                    |       | 5,697                       |       | 7,096                      |       |
| Loans held for  sale at lower of cost or market                                                                                                                                    |       | 409                         |       | 320                        |       |
| Loans, less  allowance for loan losses of $12,771 at September 30, 2009 and $7,826 at  December 31, 2008                                                                 |       | 451,256                     |       | 486,522                    |       |
| Premises and  equipment, net                                                                                                                                                       |       | 5,701                       |       | 7,013                      |       |
| Other real  estate                                                                                                                                                                 |       | 13,484                      |       | 2,068                      |       |
| Bank owned life  insurance                                                                                                                                                         |       | 11,572                      |       | 11,199                     |       |
| Accrued interest  receivable and other assets                                                                                                                                      |       | 26,910                      |       | 20,102                     |       |
| Total assets                                                                                                                                                                       |       | $                           | 553,692    |                       | $          | 595,244 |   |
|                                                                                                                                                                               |       |                        |       |                       |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                                         |       |                        |       |                       |       |
|                                                                                                                                                                               |       |                        |       |                       |       |
| Deposits:                                                                                                                                                                          |       |                        |       |                       |       |
| Non-interest  bearing                                                                                                                                                              |       | $                           | 73,443     |                       | $          | 82,159 |   |
| Interest bearing                                                                                                                                                                   |       | 416,873                     |       | 444,326                    |       |
| Total deposits                                                                                                                                                                     |       | 490,316                     |       | 526,485                    |       |
|                                                                                                                                                                               |       |                        |       |                       |       |
| ESOP and other  notes payable                                                                                                                                                      |       | 4,659                       |       | 5,054                      |       |
| Junior  subordinated debentures                                                                                                                                                    |       | 8,248                       |       | 8,248                      |       |
| Accrued interest  payable and other liabilities                                                                                                                                    |       | 16,302                      |       | 15,318                     |       |
| Total  liabilities                                                                                                                                                                 |       | 519,525                     |       | 555,105                    |       |
|                                                                                                                                                                               |       |                        |       |                       |       |
| Commitments and  contingencies (Note 5)                                                                                                                                            |       |                        |       |                       |       |
|                                                                                                                                                                               |       |                        |       |                       |       |
| Shareholders’  equity                                                                                                                                                         |       |                        |       |                       |       |
| Preferred stock  - no par value; 10,000,000 shares authorized; none outstanding                                                                                                    |       |                        |       |                       |       |
| Common stock -  no par value; 20,000,000 shares authorized; issued and outstanding -  6,699,603 shares at September 30, 2009, and 6,699,553 shares at  December 31, 2008 |       | 10,182                      |       | 10,147                     |       |
| Unallocated ESOP  shares - 164,341 shares at September 30, 2009 and 124,207 shares at  December 31, 2008 (at cost)                                                       |       | (1,599                      | )          | (1,438                     | )          |
| Retained  earnings                                                                                                                                                                 |       | 25,453                      |       | 31,416                     |       |
| Accumulated  other comprehensive income, net                                                                                                                                       |       | 131                         |       | 14                         |       |
| Total  shareholders’ equity                                                                                                                                                   |       | 34,167                      |       | 40,139                     |       |
| Total  liabilities and shareholders’ equity                                                                                                                                   |       | $                           | 553,692    |                       | $          | 595,244 |   |

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

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**COMMUNITY VALLEY BANCORP**

**CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)**

(dollarsin thousands, except per share data)

 
| ** **                                                 | ** ** | **For the periods ended September 30,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                 | ** ** | **Three Months**                             | ** ** | **Nine Months** | ** ** |
| ** **                                                 | ** ** | **2009**                                     | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest income:                                           |       |                                         |       |   |   |   |   |   |   |
| Interest and  fees on loans                                |       | $                                            | 6,978      |   | $ | 9,225 |   | $ | 21,388 |   | $ | 27,126 |   |
| Interest on  Federal funds sold                            |       | 21                                           |       | 83 |   | 72 |   | 534 |   |
| Interest on  deposits in banks                             |       | 18                                           |       | 49 |   | 61 |   | 355 |   |
| Interest on  investment securities:                        |       |                                         |       |   |   |   |   |   |   |
| Taxable                                                    |       | 45                                           |       | 97 |   | 164 |   | 315 |   |
| Exempt from  Federal income tax                            |       | 17                                           |       | 17 |   | 49 |   | 49 |   |
| Total interest  income                                     |       | 7,079                                        |       | 9,471 |   | 21,734 |   | 28,379 |   |
|                                                       |       |                                         |       |   |   |   |   |   |   |
| Interest  expense:                                         |       |                                         |       |   |   |   |   |   |   |
| Interest expense  on deposits                              |       | 1,280                                        |       | 2,216 |   | 4,803 |   | 7,424 |   |
| Interest expense  on junior subordinated debentures        |       | 44                                           |       | 143 |   | 330 |   | 423 |   |
| Interest expense  on notes payable                         |       | 105                                          |       | 80 |   | 264 |   | 113 |   |
| Total interest  expense                                    |       | 1,429                                        |       | 2,439 |   | 5,397 |   | 7,960 |   |
| Net interest  income before provision for loan losses      |       | 5,650                                        |       | 7,032 |   | 16,337 |   | 20,419 |   |
| Provision for  loan losses                                 |       | 5,900                                        |       | 750 |   | 13,000 |   | 1,425 |   |
| Net interest  income after provision for loan losses       |       | (250                                         | )          | 6,282 |   | 3,337 |   | 18,994 |   |
|                                                       |       |                                         |       |   |   |   |   |   |   |
| Non-interest  income:                                      |       |                                         |       |   |   |   |   |   |   |
| Sale of merchant  processing portfolio                     |       | —                                       |       | — |   | 2,640 |   | — |   |
| Loss on sale of  investment security                       |       | —                                       |       | — |   | (172 | ) | — |   |
| Other income                                               |       | 2,149                                        |       | 2,539 |   | 7,178 |   | 6,708 |   |
| Total  non-interest income                                 |       | 2,149                                        |       | 2,539 |   | 9,646 |   | 6,708 |   |
|                                                       |       |                                         |       |   |   |   |   |   |   |
| Non-interest  expenses:                                    |       |                                         |       |   |   |   |   |   |   |
| Salaries and  employee benefits                            |       | 3,112                                        |       | 3,729 |   | 9,676 |   | 11,080 |   |
| Occupancy                                                  |       | 737                                          |       | 727 |   | 2,123 |   | 2,116 |   |
| Furniture and  equipment                                   |       | 599                                          |       | 668 |   | 1,887 |   | 1,960 |   |
| Other real  estate                                         |       | 2,265                                        |       | 31 |   | 3,622 |   | 39 |   |
| FDIC assessments                                           |       | 267                                          |       | 78 |   | 1,315 |   | 234 |   |
| Other expense                                              |       | 1,714                                        |       | 1,723 |   | 4,903 |   | 5,240 |   |
| Total  non-interest expense                                |       | 8,694                                        |       | 6,956 |   | 23,526 |   | 20,669 |   |
|                                                       |       |                                         |       |   |   |   |   |   |   |
| (Loss) income  before (benefit) provision for income taxes |       | (6,795                                       | )          | 1,865 |   | (10,543 | ) | 5,033 |   |
|                                                       |       |                                         |       |   |   |   |   |   |   |
| (Benefit)  provision for income taxes                      |       | (3,232                                       | )          | 564 |   | (4,580 | ) | 1,864 |   |
|                                                       |       |                                         |       |   |   |   |   |   |   |
| Net (loss)  income                                         |       | $                                            | (3,563     | ) | $ | 1,301 |   | $ | (5,963 | ) | $ | 3,169 |   |
|                                                       |       |                                         |       |   |   |   |   |   |   |
| Basic (loss)  earnings per share                           |       | $                                            | (0.55      | ) | $ | 0.20 |   | $ | (0.91 | ) | $ | 0.45 |   |
| Diluted (loss)  earnings per share                         |       | $                                            | (0.55      | ) | $ | 0.20 |   | $ | (0.91 | ) | $ | 0.44 |   |
|                                                       |       |                                         |       |   |   |   |   |   |   |
| Cash dividends  per share                                  |       | $                                            | —     |   | $ | 0.04 |   | $ | — |   | $ | 0.16 |   |

 

See Notes toUnaudited Condensed Consolidated Financial Statements

 

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**COMMUNITY VALLEY BANCORP**

**CONDENSED CONSOLIDATED STATEMENT OF CHANGES INSHAREHOLDERS’ EQUITY (Unaudited)**

 (In thousands except number ofshares)

 
| ** **                                                                  | ** ** | ** **            | ** ** | ** **      | ** ** | ** **           | ** ** | ** **                   | ** ** | **Accumulated Other** | ** ** | ** **        | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|-----------------|------------|----------------------|------------|------------------------------|------------|----------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | ** **            | ** ** | ** **      | ** ** | ** **           | ** ** | ** **                   | ** ** | **Comprehensive**          | ** ** | **Total**         | ** ** | ** **             | ** ** |
| ** **                                                                  | ** ** | **Common Stock** | ** ** | **Unallocated** | ** ** | **Retained**         | ** ** | **Income, net of** | ** ** | **Shareholders’**     | ** ** | **Comprehensive** | ** ** |
| ** **                                                                  | ** ** | **Shares**            | ** ** | **Amount**      | ** ** | **ESOP shares** | ** ** | **Earnings**                 | ** ** | **taxes**                  | ** ** | **Equity**        | ** ** | **Income (Loss)** | ** ** |
| Balance, January 1,  2008                                              |       | 7,607,908             |       | $               | 10,910     |                 | $          | (1,407                       | )          | $                          | 41,454     |              | $          | 17                     |       | $ | 50,974 |   |   |   |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       |                   |       |
| Comprehensive  income                                                       |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       |                   |       |
| Net income                                                                  |       |                  |       |            |       |                 |       | 2,739                        |       |                       |       | 2,739             |       | $                      | 2,739      |   |
| Other  comprehensive income                                                 |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       |                   |       |
| Net change in  unrealized gains on available-for-sale investment securities |       |                  |       |            |       |                 |       |                         |       | (3                         | )          | (3                | )          | (3                     | )          |
| Total  comprehensive income                                                 |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       | $                      | 2,736      |   |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       |                   |       |
| Exercise of stock  options and related tax benefit                          |       | 103,651               |       | 654             |       |                 |       |                         |       |                       |       | 654               |       |                   |       |
| Amortization of  stock compensation-ESOP shares                             |       |                  |       | (8              | )          | 90                   |       |                         |       |                       |       | 82                |       |                   |       |
| Shares acquired  by ESOP                                                    |       |                  |       |            |       | (121                 | )          |                         |       |                       |       | (121              | )          |                   |       |
| Cash dividends-  $.12 per share                                             |       |                  |       |            |       |                 |       | (1,148                       | )          |                       |       | (1,148            | )          |                   |       |
| Stock-based  compensation expense                                           |       |                  |       | 80              |       |                 |       |                         |       |                       |       | 80                |       |                   |       |
| Retirement of  common stock                                                 |       | (1,012,006            | )          | (1,489          | )          |                 |       | (11,629                      | )          |                       |       | (13,118           | )          |                   |       |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       |                   |       |
| Balance,  December 31, 2008                                            |       | 6,699,553             |       | 10,147          |       | (1,438               | )          | 31,416                       |       | 14                         |       | 40,139            |       |                   |       |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       |                   |       |
| Comprehensive  loss                                                         |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       |                   |       |
| Net loss                                                                    |       |                  |       |            |       |                 |       | (5,963                       | )          |                       |       | (5,963            | )          | $                      | (5,963     | ) |
| Other  comprehensive income                                                 |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       |                   |       |
| Net change in  unrealized gains on available-for-sale investment securities |       |                  |       |            |       |                 |       |                         |       | 117                        |       | 117               |       | 117                    |       |
| Total  comprehensive loss                                                   |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       | $                      | (5,846     | ) |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       |                   |       |
| Exercise of stock  options and related tax benefit                          |       | 50                    |       | 1               |       |                 |       |                         |       |                       |       | 1                 |       |                   |       |
| Amortization of  stock compensation-ESOP shares                             |       |                  |       | (10             | )          | 56                   |       |                         |       |                       |       | 46                |       |                   |       |
| Shares acquired  by ESOP                                                    |       |                  |       |            |       | (217                 | )          |                         |       |                       |       | (217              | )          |                   |       |
| Stock-based  compensation expense                                           |       |                  |       | 44              |       |                 |       |                         |       |                       |       | 44                |       |                   |       |
|                                                                        |       |                  |       |            |       |                 |       |                         |       |                       |       |              |       |                   |       |
| Balance,  September 30, 2009                                           |       | 6,699,603             |       | $               | 10,182     |                 | $          | (1,599                       | )          | $                          | 25,453     |              | $          | 131                    |       | $ | 34,167 |   |   |   |

 

SeeNotes to Unaudited Condensed Consolidated Financial Statements

 

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**COMMUNITY VALLEY BANCORP**

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

(In thousands)

 
| ** **                                                                         | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 30,** | ** ** |
| ** **                                                                         | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Cash flows from  operating activities:                                             |       |                   |       |   |   |
| Net (loss)  income                                                                 |       | $                      | (5,963     | ) | $ | 3,169 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Provision for  loan losses                                                         |       | 13,000                 |       | 1,425 |   |
| Decrease in  deferred loan origination fees                                        |       | (260                   | )          | (149 | ) |
| Depreciation and  amortization, net                                                |       | 1,476                  |       | 1,596 |   |
| Gain on  disposition of Bank premises and equipment                                |       | (22                    | )          | (4 | ) |
| Loss on write-down  of other real estate                                           |       | 3,763                  |       | — |   |
| Net increase in  loans held for sale                                               |       | (88                    | )          | (478 | ) |
| Increase in cash  surrender value of bank-owned life insurance, net                |       | (313                   | )          | (325 | ) |
| Excess tax  benefit from exercise of stock options                                 |       | —                 |       | (163 | ) |
| Non-cash  compensation expense associated with the ESOP                            |       | 46                     |       | 124 |   |
| Stock based  compensation                                                          |       | 44                     |       | 63 |   |
| Loss recognized  on investment security                                            |       | 172                    |       | — |   |
| (Increase)  decrease in accrued interest receivable and other assets               |       | (3,886                 | )          | 357 |   |
| Increase in  accrued interest payable and other liabilities                        |       | 1,069                  |       | 2,844 |   |
| Provision for  deferred income taxes                                               |       | (3,000                 | )          | (242 | ) |
| Net cash  provided by operating activities                                         |       | 6,038                  |       | 8,217 |   |
|                                                                               |       |                   |       |   |   |
| Cash flows from  investing activities:                                             |       |                   |       |   |   |
| Increase in  interest-bearing deposits in banks                                    |       | (164                   | )          | 1,080 |   |
| Proceeds from  matured or called available-for-sale investment securities          |       | 3,000                  |       | 2,000 |   |
| Proceeds from  principal payments on available-for-sale investment securities      |       | 217                    |       | 163 |   |
| Proceeds from  matured or called held-to-maturity investment securities            |       | 88                     |       | 1,000 |   |
| Proceeds from  principal payments of held-to-maturity investment securities        |       | 118                    |       | 185 |   |
| Purchase of  available-for-sale investment securities                              |       | (1,000                 | )          | (4,009 | ) |
| Purchase of  held-to-maturity investment securities                                |       | (996                   | )          | (1,750 | ) |
| Purchases of  premises and equipment                                               |       | (172                   | )          | (678 | ) |
| Proceeds from  sale of premises and equipment                                      |       | 24                     |       | 9,712 |   |
| Acquisition of  other real estate                                                  |       | (319                   | )          | — |   |
| Proceeds from  sale of other real estate                                           |       | 1,661                  |       | — |   |
| Premiums paid  for life insurance policies                                         |       | (60                    | )          | — |   |
| Net decrease  (increase) in loans                                                  |       | 5,920                  |       | (59,273 | ) |
| Net cash  provided by (used in) investing activities                               |       | 8,317                  |       | (51,570 | ) |
|                                                                               |       |                   |       |   |   |
| Cash flows from  financing activities:                                             |       |                   |       |   |   |
| Net (decrease)  increase in demand, interest-bearing and savings deposits          |       | (3,441                 | )          | 4,935 |   |
| Net decrease in  time deposits                                                     |       | (32,728                | )          | 27,443 |   |
| Proceeds from  note payable                                                        |       | —                 |       | 4,000 |   |
| Repayment of  note payable                                                         |       | (500                   | )          | — |   |
| Repayment of  ESOP note payable                                                    |       | (112                   | )          | (117 | ) |
| Proceeds from  ESOP note payable                                                   |       | 217                    |       | — |   |
| Purchase of ESOP  shares                                                           |       | (217                   | )          | — |   |
| Payment of cash  dividends                                                         |       | —                 |       | (1,490 | ) |
| Tax benefit from  the exercise of stock options                                    |       | —                 |       | 163 |   |
| Proceeds from  exercise of stock options                                           |       | 1                      |       | 467 |   |
| Retirement of  common stock                                                        |       | —                 |       | (13,118 | ) |
| Repayment of  junior subordinated debentures                                       |       | —                 |       | (8,248 | ) |
| Net cash (used  in) provided by financing activities                               |       | (36,780                | )          | 14,035 |   |
|                                                                               |       |                   |       |   |   |
| Decrease in cash  and cash equivalents                                             |       | (22,425                | )          | (29,318 | ) |
|                                                                               |       |                   |       |   |   |
| Cash and cash  equivalents at beginning of year                                    |       | 58,348                 |       | 86,004 |   |
|                                                                               |       |                   |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                      | 35,923     |   | $ | 56,686 |   |

 

See Notes toUnaudited Condensed Consolidated Financial Statements

 

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Community Valley Bancorp

 

NOTESTO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

**1.BASIS OF PRESENTATION**

 

The accompanying unauditedcondensed consolidated financial statements of Community Valley Bancorp andsubsidiaries (the “Company”) have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (the “SEC”) and theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, certain information and footnote disclosures required byaccounting principles generally accepted in the United States of America (GAAP)for annual financial statements are not included herein, however the Companybelieves that the disclosures made are adequate to make the information notmisleading. In the opinion of management, all adjustments (which consist solelyof normal recurring adjustments) considered necessary for a fair presentationof the results for the interim periods presented have been included. Theseinterim consolidated financial statements should be read in conjunction withthe financial statements and related notes contained in the Company’s 2008Annual Report to Shareholders on Form 10-K.

 

The condensed consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries, Butte Community Bank (the “Bank”) and BCB Insurance Agency, LLC.All significant inter-company balances and transactions have been eliminated inconsolidation. The Company also has a wholly-owned unconsolidated subsidiary,Community Valley Bancorp Trust II (the “Trust”), a Delaware statutory businesstrust, formed for the sole purpose of issuing trust preferred securities. Theresults of operations for the three-month and nine month periods ended September 30,2009 may not necessarily be indicative of the operating results for the fullyear 2009.

 

Management has determinedthat because all of the commercial banking products and services offered by theCompany are available in each branch of the bank, all branches are locatedwithin the same economic environment and management does not allocate resourcesbased on the performance of different lending or transaction activities, it isappropriate to aggregate the Bank branches and report them as a singleoperating segment. No single customer accounts for more than 10% of therevenues of the Company or the Bank.

 

The Company evaluatedsubsequent events for potential recognition and/or disclosure through November 16,2009, the date the condensed consolidated financial statements were issued.

 

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

 

**2.EARNINGS PER SHARE COMPUTATION**

 

Basic earnings per share arecomputed by dividing net income by the weighted average common sharesoutstanding for the period (6,531,724 and 6,538,895 shares for the three andnine month periods ended September 30, 2009 and 6,605,621 and 7,100,673shares for the three and nine month periods ended September 30, 2008).Diluted earnings 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 (zero shares for the three and nine month periods ended September 30,2009 and 41,305 and 86,562 shares for the three and nine month periods ended September 30,2008).  As of September 30, 2009,314,186 outstanding options were “out of the money “compared to 152,293 at September 30,2008, that is the option price was higher than the market price so these shareswere not used in the calculation of earnings per share as they are consideredantidilutive.  In addition, dilutedearnings per share are not presented when a loss occurs because the conversionof potential common stock is anti-dilutive.

 

**3.COMPREHENSIVE (LOSS) INCOME**

 

Comprehensive (loss) incomeis reported in addition to net (loss) income for all periods presented.Comprehensive (loss) income is made up of net (loss) income plus othercomprehensive income or loss. The Company’s only source of comprehensive incomeor loss is changes in unrealized gains or losses, net of taxes, onavailable-for-sale securities, adjusted for the effect of realized gains orlosses on available-for-sale securities, net of taxes. Comprehensive (loss)income was $(3,510,000) and $(5,846,000) for the three and nine month periodsended September 30, 2009 compared to $1,301,000 and $3,147,000 for thesame periods in 2008, respectively.

 

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**4.STOCK - BASED COMPENSATION**

 

TheCompany issues stock options under two stock-based compensation plans, theCommunity Valley Bancorp 1997 and 2000 Stock Option Plans. The plans requirethat the option price may not be less than the fair market value of the stockat the date the option is granted, and that the stock must be paid in full atthe time the option is exercised. The options expire on a date determined by theBoard of Directors, but not later than ten years from the date of grant. Thevesting period is determined by the Board of Directors and is generally overfive years; however, nonstatutory options granted during 1997 vestedimmediately. Under the 1997 plan, 4,738 shares of common stock remain reservedfor issuance to employees, and the related options are exercisable until theirexpiration. However, no new options will be granted under this plan. Under theCompany’s 2000 stock option plan, 332,048 shares of common stock remainreserved for issuance to employees and directors. There are 106,795 additionalshares available for future grants.

 

Stockoption activity for the interim 2009 period is summarized below:

 
| **2009**                                                 | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  January 1                           |       | 350,231    |       | $                                     | 4.93       |                                     | 3.4 years  |                            | $          | 0 |   |
| Exercised                                                |       | (50        | )          | $                                     | 4.70       |                                     |       |                            |       |   |
| Cancelled/Expired                                        |       | (18,133    | )          | $                                     | 8.19       |                                     |       |                            |       |   |
| Outstanding at  September 30                        |       | 332,048    |       | $                                     | 4.93       |                                     | 2.6 years  |                            | $          | 0 |   |
| Options vested  or expected to vest at September 30 |       | 327,448    |       | $                                     | 4.93       |                                     | 2.8 years  |                            | $          | 0 |   |
| Exercisable at  September 30                        |       | 312,446    |       | $                                     | 4.93       |                                     | 2.7 years  |                            | $          | 0 |   |

 

**5.COMMITMENTS AND CONTINGENCIES**

 

The Company is party toclaims and legal proceedings arising in the ordinary course of business. In theopinion of the Company’s management, the amount of ultimate liability withrespect to such proceedings will not have a material adverse effect on thefinancial condition or result of operations of the Company taken as a whole.

 

In the normal course ofbusiness, there are various outstanding commitments to extend credit which arenot reflected in the financial statements, including loan commitments of$100,993,000 and $148,000,000 and stand-by letters of credit of $5,149,000 and$6,482,000 at September 30, 2009 and December 31, 2008, respectively.

 

Of the loan commitmentsoutstanding at September 30, 2009, $26,820,000 are real estateconstruction loan commitments  that arenot expected to fund within the next twelve months due to the current downturnin the real estate market. The remaining commitments primarily relate torevolving lines of credit or other commercial loans, and many of these areexpected to expire without being drawn upon. Therefore, the total commitmentsdo not necessarily represent future cash requirements. Each loan commitment andthe amount and type of collateral obtained, if any, are evaluated on anindividual basis. Collateral held varies, but may include real property, bankdeposits, debt or equity securities or business assets.

 

Stand-by letters of creditare conditional commitments written to guarantee the performance of a customerto a third party. These guarantees are primarily related to the purchases ofinventory by commercial customers and are typically short-term in nature.Credit risk is similar to that involved in extending loan commitments tocustomers and accordingly, evaluation and collateral requirements similar tothose 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 September 30, 2009 and December 31,2008. The Company recognizes these fees as revenues over the term of thecommitment or when the commitment is used.

 

## **6.  INCOME TAXES**

##  

The Company files itsincome tax returns on a consolidated basis with its subsidiaries. Theallocation of income tax expense (benefit) represents each entity’sproportionate share of the consolidated provision for income taxes.

 

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The Company accounts forincome taxes using the liability or balance sheet method. Under this method, deferredtax assets and liabilities are recognized for the tax consequences of temporarydifferences between the reported amounts of assets and liabilities and theirtax bases. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of enactment. On the consolidatedbalance sheet, net deferred tax assets are included in accrued interestreceivable and other assets. Management has reviewed the deferred tax assetsrecorded at September 30, 2009 and has determined that a valuationallowance was not needed.

 

****7.  ESOP AND OTHER NOTES PAYABLE****

 

****Other notes payable include a note payable from acorrespondent bank to the holding company in an original amount of $4.0million, the proceeds of which were down-streamed to Butte Community Bank inthe form of additional common stock issued to the holding company.  This note has a current principal balance of$3.5 million, had an initial two year term with a maturity date of June 30,2010 and an interest rate equal to the three month LIBOR rate plus 8.125%adjusted quarterly. The rate was adjusted to 8.41% on September 30,2009.  The remaining $1,159,230represents the balance of the ESOP note payable due April 10, 2014 with avariable interest rate based on an independent index.  At September 30, 2009 the interest ratewas 5.75%. The ESOP line of credit was fully funded during the first quarter2009 to purchase additional shares for the ESOP.****

 

## **8. INVESTMENT SECURITIES**

##  

The amortized cost and estimated fair value of available-for-saleinvestment securities at September 30, 2009 and December 31, 2008consisted of the following:

 

Available for Sale

 
| ** **                                        | ** ** | **September 30, 2009** | ** **      |
|---------------------------------------------------|------------|-----------------------------|-----------------|
| ** **                                        | ** ** | **Amortized  Cost**         | ** **      | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Debt securities:                                  |       |                        |            |   |   |   |   |   |   |
| U.S. Government  agencies                         |       | $                           | 2,865,000       |   | $ | 120,000 |   | $ | — |   | $ | 2,985,000 |   |
| Obligations of  states and political subdivisions |       | 1,358,000                   |            | 100,000 |   | — |   | 1,458,000 |   |
|                                              |       | $                           |  4,223,000 |   | $ | 220,000 |   | $ | — |   | $ | 4,443,000 |   |

 
| ** **                                        | ** ** | **December 31, 2008** | ** **      |
|---------------------------------------------------|------------|---------------------------------|-----------------|
| ** **                                        | ** ** | **Amortized  Cost**             | ** **      | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Debt securities:                                  |       |                            |            |   |   |   |   |   |   |
| U.S. Government  agencies                         |       | $                               | 5,080,000       |   | $ | 24,000 |   | $ | (10,000 | ) | $ | 5,094,000 |   |
| Obligations of  states and political subdivisions |       | 1,358,000                       |            | 16,000 |   | (6,000 | ) | 1,368,000 |   |
|                                              |       | $                               |  6,438,000 |   | $ | 40,000 |   | $ | (16,000 | ) | $ | 6,462,000 |   |

 

Net unrealizedgains on available-for-sale investment securities totaling $220,000 and $24,000were recorded, net of $89,000 and 10,000 in tax expenses for 2009 and 2008,respectively. There were no sales or transfers of available-for-sale investmentsecurities for the periods ended September 30, 2009 and December 31,2008.

 

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The amortized cost and estimated fair value ofheld-to-maturity investment securities at September 30, 2009 and December 31,2008 consisted of the following:

 

Held to Maturity

 
| ** **                | ** ** | **September 30, 2009** | ** **      |
|---------------------------|------------|-----------------------------|-----------------|
| ** **                | ** ** | **Amortized  Cost**         | ** **      | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Debt securities:          |       |                        |            |   |   |   |   |   |   |
| U.S. Government  agencies |       | $                           | 1,254,000       |   | $ | 18,000 |   | $ | — |   | $ | 1,273,000 |   |
|                      |       | $                           |  1,254,000 |   | $ | 18,000 |   | $ | — |   | $ | 1,273,000 |   |

 
| ** **                | ** ** | **December 31, 2008** | ** **    |
|---------------------------|------------|---------------------------------|---------------|
| ** **                | ** ** | **Amortized  Cost**             | ** **    | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Debt securities:          |       |                            |          |   |   |   |   |   |   |
| U.S. Government  agencies |       | $                               | 373,000       |   | $ | 4,000 |   | $ | — |   | $ | 377,000 |   |
| Other Securities          |       | 261,000                         |          | — |   | — |   | 261,000 |   |
|                      |       | $                               |  634,000 |   | $ | 4,000 |   | $ | — |   | $ | 638,000 |   |

 

Net unrealizedgains on held-to-maturity investment securities totaling $18,000 and $4,000were recorded for 2009 and 2008, respectively. The Company charged off$1,489,000 in December 2008 when an investment was determined to be otherthan temporarily impaired. The investment continued to be a credit risk and wastherefore sold in the first quarter of 2009. There were no transfers ofheld-to-maturity investment securities for the period ended September 30,2009. There were no sales or transfers of held to maturity investmentsecurities for the period ended December 31, 2008.

 

There were noinvestment securities with unrealized losses at September 30, 2009.Investment securities with unrealized losses at December 31, 2008 aresummarized and classified according to the duration of the loss period asfollows:

 

Available-for-sale

 
| ** **                                        | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **Less than 12 Months**    | ** ** | **12 Months or More** | ** ** | **Total** | ** ** |
| ** **                                        | ** ** | **Fair Value**             | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| Debt securities:                                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government agencies                          |       | $                          | —     |   | $ | — |   | $ | 686,000 |   | $ | (10,000 | ) | $ | 686,000 |   | $ | (10,000 | ) |
| Obligations of  states and political subdivisions |       | 657,000                    |       | (6,000 | ) | — |   | — |   | 657,000 |   | (6,000 | ) |
|                                              |       | $                          | 657,000    |   | $ | (6,000 | ) | $ | 686,000 |   | $ | (10,000 | ) | $ | 1,343,000 |   | $ | (16,000 | ) |

 

At September 30,2009, the Company held ten U.S. Government agency securities, none of which wasin a loss position and held three obligations of state and politicalsubdivision securities none of which was in a loss position.

 

The amortized cost and estimated fair value of investmentsecurities at September 30, 2009, by contractual maturity, are shownbelow. Expected maturities will differ from contractual maturities because theissuers of securities may have the right to call or prepay obligationswith or without prepayment penalties.

 

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| ** **                                                | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | **Amortized  Cost**              | ** ** | **Estimated Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Estimated Fair  Value** | ** ** |
| Within one year                                           |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | — |   |
| After one year  through five years                        |       | 1,000,000                        |       | 1,008,000                      |       | 999,000 |   | 1,005,000 |   |
| After five years  through ten years                       |       | 495,000                          |       | 542,000                        |       | — |   | — |   |
| After ten years                                           |       | 863,000                          |       | 921,000                        |       | — |   | — |   |
|                                                      |       | 2,358,000                        |       | 2,471,000                      |       | 999,000 |   | 1,005,000 |   |
| Investment  securities not due at a single maturity date: |       |                             |       |                           |       |   |   |   |   |
| SBA pools                                                 |       | 1,865,000                        |       | 1,972,000                      |       | 255,000 |   | 268,000 |   |
|                                                      |       | $                                | 4,223,000  |                           | $          | 4,443,000 |   | $ | 1,254,000 |   | $ | 1,273,000 |   |

 

Investmentsecurities with amortized costs totaling $3,357,000 and $4,356,000 and fairvalues totaling $3,471,000 and $4,382,000 were pledged to secure publicdeposits and treasury, tax and loan accounts at September 30, 2009 and December 31,2008, respectively.

 

## **9.****             ****FAIR VALUE MEASUREMENTS**

##  

The carrying amounts and estimated fair values of the Company’sfinancial instruments are as follows (in thousands):

 
| ** **                                                  | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                  | ** ** | **Carrying  Amount**        | ** ** | **Fair Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
|                                                        |       |                        |       |                       |       |   |   |   |   |
| Financial  assets:                                          |       |                        |       |                       |       |   |   |   |   |
| Cash and due  from banks                                    |       | $                           | 12,703     |                       | $          | 12,703 |   | $ | 21,743 |   | $ | 21,743 |   |
| Federal Funds  sold                                         |       | 23,220                      |       | 23,220                     |       | 36,605 |   | 36,605 |   |
| Interest-bearing  deposits in banks                         |       | 2,740                       |       | 2,743                      |       | 2,576 |   | 2,595 |   |
| Loans held for  sale                                        |       | 409                         |       | 409                        |       | 320 |   | 320 |   |
| Investment  securities                                      |       | 5,697                       |       | 5,716                      |       | 7,096 |   | 7,100 |   |
| Loans                                                       |       | 451,256                     |       | 459,960                    |       | 486,522 |   | 487,578 |   |
| Other  investments                                          |       | 1,029                       |       | 1,029                      |       | 1,096 |   | 1,096 |   |
| Accrued interest  receivable                                |       | 3,331                       |       | 3,331                      |       | 3,838 |   | 3,838 |   |
| Cash surrender  value of Bank owned life insurance policies |       | 11,572                      |       | 11,572                     |       | 11,199 |   | 11,199 |   |
| Loan servicing  assets                                      |       | 2,925                       |       | 2,925                      |       | 2,004 |   | 2,004 |   |
|                                                        |       |                        |       |                       |       |   |   |   |   |
| Financial  liabilities:                                     |       |                        |       |                       |       |   |   |   |   |
| Deposits                                                    |       | $                           | 490,316    |                       | $          | 492,739 |   | $ | 526,485 |   | $ | 527,720 |   |
| Notes payable                                               |       | 4,659                       |       | 4,659                      |       | 5,054 |   | 5,054 |   |
| Junior  subordinated debentures                             |       | 8,248                       |       | 9,586                      |       | 8,248 |   | 9,205 |   |
| Accrued interest  payable                                   |       | 429                         |       | 429                        |       | 6,450 |   | 6,450 |   |

 

Estimated fairvalues are disclosed for financial instruments for which it is practicable toestimate fair value. These estimates are made at a specific point in time basedon relevant market data and information about the financial instruments. Theseestimates do not reflect any premium or discount that could result fromoffering the Company’s entire holdings of a particular financial instrument forsale at one time, nor do they attempt to estimate the value of anticipatedfuture business related to the instruments. In addition, the tax ramificationsrelated to the realization of unrealized gains and losses can have asignificant effect on fair value estimates and have not been considered in anyof these estimates.

 

Because no marketexists for a significant portion of the Company’s financial instruments, fairvalue estimates are based on judgments regarding current economic conditions,risk characteristics of various financial instruments and other factors. Theseestimates are subjective in nature and involve uncertainties and matters ofsignificant judgment and therefore cannot be determined with precision. Changesin assumptions could significantly affect the fair values presented.

 

The followingmethods and assumptions were used by the Company to estimate the fair value ofits financial instruments at September 30, 2009 and December 31,2008:

 

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Cash and cashequivalents: Cashand cash equivalents include cash and due from banks, and Federal funds soldwhere the carrying amount is estimated to be fair value.

 

Interest-bearingdeposits in banks:The fair values of interest-bearing deposits in banks are estimated bydiscounting their future cash flows using rates at each reporting date forinstruments with similar remaining maturities offered by comparable financialinstitutions.

 

Investmentsecurities: Forinvestment securities, fair values are based on quoted market prices, whereavailable. If quoted market prices are not available, fair values are estimatedusing quoted market prices for similar securities and indications of valueprovided by brokers.

 

Loans: Fair values of loans held for sale areestimated using quoted market prices for similar loans or the amount thatpurchasers have committed to purchase the loans. For variable-rate loans thatreprice frequently with no significant change in credit risk, fair values arebased on carrying values.  The fairvalues for other loans are estimated using discounted cash flow analyses, usinginterest rates offered at each reporting date for loans with similar terms toborrowers of comparable creditworthiness adjusted for the allowance for loanlosses. The carrying amount of accrued interest receivable approximates itsfair value.

 

Other investments: Other investments includenon-marketable equity securities. The carrying value of these investmentsapproximates their fair value.

 

Bank owned lifeinsurance policies:The fair values of life insurance policies are based on cash surrender valuesat each reporting date provided by the insurers.

 

Loan servicingassets: The fairvalue of servicing assets is estimated using projected cash flows, adjusted forthe effects of anticipated prepayments, using a market discount rate.

 

Deposits: The fair values of time deposits arebased on the discounted value of contractual cash flows using discount ratesequal to the interest rates offered at each reporting date by the Bank for timedeposits with similar maturities. The fair values of deposits that have nostated maturities are based on the carrying amounts reported in the balancesheet.

 

Notes payable: The ESOP note payable reprice is basedupon an independent index. The other note payable reprice is based upon anindependent index plus a stated rate. The carrying amount of the notes payableapproximates their fair value.

 

Junior subordinateddebentures: Thefair value of the junior subordinated debentures was determined based on thecurrent market for like-kind instruments of a similar maturity and structure.

 

Commitments toextend credit and standby letters of credit: Commitments to extend credit are primarily forvariable rate loans and standby letters of credit. The fair value ofcommitments are estimated using the fees currently charged to enter intosimilar agreements and are not significant and, therefore, not included in theabove table.

 

The following tablespresent information about the Company’s assets and liabilities measured at fairvalue on a recurring and non recurring basis as of September 30, 2009.

 

Assets measured atfair value on a recurring basis are summarized below:

 
| ** **                                | ** ** | **Fair  Value Measurements**           | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **at  September 30, 2009, Using** | ** ** |
| ** **                                | ** ** | ** **                             | ** ** | **Quoted  Prices in** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                                | ** ** | ** **                             | ** ** | **Active  Markets for** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                | ** ** | **Fair  Value**                        | ** ** | **Identical  Assets** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                           | ** ** | **30-Sep-09**                          | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Available-for-sale  investment securities |       | $                                      | 4,443      |   | $ | — |   | $ | 4,443 |   | $ | — |   |
|                                           |            |                                        |            |  |  |  |  |  |  |  |  |  |  |

 

The following methods were used to estimate the fair value of eachclass of financial instrument above:

 

*Securities*- Fair values for available-for-saleinvestment securities are based on quoted market prices.

 

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

 
| ** **                                                    | ** ** | **Fair  Value Measurements**           | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                    | ** ** | **at  September 30, 2009, Using** | ** ** |
| ** **                                                    | ** ** | ** **                             | ** ** | **Quoted  Prices in** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                                                    | ** ** | ** **                             | ** ** | **Active  Markets for** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                                    | ** ** | **Fair  Value**                        | ** ** | **Identical  Assets** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                                               | ** ** | **30-Sep-09**                          | ** ** | **(Level  1)** | ** ** | **(Level 2)** | ** ** | **(Level  3)** | ** ** |
| Impaired loans                                                |       | $                                      | 29,786     |   | $ | — |   | $ | 27,492 |   | $ | 2,294 |   |
| Other real  estate                                            |       | 13,484                                 |       | — |   | 13,484 |   | — |   |
| Total assets  measured at fair value on a non recurring basis |       | $                                      | 43,270     |   | $ | — |   | $ | 40,976 |   | $ | 2,294 |   |

 

*ImpairedLoans*—The fairvalue of impaired loans is based on the fair value of the collateral for allcollateral dependent loans and for other impaired loans is estimated using adiscounted cash flow model. When the fair value of the collateral is based on acurrent appraisal value which uses observable data, the Company records theimpaired loan as Level 2. Otherwise, the Company records the impaired loans asLevel 3.

* *

*OtherReal Estate*— Thefair value of other real estate is based primarily on the values obtainedthrough current property appraisals which use observable data.

 

**10.  NEW ACCOUNTINGPRONOUNCEMENTS**

 

FASB Accounting StandardsCodificationTM (ASC or Codification):  In June 2009, the FASB issuedAccounting Standards Update (ASU) No. 2009-01 (formerly Statement No. 168),*“Topic 105 - Generally Accepted AccountingPrinciples - FASB Accounting Standards CodificationTM** **and the Hierarchy ofGenerally Accepted Accounting Principles*.”* *TheCodification is the single source of authoritative nongovernmental U.S.generally accepted accounting principles (GAAP).  The Codificationdoes not change current GAAP, but is intended to simplify user access to allauthoritative GAAP by providing all the authoritative literature related to aparticular topic in one place.  All existing accounting standarddocuments are superseded and all other accounting literature not included inthe Codification is considered nonauthoritative.  The Codification iseffective for interim or annual reporting periods ending after September 15,2009.  We have made the appropriate changes to GAAP references in ourfinancial statements.

 

Measuring Liabilities atFair Value:  InAugust 2009, the FASB issued ASU No. 2009-05, *“Fair Value Measurements and Disclosures (Topic 820) —Measuring Liabilities at Fair Value”*.  This ASU providesamendments for fair value measurements of liabilities.  It providesclarification that in circumstances in which a quoted price in an active marketfor the identical liability is not available, a reporting entity is required tomeasure fair value using one or more techniques.  ASU 2009-05 alsoclarifies that when estimating a fair value of a liability, a reporting entityis not required to include a separate input or adjustment to other inputsrelating to the existence of a restriction that prevents the transfer of theliability.  ASU 2009-05 is effective for the first reporting period(including interim periods) beginning after issuance or fourth quarter2009.  We are assessing the impact of ASU 2009-05 on our financialcondition, results of operations, and disclosures.

 

Amendments to FASBInterpretation No. 46(R):  In June 2009, the FASB issuedStatement No. 167, *“Amendments to FASBInterpretation No. 46(R) (Topic 820)”*(SFAS167).  SFAS 167 amends the consolidation guidance applicable tovariable interest entities.  The amendments to the consolidationguidance affect all entities currently within the scope of FIN 46(R), as wellas qualifying special-purpose entities (QSPEs) that are currently excluded fromthe scope of FIN 46(R).  SFAS 167 is effective as of the beginning ofthe first annual reporting period that begins after November 15,2009.  We are assessing the impact of SFAS 167 on our financialcondition, results of operations, and disclosures.

 

Accounting for Transfersof Financial Assets:  InJune 2009, the FASB issued Statement No. 166, *“Accounting for Transfers of Financial Assets (Topic860), an amendment of FASB Statement No. 140”*(SFAS No. 166).  SFAS166 amends the derecognition accounting and disclosure guidance relating toSFAS 140.  SFAS 166 eliminates the exemption from consolidation forQSPEs, it also requires a transferor to evaluate all existing QSPEs todetermine whether it must be consolidated in accordance with SFAS167.  SFAS 166 is effective as of the beginning of the first annual reportingperiod that begins after November 15, 2009.  We are assessingthe impact of SFAS 166 on our financial condition, results of operations, anddisclosures.

 

FASB Amends Disclosuresabout Fair Value of Financial Instruments:  In April 2009, the FASB issued ASC 825(formerly FASB Staff Position (FSP) 107-1 and APB 28-1), *“Interim Disclosures about Fair Value of Financial*

 

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* *

*Instruments.”  *ASC 825 requires a public entity toprovide disclosures about fair value of financial instruments in interimfinancial information.  ASC 825 is effective for interim and annualfinancial periods ending after June 15, 2009.  We adopted theprovisions of ASC 825 on April 1, 2009 and the impact on our disclosuresare presented in Note 9 — Fair Value.

 

FASB ClarifiesOther-Than-Temporary Impairment:  In April 2009, the FASB issued ASC320 (formerly FSP FAS 115-2, FAS124-2 and EITF 99-20-2), *“Recognition and Presentation ofOther-Than-Temporary-Impairment.”  *ASC 320 (i) changesexisting guidance for determining whether an impairment is other than temporaryto debt securities and (ii) replaces the existing requirement that theentity’s management assert it has both the intent and ability to hold animpaired security until recovery with a requirement that management assert: (a) itdoes not have the intent to sell the security; and (b) it is more likelythan not it will not have to sell the security before recovery of its costbasis.  Under ASC 320, declines in the fair value of held-to-maturityand available-for-sale securities below their cost that are deemed to be otherthan temporary are reflected in earnings as realized losses to the extent theimpairment is related to credit losses.  The amount of impairmentrelated to other factors is recognized in other comprehensiveincome.  ASC 320 is effective for interim and annual periods endingafter June 15, 2009.  We adopted the provisions of ASC 320 on April 1,2009. The provisions of ASC 320 did not have an impact on our financialcondition and results of operations.

 

FASB ClarifiesApplication of Fair Value Accounting:  In April 2009, the FASB issued ASC820 (formerly FSP FAS 157-4), *“Determining FairValue When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly.”  *ASC820 affirms the objective of fair value when a market is not active, clarifiesand includes additional factors for determining whether there has been asignificant decrease in market activity, eliminates the presumption that alltransactions are distressed unless proven otherwise, and requires an entity todisclose a change in valuation technique.  ASC 820 is effective forinterim and annual periods ending after June 15, 2009.  Weadopted the provisions of ASC 820 on April 1, 2009.  Theprovisions of ASC 820 did not have a material impact on our financial conditionand results of operations.

 

Noncontrolling Interestsin Consolidated Financial Statements:  In December 2007, the FASB issuedASC 810 (formerly Statement No. 160), “*NoncontrollingInterests in Consolidated Financial Statements*.  ASC 810requires that a noncontrolling interest in a subsidiary be reported separatelywithin equity and the amount of consolidated net income specificallyattributable to the noncontrolling interest be identified in the consolidatedfinancial statements.  It also calls for consistency in the manner ofreporting changes in the parent’s ownership interest and requires fair valuemeasurement of any noncontrolling equity investment retained in adeconsolidation.  ASC 810 is effective for fiscal years, and interimperiods within those fiscal years, beginning on or after December 15,2008.  We adopted the provisions of ASC 810 on January 1,2009.  The provisions of ASC 810 did not have an impact on ourfinancial condition and results of operations.

 

Business Combinations:  In December 2007, theFASB issued ASC 805 (formerly Statement  No. 141R), *“Business Combinations”.*  ASC805 broadens the guidance and , extends its applicability to all transactionsand other events in which one entity obtains control over one or more otherbusinesses.  It broadens the fair value measurement and recognitionof assets acquired, liabilities assumed, and interests transferred as a resultof business combinations.  ASC 805 expands on required disclosures toimprove the statement users’ abilities to evaluate the nature and financialeffects of business combinations.  ASC 805 is effective for the firstannual reporting period beginning on or after December 15,2008.  In April 2009, the FASB amended the guidance in ASC 805and is effective for the first annual reporting period beginning on or after December 15,2008.  The provisions of ASC 805 will only impact us if we are partyto a business combination closing on or after January 1, 2009.

 

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

 

The following is CommunityValley Bancorp’s (the “Company”) management’s discussion and analysis of thesignificant changes in balance sheet accounts between September 30, 2009and December 31, 2008 and income and expense accounts for the three andnine month periods ended September 30, 2009 and 2008. The discussion isdesigned to provide a better understanding of significant trends related to theCompany’s financial condition, results of operations, liquidity, capitalresources and interest rate sensitivity.

 

In addition to thehistorical information contained herein, this report on Form 10-Q containscertain forward-looking statements. The reader of this report should understandthat all such forward-looking statements are subject to various uncertaintiesand risks that could affect their outcome. The Company’s actual results coulddiffer materially from those suggested by such forward-looking statements.Factors that could cause or contribute to such differences include, but are notlimited to, variances in the actual versus projected growth in assets, returnon assets, loan losses, expenses, rates charged on loans and earned onsecurities investments, rates paid on deposits, competition effects, fee andother noninterest income earned, general economic conditions, nationally,regionally and in the operating market areas of the Company and its subsidiaries,changes in the regulatory environment, changes in business conditions andinflation, changes in securities markets, data processing problems, a declinein real estate values in the Company’s market area,  the effects ofterrorism, including the events of September 11, 2001 and thereafter, andthe conduct of the war on terrorism by the United States and its allies, aswell as other factors. This entire report should be read putting suchforward-looking statements in context.

 

**General Development of Business**

 

The Company is a financialholding company (“FHC”) registered and authorized to engage in the activitiespermitted under the Bank Holding Company Act of 1956, as amended. The Companywas incorporated under the laws of the State of California in 2002 and electedto change to a FHC in 2004. As a financial holding company, the Company issubject to the Federal Holding Company Act and to supervision by the board ofGovernors of the Federal Reserve System (“FRB”). Its principal office islocated at 1360 E. Lassen Avenue, Chico, California 95973 and its telephonenumber is (530) 899-2344.

 

The Company owns 100% of theissued and outstanding common shares of Butte Community Bank (the “Bank”). TheBank was incorporated and commenced business in Paradise and Oroville,California in 1990. The Bank operates fifteen full service offices within itsservice areas of Butte, Sutter, Yuba, Tehama, Shasta, and Colusa Counties. TheBank also maintains a Loan Production Office (LPO) in Citrus Heights, inSacramento County. In March 2009, the Gridley LPO was consolidated withthe full service Yuba City Office. Butte Community Bank’s primary business isserving the commercial banking needs of small to mid-sized businesses andconsumers within those counties. Butte Community Bank accepts checking andsavings deposits, offers money market deposit accounts and certificates ofdeposit, makes secured and unsecured commercial, secured real estate, and otherinstallment and term loans and offers other customary banking services.

 

On December 1, 2004,the Company formed a wholly-owned subsidiary, CVB Insurance Agency LLC for thepurpose of providing insurance related services.  The name was subsequently changed to ButteCommunity Insurance Agency LLC in April 2006.

 

On July 10, 2007 theCompany formed a wholly-owned unconsolidated subsidiary, Community ValleyBancorp Trust II (the “Trust”), a Delaware statutory business trust, for thepurpose of issuing trust preferred securities.

 

**Critical Accounting Policies**

 

*General*

 

The Company’s significantaccounting principles are described in Note 1 of the consolidated financialstatements in the Company’s 2008 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.

 

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*Allowance for Loan Losses (ALL)*

 

The allowance for loan lossesis management’s best estimate of the probable losses that may be sustained inour loan portfolio. The allowance is based on two basic principles ofaccounting:  (1) ASC 450 which requires that losses be accrued whenthey are probable of occurring and estimable and (2) ASC 310 whichrequires that losses be accrued on impaired loans based on the differencesbetween the value of collateral, present value of future cash flows or valuesthat 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 factors includeconcentrations of borrowers, industries, geographical sectors, loan product,loan classes and collateral types, volume and trends of loan delinquencies andnon-accrual, criticized and classified assets and trends in the aggregate insignificant credits identified as watch list items. There are severalcomponents to the determination of the adequacy of the ALL. Each of thesecomponents is determined based upon estimates that can and do change when theactual events occur. The Company estimates the ASC 450 portion of the ALL basedon the segmentation of its portfolio. For those segments that require an ALL,the Company estimates loan losses on a monthly basis based upon its ongoingloan review process and analysis of loan performance. The Company follows asystematic and consistently applied approach to select the most appropriateloss measurement methods and support its conclusions and rationale with writtendocumentation. One method of estimating loan losses for groups of loans isthrough the application of loss rates to the groups’ aggregate loan balances.Such rates typically reflect historical loss experience for each group ofloans, adjusted for relevant economic factors over a defined period of time.The Company evaluates and modifies its loss estimation model as needed toensure that the resulting loss estimate is consistent with GAAP.

 

For individually impairedloans, ASC 310 provides guidance on the acceptable methods to measureimpairment. Specifically, ASC 310 states that when a loan is impaired, theCompany should measure impairment based on the present value of expected futureprincipal and interest cash flows discounted at the loan’s effective interestrate, except that as a practical expedient, a creditor may measure impairmentbased on a loan’s observable market price or the fair value of collateral, ifthe loan is collateral dependent. When developing the estimate of future cashflows for a loan, the Company considers all available information reflectingpast events and current conditions, including the effect of existingenvironmental factors.

 

*Loan Sales and Servicing*

 

The Company originatesgovernment guaranteed loans and mortgage loans that may be sold in thesecondary market.  The amount 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 fair value of the servicing assets and the fair value of the I/Ostrips receivable, 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 September 30, 2009.  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*

 

Compensation cost isrecognized for all share-based payments over the requisite service periods ofthe awards based on the grant-date fair value of the options determined usingthe Black-Scholes-Merton based option valuation model.  Critical assumptions that are assessed incomputing the fair value of share-based payments include stock pricevolatility, expected dividend rates, the risk free interest rate and theexpected lives of such options. Compensation cost recorded is net of estimatedforfeitures expected to occur prior to vesting. See Note 4 to the UnauditedCondensed Consolidated Financial Statements for additional information relatedto stock-based compensation.

 

*Impairment of Investment Securities*

 

Investment securities are evaluated forother-than-temporary impairment on at least a quarterly basis and morefrequently when economic or market conditions warrant such an evaluation todetermine whether a decline in their value below amortized cost is other thantemporary. Management utilizes criteria such as the magnitude and duration ofthe decline, the financial condition of the issuer, rating agency changesrelated to the issuer’s securities and the intent and ability of the Bank toretain its investment in 

 

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the issues for a period of time sufficient toallow for an anticipated recovery in fair value, in addition to the reasonsunderlying the decline, to determine whether the loss in value is other thantemporary. The term “other than temporary” is not intended to indicate that thedecline is permanent, but indicates that the prospects for a near-term recoveryof value is not necessarily favorable, or that there is a lack of evidence tosupport a realizable value equal to or greater than the carrying value of theinvestment. Once adecline in value is determined to be other-than-temporary and management hasthe ability and intent to hold the security to a forecasted recovery of cost,only the portion of the impairment loss representing credit exposure would berecognized as a charge to earnings, with the balance recognized as a charge toother comprehensive income.  If management, intends to sell the securityor it is more likely than not that it will be required to sell the securitybefore recovering its forecasted cost, the entire impairment loss would berecognized as a charge to earnings.

 

*Revenue recognition*

 

The Company’s primary sourceof revenue is net interest income, which is the difference between the interestincome it receives on interest-earning assets and the interest expense it payson interest-bearing liabilities, and fee income, which includes fees earned ondeposit services, income from sales and servicing of SBA loans,electronic-based cash management services, and mortgage brokerage feeincome.  Interest income is recorded onan accrual basis. Note 1 to the Consolidated Financial Statements in theCompany’s 2008 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.

 

*Income Taxes*

 

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 Company accounts for uncertainty in income taxesunder Financial Accounting Standards Board (“FASB”) ASC 740, *Accounting for Uncertainty in Income Taxes*.  Under the provisions of ASC 740, only taxpositions that met the more likely than not recognition threshold that the taxposition would be sustained in a tax examination were recognized or continue tobe recognized.

 

When tax returns arefiled, it is highly certain that some positions taken would be sustained uponexamination by the taxing authorities, while others are subject to uncertaintyabout the merits of the position taken or the amount of the position that wouldbe ultimately sustained.  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 or aggregatedwith other positions.  Tax positions that meet the more-likely-than-notrecognition threshold are measured as the largest amount of tax benefit that ismore than 50 percent likely of being realized upon settlement with theapplicable 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 andpenalties associated with unrecognized tax benefits are classified as incometax expense in the consolidated statement of income.

 

*FairValue*

 

Effective January 1,2008, the Company adopted ASC 820, *FairValue Measurements,*which among other things requires enhanceddisclosures about financial instruments carried at fair value. ASC 820establishes a hierarchical disclosure framework associated with the level ofobservable pricing scenarios utilized in measuring financial instruments atfair value. The degree of judgment utilized in measuring the fair value offinancial instruments generally correlates to the level of the observablepricing scenario. Financial instruments with readily available active quotedprices or for which fair value can be measured from actively quoted pricesgenerally will have a higher degree of observable pricing and a lesser degreeof judgment utilized in measuring fair value. Conversely, financial instrumentsrarely traded or not quoted will generally have little or no observable pricingand a higher degree of judgment utilized in measuring fair value. Observablepricing scenarios are impacted by a number of factors, including the type offinancial instrument, whether the financial instrument is new to the market andnot yet established and the characteristics specific to the transaction.

 

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**Overview**

 

TheCompany recorded a net loss of $(3,563,000) for the quarter ended September 30,2009, compared to the net income of $1,301,000 reported for the same period of2008. Diluted (loss) earnings per share for the third quarter of 2009 were($0.55), compared to the $0.20 recorded in the third quarter of 2008. Theannualized return on average equity (ROAE) and annualized return on averageassets (ROAA) for the third quarter of 2009 were (38.17)% and (2.53)%, respectively,as compared to 12.73% and .89%, respectively, for the same period in 2008. Theprimary reasons for the loss for the third quarter ended September 30,2009 are the increase in the level of the provision for loan losses, increasein the FDIC assessment, increase in other real estate expenses, and a declinein net interest income and non interest income. This waspartially mitigated by the decrease in non interest expense and the recognitionof an income tax benefit.

 

We experienced a compressionof the net interest margin of 86 basis points as yields on earning assetsdecreased 156 basis points while rates paid on interest bearing liabilitiesdecreased 88 basis points. The compression is a direct result of the FederalOpen market Committee of the Federal Reserve System (“FOMC”) reducing theFederal Funds rate to a range of 0% - .25% in December 2008. Additionally,for the third quarter ended September 30, 2009 we increased the provisionfor loan losses to $5,900,000 compared to $750,000 for the third quarter of2008. Other factors are the increase in FDIC assessment to $267,000 from$78,000 and other real estate expense to $2,265,000 from $31,000 for the thirdquarter ended September 30, 2009 compared to 2008, respectively. This was partially mitigated by decreasesin non interest expenses and the recognition of an income tax benefit in thecurrent quarter.

 

The net loss for the nine months ended September 30,2009 was $(5,963,000), compared to the net income of $3,169,000 reported forthe same period of 2008. Diluted (loss) earnings per share for the nine monthsended September 30, 2009 were ($0.91), compared to the $0.44 recorded forthe same period in 2008. The annualized return on average equity (ROAE) and theannualized return on average assets (ROAA) for the nine months ended September 30,2009 were  (20.08)% and (1.37.)%,respectively, as compared to 9.21% and 0.74%, respectively, for the same periodin 2008. The primary reasons for the decrease in net income for the nine monthperiod is generally consistent with the discussion above for the third quarteras the net interest margin decreased 110 basis points from September 30,2008, provision for loan losses increased by $11,575,000 to $13,000,000 from$1,425,000 for the same period in 2008, FDIC assessments, including aspecial assessment of $268,000, increased $1,081,000 to $1,315,000 from $234,000, andother real estate expenses increased by $3,583,000 to $3,622,000 from $39,000for the nine month period ended September 30, 2008.

 

Total assets of the Companydecreased by $41,552,000 or 7.0% from $595,244,000 at December 31, 2008 to$553,692,000 at September 30, 2009. Cash and cash equivalents decreased to$35,923,000, down $22,425,000 or 38.4%. Net loans decreased to 451,256,000, down $35,266,000 or 7.2% from December 31,2008. Deposit balances at September 30, 2009 decreased to $490,316,000,down $36,169,000 or 6.9% from December 31, 2008.   Premises and equipment decreased to$5,701,000, down $1,312,000 or 18.7%.  Shareholder’s equity decreased to $34,167,000, down $5,972,000.

 

Table One below provides asummary of the components of net (loss) income for the periods indicated:

 

**Table One:  Components of Net (Loss) Income**

 
| ** **                                                              | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands,  except percentages)**                                 | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                    |       |                                       |       |                                      |       |   |   |   |   |
| Net interest  income                                                    |       | $                                          | 5,650      |                                      | $          | 7,032 |   | $ | 16,337 |   | $ | 20,419 |   |
| Provision for  loan losses                                              |       | (5,900                                     | )          | (750                                      | )          | (13,000 | ) | (1,425 | ) |
| Non-interest  income                                                    |       | 2,149                                      |       | 2,539                                     |       | 9,646 |   | 6,708 |   |
| Non-interest  expense                                                   |       | (8,694                                     | )          | (6,956                                    | )          | (23,526 | ) | (20,669 | ) |
| Benefit  (provision) for income taxes                                   |       | 3,232                                      |       | (564                                      | )          | 4,580 |   | (1,864 | ) |
|                                                                    |       |                                       |       |                                      |       |   |   |   |   |
| Net (loss)  income                                                      |       | $                                          | (3,563     | )                                         | $          | 1,301 |   | $ | (5,963 | ) | $ | 3,169 |   |
|                                                                    |       |                                       |       |                                      |       |   |   |   |   |
| Average total  assets (in millions)                                     |       | $                                          | 558.2      |                                      | $          | 577.0 |   | $ | 583.9 |   | $ | 572.2 |   |
| Net (loss)  income (annualized) as a percentage of average total assets |       | (2.53                                      | )%         | 0.89                                      | %          | (1.37 | )% | 0.74 | % |

 

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**Results of Operations**

 

**Net Interest Income and Net Interest Margin**

 

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

 

TheCompany’s net interest margin was 4.40% for the three month period ended September 30,2009 and 4.11% for the nine month period ending September 30, 2009compared to 5.26% and 5.21% for the same periods in the prior year and weredown 86 basis points and 110 basis points, respectively.  Net interest income decreased $1,382,000(19.65%) for the third quarter of 2009 compared to the same period in2008.  Net interest income decreased $4,082,000 (19.99%) for the ninemonths ended September 30, 2009 over the same period in 2008.  The primary reason for this decrease was thecompression of the net interest margin due to the sharp decrease in interestrates by the Federal Reserve Board during 2008, which ended with thecurrent interest rate of 0.00% - 0.25% since December 18, 2008, andbecause the pricing of our interest bearing liabilities is at a point where itcannot decrease much further.

 

Table Two, Analysis of NetInterest Margin, sets forth the average daily balances for the major asset andliability categories, the related income or expense where applicable, and theresultant yield or cost attributable to the average earning assets andinterest-bearing liabilities.  Changes inthe average balances and the rates received or paid depend on marketopportunities, how well the Company has managed interest rate risks, productpricing policy, product mix, and external trends and developments.

 

Table Three, Analysis ofVolume and Rate changes on Net Interest Income, analyzes the changes in netinterest income for the three and nine month periods ended September 30,2009 compared to September 30, 2008 that are reported in Table Two.  The analysis shows the impact of volume andrate changes on the major categories of assets and liabilities between theseperiods.  The table explains what portionof the difference or variance in interest income or expense between theseperiods for each major category of assets or liabilities is due to changes inthe balances (volume) or to changes in rates.

 

For example, Table Two showsthat interest income from loans for the three months ended September 30,2009 decreased by $2,247,000 from $9,225,000 at September 30, 2008 to$6,978,000.  The average balance of loansdecreased from $502,417,000 to $467,975,000 and the interest rate earneddecreased from 7.30% to 5.92%.  TableThree shows the $2,247,000 decrease in interest income from loans was actuallythe result of a $634,000 decrease in interest income from the lower balance ofloans and a $1,613,000 decrease from the decrease in yields earned in the thirdquarter of 2009 compared to the same period in 2008.

 

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

 

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**Table Two:  Analysis of Net Interest Margin**

 
| **Three Months Ended September 30,**

**(In thousands, except percentages)** | ** **      | **2009**   | ** **   | **2008**   | ** **         |
|-----------------------------------------------------------------------------------|-----------------|------------|--------------|------------|--------------------|
| ** **                                                                        | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield  (4)** | ** ** | **Avg Balance** | ** ** | **Interest** | ** ** | **Avg Yield  (4)** | ** ** |
| Assets:                                                                           |            |       |         |       |               |   |   |   |   |   |   |   |   |
| Earning  assets                                                                   |            |       |         |       |               |   |   |   |   |   |   |   |   |
| Loans  (1)                                                                        |            | $          | 467,975      |       | $                  | 6,978 |   | 5.92 | % | $ | 502,417 |   | $ | 9,225 |   | 7.30 | % |
| Taxable  investment securities                                                    |            | 4,271      |         | 45         |               | 4.18 | % | 7,297 |   | 97 |   | 5.29 | % |
| Tax-exempt  investment securities (2)                                             |            | 1,394      |         | 17         |               | 4.84 | % | 1,379 |   | 17 |   | 4.90 | % |
| Federal  funds sold                                                               |            | 32,433     |         | 21         |               | 0.26 | % | 17,213 |   | 83 |   | 1.92 | % |
| Interest  bearing deposits in banks                                               |            | 3,177      |         | 18         |               | 2.25 | % | 3,926 |   | 49 |   | 4.97 | % |
| Total  earning assets                                                             |            | 509,250    |         | 7,079      |               | 5.52 | % | 532,232 |   | 9,471 |   | 7.08 | % |
| Cash &  due from banks                                                   |            | 15,074     |         |       |               |   |   | 15,480 |   |   |   |   |   |
| Other  assets                                                                     |            | 33,885     |         |       |               |   |   | 29,314 |   |   |   |   |   |
| Average  total assets                                                             |            | $          | 558,209      |       |               |   |   |   | $ | 577,026 |   |   |   |   |   |
|                                                                              |            |       |         |       |               |   |   |   |   |   |   |   |   |
| Liabilities &  Shareholders’ Equity Interest bearing liabilities:   |            |       |         |       |               |   |   |   |   |   |   |   |   |
| NOW &  MMDA                                                              |            | $          | 149,301      |       | $                  | 159 |   | 0.42 | % | $ | 151,754 |   | $ | 295 |   | 0.77 | % |
| Savings                                                                           |            | 113,603    |         | 252        |               | 0.88 | % | 115,397 |   | 504 |   | 1.74 | % |
| Time  deposits                                                                    |            | 165,718    |         | 869        |               | 2.08 | % | 169,692 |   | 1,417 |   | 3.32 | % |
| Other  borrowings                                                                 |            | 12,919     |         | 149        |               | 4.58 | % | 13,237 |   | 223 |   | 6.70 | % |
| Total  interest bearing liabilities                                               |            | 441,541    |         | 1,429      |               | 1.28 | % | 450,080 |   | 2,439 |   | 2.16 | % |
| Demand  deposits                                                                  |            | 75,148     |         |       |               |   |   | 72,224 |   |   |   |   |   |
| Other  liabilities                                                                |            | 4,486      |         |       |               |   |   | 14,165 |   |   |   |   |   |
| Total  liabilities                                                                |            | 521,175    |         |       |               |   |   | 536,469 |   |   |   |   |   |
| Shareholders’  equity                                                        |            | 37,034     |         |       |               |   |   | 40,557 |   |   |   |   |   |
| Average  liabilities and equity                                                   |            | $          | 558,209      |       |               |   |   |   | $ | 577,026 |   |   |   |   |   |
|                                                                              |            |       |         |       |               |   |   |   |   |   |   |   |   |
| Net  interest income & margin (3)                                        |            |       |         | $          | 5,650              |   | 4.40 | % |   |   | $ | 7,032 |   | 5.26 | % |

 

----

(1) Loan interestincludes loan fees of $304,000 and $401,000 during the quarters endedSeptember 30, 2009 and September 30, 2008, respectively.

 

(2)  Does notinclude taxable-equivalent adjustments that primarily relate to income oncertain securities that are exempt from federal income taxes.

 

(3)  Net interestmargin is computed by dividing net interest income by total average earning assets.

 

(4)  Average yieldis calculated based on actual days in quarter (92 for September 30, 2009and September 30, 2008) and annualized to actual days in year (365 for2009 and 366 for 2008).

 

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| **Nine months ended September 30,**

**(In thousands, except percentages)** | ** **       | **2009**   | ** **   | **2008**   | ** **          |
|----------------------------------------------------------------------------------|------------------|------------|--------------|------------|---------------------|
| ** **                                                                       | **Avg  Balance** | ** ** | **Interest** | ** ** | **Avg  Yield  (4)** | ** ** | **Avg  Balance** | ** ** | **Interest** | ** ** | **Avg  Yield  (4)** | ** ** |
| Assets                                                                           |             |       |         |       |                |   |   |   |   |   |   |   |   |
| Earning  assets:                                                                 |             |       |         |       |                |   |   |   |   |   |   |   |   |
| Loans  (1)                                                                       |             | $          | 479,885      |       | $                   | 21,388 |   | 5.96 | % | $ | 476,660 |   | $ | 27,126 |   | 7.60 | % |
| Taxable  investment securities                                                   |             | 5,031      |         | 164        |                | 4.36 | % | 7,022 |   | 315 |   | 5.99 | % |
| Tax-exempt  investment securities (2)                                            |             | 1,387      |         | 49         |                | 4.72 | % | 1,391 |   | 49 |   | 4.71 | % |
| Federal  funds sold & other                                             |             | 42,641     |         | 72         |                | 0.23 | % | 28,708 |   | 534 |   | 2.48 | % |
| Interest  bearing deposits in banks                                              |             | 2,641      |         | 61         |                | 3.09 | % | 9,591 |   | 355 |   | 4.94 | % |
| Total  earning assets                                                            |             | 531,585    |         | 21,734     |                | 5.47 | % | 523,372 |   | 28,379 |   | 7.24 | % |
| Cash &  due from banks                                                  |             | 14,789     |         |       |                |   |   | 16,440 |   |   |   |   |   |
| Other  assets                                                                    |             | 37,477     |         |       |                |   |   | 32,394 |   |   |   |   |   |
| Average  total assets                                                            |             | $          | 583,851      |       |                |   |   |   | $ | 572,206 |   |   |   |   |   |
|                                                                             |             |       |         |       |                |   |   |   |   |   |   |   |   |
| Liabilities &  Shareholders’ Equity Interest bearing liabilities:  |             |       |         |       |                |   |   |   |   |   |   |   |   |
| NOW &  MMDA                                                             |             | $          | 151,001      |       | $                   | 530 |   | 0.47 | % | $ | 151,031 |   | $ | 919 |   | 0.81 | % |
| Savings                                                                          |             | 109,901    |         | 787        |                | 0.96 | % | 116,171 |   | 1,628 |   | 1.87 | % |
| Time  deposits                                                                   |             | 185,558    |         | 3,485      |                | 2.51 | % | 160,168 |   | 4,877 |   | 4.07 | % |
| Other  borrowings                                                                |             | 13,221     |         | 595        |                | 6.02 | % | 10,845 |   | 536 |   | 6.60 | % |
| Total  interest bearing liabilities                                              |             | 459,681    |         | 5,397      |                | 1.57 | % | 438,215 |   | 7,960 |   | 2.43 | % |
| Demand  deposits                                                                 |             | 74,393     |         |       |                |   |   | 74,077 |   |   |   |   |   |
| Other  liabilities                                                               |             | 10,077     |         |       |                |   |   | 13,940 |   |   |   |   |   |
| Total  liabilities                                                               |             | 544,151    |         |       |                |   |   | 526,232 |   |   |   |   |   |
| Shareholders’  equity                                                       |             | 39,700     |         |       |                |   |   | 45,974 |   |   |   |   |   |
| Average  liabilities and equity                                                  |             | $          | 583,851      |       |                |   |   |   | $ | 572,206 |   |   |   |   |   |
|                                                                             |             |       |         |       |                |   |   |   |   |   |   |   |   |
| Net  interest income & margin (3)                                       |             |       |         | $          | 16,337              |   | 4.11 | % |   |   | $ | 20,419 |   | 5.21 | % |

 

----

(1)  Loan interestincludes loan fees of $922,000 and $1,113,000 during the nine months ended September 30,2009 and September 30, 2008, respectively. 

 

(2)  Does notinclude taxable-equivalent adjustments that primarily relate to income oncertain securities that are exempt from federal income taxes.

 

(3)  Net interestmargin is computed by dividing net interest income by total average earningassets.

 

(4)  Average yieldis calculated based on actual days in period (273 for September 30, 2009and 274 for September 30, 2008) and annualized to actual days in year (365for 2009 and 366 for 2008).

 

TableThree sets forth a summary of the changes in interest income and interestexpense from changes in average asset and liability balances (volume) andchanges in average interest rates.  On a quarter over quarter basis forthe period ending September 30, 2009, net interest income has decreased$1,382,000 from the same time period in 2008.  Interest income fromearning assets has decreased by $2,392,000. Changes in the volume of earningassets, primarily loans, have resulted in a decrease in interest income of$609,000 while interest income from changes in rates has decreased by$1,783,000.  Interest expense for the third quarter of 2009 was $1,010,000less than the same period in 2008. Decreases in the volume of interest bearing liabilities have resulted ina decrease of interest expense of $51,000. Decreases in average rates paid on all deposit products have resulted inan interest expense decrease of $959,000.

 

Ona year-to-date basis through September 30, 2009, net interest income hasdecreased $4,082,000 from the total at September 30, 2008.  Interestincome from earning assets has decreased by $6,645,000. Changes in the volumeof earning assets, primarily from increases in loans and federal funds sold anddecreases in taxable investment securities and interest bearing deposits inbanks, have resulted in an increase in interest income of $95,000 whileinterest income from changes in rates has decreased by $6,740,000. Interest expense for the nine month period ending September 30, 2009 was$2,563,000 less than the same period in 2008. Changes in the volume of interest bearing liabilities, primarily thechange in mix with an increase in balances of time deposits and otherborrowings and decreases in NOW, MMDA, and savings deposits, has resulted in anet increase of interest expense of $802,000. Decreases in average rates paid on all interest bearing liabilities haveresulted in an interest expense decrease of $3,365,000.

 

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Theaverage balances of interest bearing liabilities of $441,541,000 were$8,539,000 (1.9%) less in the third quarter of 2009 versus the same quarter in2008.  As interest bearing liability balances decreased, rates paid onthese liabilities decreased by 88 basis points on a quarter over quarterbasis.  As a result of both the decrease in  interest rates and the volume and mix ofinterest bearing liabilities, interest expense was $1,010,000 (41.4%) lower inthe third quarter versus the same period in 2008.  The average balances of interest bearingliabilities were $21,466,000 higher in the nine month period ended September 30,2009 versus the same period in 2008. Rates paid on interest bearing liabilitiesdecreased 86 basis points compared to the nine month period ended September 30,2008.

 

As a result of the above,the Company’s net interest margin declined 86 basis points to 4.40% for thethree months ended September 30, 2009 from 5.26% for the same period inthe prior year.  For the nine monthsended September 30, 2009, the net interest margin declined 110 basispoints to 4.11% compared to 5.21% for the same period in the prior year.

 

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

** **
| **Three Months Ended  September 30, 2009 over 2008** | ** ** | ** ** | ** ** | ** **   | ** ** | ** **     | ** ** |
|-----------------------------------------------------------|------------|------------|------------|--------------|------------|----------------|------------|
| **(In thousands)**                                        | ** ** | **Volume** | ** ** | **Rate (2)** | ** ** | **Net Change** | ** ** |
| Increase  (decrease) due to change in:                    |       |       |       |         |       |           |       |
| Interest-earning  assets:                                 |       |       |       |         |       |           |       |
| Net  loans                                                |       | $          | (634       | )            | $          | (1,613         | )          | $ | (2,247 | ) |
| Taxable  investment securities                            |       | (40        | )          | (12          | )          | (52            | )          |
| Tax  exempt investment securities (1)                     |       | —     |       | —       |       | —         |       |
| Federal  funds sold                                       |       | 74         |       | (136         | )          | (62            | )          |
| Interest  bearing deposits in banks                       |       | (9         | )          | (22          | )          | (31            | )          |
| Total                                                     |       | (609       | )          | (1,783       | )          | (2,392         | )          |
|                                                      |       |       |       |         |       |           |       |
| Interest-bearing  liabilities:                            |       |       |       |         |       |           |       |
| NOW  and MMDA deposits                                    |       | (5         | )          | (131         | )          | (136           | )          |
| Savings  deposits                                         |       | (8         | )          | (244         | )          | (252           | )          |
| Time  deposits                                            |       | (33        | )          | (515         | )          | (548           | )          |
| Other  borrowings                                         |       | (5         | )          | (69          | )          | (74            | )          |
| Total                                                     |       | (51        | )          | (959         | )          | (1,010         | )          |
| Interest  differential                                    |       | $          | (558       | )            | $          | (824           | )          | $ | (1,382 | ) |

 
| **Nine Months Ended  September 30, 2009 over 2008** | ** ** | ** ** | ** ** | ** **   | ** ** | ** **     | ** ** |
|----------------------------------------------------------|------------|------------|------------|--------------|------------|----------------|------------|
| **(In thousands)**                                       | ** ** | **Volume** | ** ** | **Rate (2)** | ** ** | **Net Change** | ** ** |
| Increase  (decrease) due to change in:                   |       |       |       |         |       |           |       |
| Interest-earning  assets:                                |       |       |       |         |       |           |       |
| Net  loans                                               |       | $          | 183        |         | $          | (5,921         | )          | $ | (5,738 | ) |
| Taxable  investment securities                           |       | (89        | )          | (62          | )          | (151           | )          |
| Tax  exempt investment securities (1)                    |       | —     |       | —       |       | —         |       |
| Federal  funds sold                                      |       | 258        |       | (720         | )          | (462           | )          |
| Interest  bearing deposits in banks                      |       | (257       | )          | (37          | )          | (294           | )          |
| Total                                                    |       | 95         |       | (6,740       | )          | (6,645         | )          |
|                                                     |       |       |       |         |       |           |       |
| Interest-bearing  liabilities:                           |       |       |       |         |       |           |       |
| NOW  and MMDA deposits                                   |       | —     |       | (389         | )          | (389           | )          |
| Savings  deposits                                        |       | (88        | )          | (753         | )          | (841           | )          |
| Time  deposits                                           |       | 773        |       | (2,165       | )          | (1,392         | )          |
| Other  borrowings                                        |       | 117        |       | (58          | )          | 59             |       |
| Total                                                    |       | 802        |       | (3,365       | )          | (2,563         | )          |
| Interest  differential                                   |       | $          | (707       | )            | $          | (3,375         | )          | $ | (4,082 | ) |

 

----

(1)             Does notinclude taxable-equivalent adjustments that primarily relate to income oncertain securities that is exempt from federal income taxes.

 

(2)             The rate/volumevariance has been included in the rate variance.

 

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**Non-interest Income**

 

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

 

**Table Four:  Components of Non-interest Income**

 
| ** **                             | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                             | ** ** | **(In thousands)**                         | ** ** |
| ** **                             | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sale  of merchant processing portfolio |       | $                                          | —     |                                      | $          | — |   | $ | 2,640 |   | $ | — |   |
| Loss  on sale of investment security   |       | —                                     |       | —                                    |       | (172 | ) | — |   |
| Service  charges on deposit accounts   |       | 1,056                                      |       | 1,033                                     |       | 2,954 |   | 2,883 |   |
| Loan  servicing fees                   |       | 134                                        |       | 124                                       |       | 396 |   | 385 |   |
| Fees  - alternative investment sales   |       | 106                                        |       | 96                                        |       | 360 |   | 395 |   |
| Merchant  fee income                   |       | —                                     |       | 105                                       |       | 86 |   | 314 |   |
| Gain  on the sale of loans             |       | 256                                        |       | 546                                       |       | 1,528 |   | 1,009 |   |
| Other                                  |       | 597                                        |       | 635                                       |       | 1,854 |   | 1,722 |   |
| Total  non-interest income             |       | $                                          | 2,149      |                                      | $          | 2,539 |   | $ | 9,646 |   | $ | 6,708 |   |

 

Non-interestincome decreased by $390,000 (15.4%) to $2,149,000 for the three months ended September 30,2009 as compared to $2,539,000 for the three months ended September 30,2008.  Increases in non-interest income were realized primarily from servicescharges (up 2.2%), loan servicing fees (up 8.1%), and fees from alternativeinvestment sales (up 10.4%). Decreases were realized in gain on the sale ofloans (down 53.1%), other income (down 6.0%), and merchant fee income due tothe sale of the merchant processing portfolio in the first quarter. The gain onthe sale of loans into the secondary market decreased compared to the thirdquarter of 2008 as there were fewer loans available to sell during this periodby our government lending division. Loan servicing fees increased as the volumeof loans sold in the secondary market for which the Company retains servicingrights increased due to refinancing activity. The Alternative InvestmentDepartment, which sells third-party mutual funds and annuities, experienced anincrease in fees of $10,000 due to additional sales of investments during thethird quarter as there was a slight renewed interest in the equities market.

 

Non-interestincome increased by $2,938,000 (43.8%) to $9,646,000 for the nine months ended September 30,2009 as compared to $6,708,000 for the nine months ended September 30,2008.  Increases in non-interest income were realized primarily from thegain on the sale of the merchant portfolio of $2,640,000 in addition to feesfrom service charges (up 2.5%), loan servicing fees (up 2.9%), gains on thesale of loans (up 51.4%), and other income (up 7.7%). Decreases were realizedin fees from alternative investment sales (down 8.9%), merchant fee income(down 72.6%) due to the sale of the merchant processing portfolio, and a lossof $172,000 when the Company sold a trust preferred security it held forinvestment. The gain on the sale of loans into the secondary market increasedduring the first nine months of 2009 compared to 2008 as the loans sold by ourgovernment lending division and real estate division increased. Loan servicingfees increased as the volume of loans sold in the secondary market for whichthe Company retains servicing rights increased due to refinancing activity. Theincrease in the “Other” category was the result of a one time premium receivedfor renewal of our check printing contract in addition to commissions earned onsales of insurance policies and fees paid for payroll processing through ourBusiness Services Division. The Alternative Investment Department, which sellsthird-party mutual funds and annuities, experienced a decrease in fees of$35,000 due to fewer sales of investments during the first nine months of 2009.

 

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**Non-interest Expense**

 

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

 

**Table Five:  Components of Non-interest Expense**

** **
| ** **                      | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | ** **                                 | ** ** | **(In thousands)**                        | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Salaries  and employee benefits |       | $                                          | 3,112      |                                      | $          | 3,729 |   | $ | 9,676 |   | $ | 11,080 |   |
| Occupancy                       |       | 737                                        |       | 727                                       |       | 2,123 |   | 2,116 |   |
| Furniture  and equipment        |       | 599                                        |       | 668                                       |       | 1,887 |   | 1,960 |   |
| Professional  fees              |       | 367                                        |       | 283                                       |       | 1,039 |   | 821 |   |
| Telephone  and postage          |       | 154                                        |       | 159                                       |       | 510 |   | 512 |   |
| Stationery  and supply costs    |       | 122                                        |       | 191                                       |       | 395 |   | 587 |   |
| Director  fees and retirement   |       | 101                                        |       | 126                                       |       | 315 |   | 377 |   |
| Advertising  and promotion      |       | 304                                        |       | 429                                       |       | 927 |   | 1,306 |   |
| FDIC  assessments               |       | 267                                        |       | 78                                        |       | 1,315 |   | 234 |   |
| Other  real estate expense      |       | 2,265                                      |       | 31                                        |       | 3,622 |   | 39 |   |
| Other                           |       | 666                                        |       | 535                                       |       | 1,717 |   | 1,637 |   |
| Total  non-interest expense     |       | $                                          | 8,694      |                                      | $          | 6,956 |   | $ | 23,526 |   | $ | 20,669 |   |

 

Non-interestexpense increased $1,738,000 (25.0%) from $6,956,000 in the third quarter of2008 to $8,694,000 in the third quarter of 2009.  Salary and employeebenefits decreased by $617,000 (16.5%), largely due to lower FTE (full timeequivalent) employees from reductions in staffing in the first quarter 2009.Furniture and equipment expense was $599,000 in the third quarter of 2009compared to $668,000 in the same period of 2008, representing a 10.3%decrease.  Operating expenses such as telephone, postage, stationery,office supplies, director fees, and advertising fees decreased by 24.75% due toconscientious efforts to decrease non interest expenses. The main increases arefrom other real estate expenses which increased $2,234,000 to $2,265,000 from$31,000 due to loan foreclosures and subsequent write downs, FDIC assessmentswhich increased $189,000 to $267,000 from $78,000, occupancy expenses whichwere higher by $10,000 (1.4%), and professional fees which increased $84,000due to consulting expenses associated with management strategic initiatives andlegal fees related to loan foreclosures.

 

Non-interestexpense increased $2,857,000 (13.8%) from $20,669,000 in the nine months ended September 30,2008 to $23,526,000 in the nine months ended September 30, 2009. Salary and employee benefits decreased by $1,404,000 (12.7%), largely due tolower FTE (full time equivalent) employees from reductions in staffing in thefirst quarter 2009. On a year over year basis, full time equivalent employeesdecreased by 34 to 225. Furniture and equipment expense was down $73,000 (3.7%)from the first nine months of 2008 to the first nine months of 2009. Operating expenses mentioned above decreased 22.82%. Other real estate expensesincreased $3,583,000 due to loan foreclosures and subsequent write downs. FDICassessments increased $1,081,000 to $1,315,000 from $234,000. Professional feesincreased $218,000 (26.6%) for the reasons previously stated for the ninemonths ended September 30, 2009 versus the same period in 2008.

 

**Provision for Loan Losses**

 

TheCompany provided $5,900,000 for loan losses in the third quarter of 2009compared to $750,000 in the third quarter of 2008.  Net loan charge-offsfor the third quarter of 2009 and 2008 were $2,347,000 and $418,000,respectively. For the first nine months of 2009 the Company recorded provisionsfor loan losses of $13,000,000 which compared to $1,425,000 for the first ninemonths of 2008. Net loan charge-offs for the nine months ended September 30,2009 and September 30, 2008 were $8,139,000 and $638,000respectively.  Management assesses itsloan quality on a monthly basis to maintain an adequate allowance for loanlosses.  The Company’s loan portfolio composition, non-performing assetsand allowance for loan losses are further discussed under the Balance SheetAnalysis section below.

 

**Income Taxes**

 

Thebenefit for income taxes for the third quarter and first nine months of 2009was $3,232,000 and $4,580,000 as compared to a provision for income taxes of$564,000 and $1,864,000 for the same periods in 2008.  The effective benefit rate for state andfederal income taxes was 47.6% and 43.4% for the three and nine months ended September 30,2009 compared to 

 

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aneffective tax rate of 30.2% and 37.1% for the same periods in 2008.  The difference in the effective tax ratecompared to the statutory tax rate (approximately 42.05%) is primarily theresult of the Company’s investment in municipal securities and Company-ownedlife insurance policies whose income is exempt from Federal taxes. In addition,the Company receives special tax benefits from the State of CaliforniaFranchise Tax Board for operating and providing loans in designated ‘EnterpriseZones’. Managementhas reviewed the deferred tax assets recorded at September 30, 2009 andhas determined that a valuation allowance was not needed for financialstatement purposes.

 

**Balance Sheet Analysis**

 

TheCompany’s total assets were $553,692,000 at September 30, 2009, down$41,552,000 (7.0%) from $595,244,000 at December 31, 2008.  On a yearover year basis, the average balance of total assets for the nine months ended September 30,2009 was $583,851,000, which represents an increase of $11,645,000 (2.0%) overthe $572,206,000 during the nine month period ended September 30, 2008.

 

**Loans**

 

TheCompany concentrates its lending activities in the following areas: 1)commercial; 2) real estate mortgage; 3) residential real estate and real estateconstruction (both commercial and residential); 4) agriculture; and 5) consumerloans.  Commercial and residential real estate loans are generally securedby improved property, with original maturities of 3-10 years.

 

Loanbalances have declined in the current quarter mainly in the real estateconstruction category as these types of loans are generally not being made as aresult of the economic downturn and the risk associated with these loans.Further reductions have also been the result of foreclosures andreclassification to other real estate (ORE). Decreases in loan balances from December 31, 2008 consist of realestate mortgage of $6,647,000 or 2.6%, real estate construction of $39,192,000or 60.3%, and consumer loans of $1,679,000 or 2.6%.  Increases in loan balances consist ofcommercial loans of $500,000 or 0.6% and agricultural loans of $16,438,000 or57.4%. These changes to the mix and reduction of real estate construction loansare consistent with the plan to reduce our dependency on real estate relatedlending and further diversify the loan portfolio to mitigate risk. Table Sixbelow summarizes the composition of the loan portfolio as of September 30,2009 and December 31, 2008.

 

**Table Six: Loan Portfolio Composition**

** **
| **(In thousands)**         | ** ** | **September 30, 2009** | ** ** | **% of Total Loans** | ** ** | **December 31, 2008** | ** ** | **% of Total Loans** | ** ** |
|----------------------------|------------|-----------------------------|------------|----------------------|------------|----------------------------|------------|----------------------|------------|
| Commercial                 |       | $                           | 84,286     |                 | 18.16      | %                          | $          | 83,786               |       | 16.93 | % |
| Real  estate:              |       |                        |       |                 |       |                       |       |                 |       |
| Mortgage                   |       | 245,371                     |       | 52.85                | %          | 252,018                    |       | 50.93                | %          |
| Construction               |       | 25,812                      |       | 5.56                 | %          | 65,004                     |       | 13.14                | %          |
| Agriculture                |       | 45,066                      |       | 9.71                 | %          | 28,628                     |       | 5.79                 | %          |
| Consumer                   |       | 63,711                      |       | 13.72                | %          | 65,390                     |       | 13.21                | %          |
| Total  loans               |       | 464,246                     |       |                 |       | 494,826                    |       |                 |       |
| Allowance  for loan losses |       | (12,771                     | )          |                 |       | (7,826                     | )          |                 |       |
| Deferred  loan fees, net   |       | (218                        | )          |                 |       | (478                       | )          |                 |       |
| Total  net loans           |       | $                           | 451,256    |                 |       |                       | $          | 486,522              |       |   |   |

 

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

 

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

 

Realestate construction loans are generally comprised of commitments to customerswithin the Company’s service area for construction of both commercialproperties and custom and semi-custom single-family residences.  Otherreal estate loans consist primarily of loans secured by first trust deeds oncommercial and residential properties typically with maturities from 3 to 10years and original loan to value ratios generally from 65% to 90%.  Agricultureloans consist primarily of crop loans to farmers of peaches, prunes, walnuts,and almonds.  In general, except in the case of loans with SBA or FMHAguarantees, the Company does not make long-term mortgage loans; however, ButteCommunity Bank has a residential lending division to assist customers insecuring most forms of longer term single-family mortgage financing.

 

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**Risk Elements**

 

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

 

Ultimately,underlying trends in economic and business cycles influence credit quality. The Company’s business is concentrated in the Butte, Sutter and Shasta Countyareas. The economy of these three counties is diversified with professionalservices, manufacturing, agriculture and real estate investment andconstruction.  The real estate elementhas been impacted by the current economic downturn with construction activityslowing dramatically.  Other sectors ofthe local economy are maintaining with agriculture being affected the least.

 

Specialemphasis is placed within the communities in which the Company has offices(Chico, Paradise, Magalia, Oroville, Yuba City, Red Bluff, Marysville, Colusa,Corning, Redding and Anderson).  The Company also maintains a loanproduction office in Citrus Heights (the Gridley LPO was consolidated with theYuba City full service office in March 2009).  Single-familyresidential construction is the primary lending product from the Citrus Heightslocation serving the greater Sacramento area.  The primary focus of theloan production office that was located in Gridley and moved to Yuba City in March 2009is commercial and agricultural loans.

 

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

 

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

 

Inmanagement’s judgment, a concentration exists in real estate loans, which representedapproximately 58.4% of the Company’s loan portfolio at September 30, 2009,which has decreased from the 64.1% concentration level at December 31,2008.  Management believes the concentration may have more than the normalrisk of collectability due to the substantial decline in the economy in generaland the continuing decline in real estate values in the Company’s primarymarket areas. As the Company has been impacted by the slowdown in the economy,we have increased the provision for loan losses and may have to furtherincrease the provision which could adversely affect the Company’s futureprospects, results of operations, profitability and stock price. Management believes that its lending policies and underwriting standards followstrict regulatory guidelines; however, there is no assurance that losses willnot continue to occur under the current economic circumstances.  TheCompany’s loan policies and underwriting standards include, but are not limitedto, the following: (1) maintaining a thorough understanding of the Company’sservice area and originating a significant majority of its loans within thatarea, (2) maintaining a thorough understanding of borrowers’ knowledge,capacity, and market position in their field of expertise, (3) basing realestate loan approvals not only on market demand for the project, but also onthe borrowers’ capacity to support the project financially in the event it doesnot perform to expectations (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.  Although thelending officers followed these strict conservative underwriting standards at loanorigination, the downturn in the current economy, with the rising unemploymentrate and the decline in real estate values, has had an impact on the ability ofsome of our borrowers to service their debt.  The Company does not participate in any sub-prime lending activities noris it exposed to sub-prime lending in its investment portfolio.

 

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**Impaired,Nonaccrual, Past Due and Restructured Loans and Leases and Other NonperformingAssets**

 

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

 

TableSeven below sets forth nonaccrual loans as of September 30, 2009 and December 31,2008.   There were no loans past due90 days or more and still accruing interest at September 30, 2009 or December 31,2008.

 

**TableSeven: ****Impaired, Nonaccrual, Past Due and Restructured Loans and Leases andOther Nonperforming Assets:**

 
| **(In thousands)**           | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Loans  on nonaccrual:        |       |                        |       |                       |       |
| Commercial                   |       | $                           | 9,197      |                       | $          | 395 |   |
| Real  estate                 |       | 20,250                      |       | 14,490                     |       |
| Consumer  and other          |       | 458                         |       | —                     |       |
| Total  non-performing loans  |       | 29,905                      |       | 14,885                     |       |
| Other  real estate           |       | 13,484                      |       | 2,068                      |       |
| Total  non-performing assets |       | $                           | 43,389     |                       | $          | 16,953 |   |

 

Non-performing loans(defined as non-accrual loans and loans 90 days or more past due and stillaccruing interest) totaled $29,905,000 at September 30, 2009, an increaseof $15,020,000 from $14,885,000 at December 31, 2008 primarily as a resultof increasing problem loans in the Company’s real estate/development portfolioand commercial loan portfolios.  Specificreserves on the non-performing loans of $1,776,065 have been recorded at September 30,2009.  Nonperforming loans as apercentage of total loans were 6.4% at September 30, 2009 compared to 3.0%at December 31, 2008.

 

Non-performing assets,(non-performing loans and ORE) totaled $43,389,000 at September 30, 2009,an increase of $26,436,000 from $16,953,000 at December 31, 2008.  Non-performing assets as a percentage oftotal assets were 7.8% at September 30, 2009 compared to 2.9% at December 31,2008.

 

Total non-performingassets consist of thirty four loans for a total of $29,905,000 classified asimpaired and on non-accrual and forty nine properties for a total of$13,484,000 classified as other real estate (ORE).  Other than the loans included asnon-performing assets at September 30, 2009, the Company has notidentified any potential problem loans that would result in any loan beingincluded as a non-performing assets at the current date.

 

Set forth below is adiscussion of our significant non-performing assets:

 

A development loan forthe construction of an eight unit condominium project in the Yuba City area for$1,646,000 was included in our classified loans and risk rated Substandard at December 31,2008 based on the lack of cash flow and weakening real estate market. Construction of the project was completed and as of December 31, 2008 fiveunits had been leased but currently only three units continue to be leased at September 30,2009. In June of 2008, the Company received an updated appraisal on theunits and found the estimated fair market value of the collateral to be belowthe carrying amount of the loan balance.  The Company met with theborrower and requested additional collateral which the borrower was unable toprovide.  All payments were paid as agreed until October 2008. In November of 2008, the borrower notified the Company that they would nolonger be able to make the payments.  The loan was placed on non-accrualon December 30, 2008.  Due to the continued decline in the realestate market, the Company ordered another appraisal to understand thepotential loss exposure and properly value the collateral.  A newappraisal was received in December 2008 with an appraised value for the 8units of $1,050,000.   At that time, the bank was reviewing takinglegal action against the borrower and established a specific reserve of$660,000 for this loan at December 31, 2008. When it became apparent thata resolution was going to be a lengthy process, a charge-off of $501,000against the allowance for loan losses was recorded on March 18, 2009.Legal action against the borrower is pending. The bank has ordered a newappraisal.  At September 30, 2009,the loan carrying balance was $1,145,000 with a specific reserve of $284,000.

 

Another significantnon-performing loan is a commercial real estate loan for the refinance oftwenty-eight cottages located in Fortuna, California for $4,326,000.  This loan was included in our classifiedloans and risk rated substandard at June 30, 2009 due to lack of paymentand pending bankruptcy of the borrower. This loan is a government guaranteed loan under the USDA program with an80% guarantee and maximum exposure to the Company of $743,000.  In October of 2008, the Bank receivednotice that our borrower had filed Bankruptcy under Chapter 11.  It was at this time that the Bank stoppedreceiving payments.   On the advice ofour attorney, the Company placed the loan on non-accrual on January 7,2009.  To identify the

 

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Company’s potential lossexposure and properly value the collateral support provided by the property, anew appraisal was ordered in January 2009 and received on April 9,2009.  The new appraisal put the value at$4,129,000 and reflects the downturn in real estate values as it wassignificantly lower than the original appraisal.  On April 29, 2009 a charge-off of$152,000 against the allowance for loan losses was recorded. The Company isprevented from pursuing any additional legal action due to the pendingBankruptcy. The Company has allocated no specific reserves as of September, 30,2009.

 

A development propertyserves as collateral for two separate loans totaling $7,036,000. Both loans areto the same borrower.  The collateral forthe two loans consists of 153 finished lots, a 24.95 acre parcel and a 5 acreparcel all built and located around a golf course at Lake Almanor. In addition,the bank has a 3rd deed of trust against the golf course at LakeAlmanor. This loan was included in our classified loans and risk ratedSubstandard at June, 30, 2009 based on the borrower’s lack of sales and cashflow due to the weakening real estate market. To identify the Company’spotential loss exposure and properly value the collateral support provided bythe property, an appraisal was received September 28, 2009.  The appraisal demonstrated the continuingdecline in the value of the underlying project. On September 28, 2009 acharge-off of $882,197 against the allowance for loan losses was recorded. The September appraisedvalues for the various properties secured by first trust deeds totaled$7,614,000.  The appraisal on the golfcourse is dated December 2, 2008 came in at $4,500,000.  A new appraisal is pending on the golfcourse.  The total value for all of thecollateral is $11,604,000.  The combineddebt on the golf course for the 1st and 2nd totals $3,440,000.  The overall (LTV) is 86%. The Company had noadditional write-downs as of September 30, 2009.

 

A commercial real estateloan was identified as non-performing and is a loan to finance the purchase ofa 15,120 sq. ft. building located in Chico, California for $1,602,000. The loanwas included in our classified loans and risk rated substandard at June 30,2009 due to lack of cash flow.  This loanis a government guaranteed loan under the USDA program with an 80% guaranteeand maximum exposure to the Company of $320,000.  The borrower manufactures SFR trusses and dueto the slowdown in the real estate market sales have been much slower thanexpected. Payments on this loan have been deferred to October 31,2009.  At that point, the borrower willbegin making payments over an extended period of time.  To identify the Company’s potential lossexposure and properly value the collateral support provided by the property andequipment, a new appraisal was ordered in February 2009 and received April 9,2009. The new appraisal put the value at $1,700,000 resulting in a loan tovalue (LTV) of 94%.

 

Another significantnon-performing loan is a development loan to purchase 7.5 acres of propertyalong the Sacramento River located in Anderson, California for $1,287,000.  The original plans were to develop a fishinglodge and restaurant. The collateral for the loan consists of the 7.5 acresplus six 20 acre parcels located in Red Bluff. This loan was included in ourclassified loans and risk rated Substandard at June 30, 2009 due to theinability to find additional investors and the weakening real estate market.The loan was placed on non-accrual on May 22, 2009.  Due to the continued decline in the realestate market, the Company ordered an updated appraisal to understand thepotential loss exposure and properly value the collateral.  A new appraisal was received June 2009with a combined value of $1,330,000.  On June 29,2009 a charge-off of $184,000 against the allowance for loan losses wasrecorded.  The Company has allocated anadditional $46,765 for this loan at September 30, 2009

 

A commercial real estateloan is currently non-performing and was for the construction of a commercialretail center in Chester, Ca. for $1,887,000 that was included in ourclassified loans and risk rated Substandard at June 30, 2009 based on lackof cash flow. The exterior of the 24,850 sq. ft. project is complete with theinfill to be completed upon the acceptance of signed leases. To date, theborrowers have been unsuccessful in obtaining any lease agreements. Originalappraisal dated November 2007 put the value at $3,250,000 for a LTV of57%.  To identify the Company’s potentialloss exposure and properly value the collateral support provided by theproperty a new appraisal was ordered in April 2009 and was received on August 10,2009.  The new appraisal put the value at$1,475,000 resulting in a loan to value (LTV) of 128%. On August 19, 2009a charge-off of $559,007 against the allowance for loan losses wasrecorded.  The loan had been placed onnon-accrual on June 3, 2009.  TheCompany had no additional write-downs on this loan as of September 30,2009.

 

Another significantnon-performing loan is a commercial real estate loan for the construction of50,396 sq. feet of industrial condos in Shingle Springs, California for $4,153,135.  Borrowing entity is a Limited LiabilityCompany with a number of investors and three guarantors. This loan was includedin our classified loans and risk rated Substandard at September 30, 2009based on the borrower’s inability to find tenants and lack of cash flow. Sincethe loan was placed on non-accrual on August 5, 2009, the borrower’s havesigned a lease to a tenant to occupy 40% of the total square footage. Toidentify the Company’s potential loss exposure and properly value thecollateral support provided by the property, a new appraisal was ordered in February 2009and received on May 27, 2009.  Thenew appraisal put the value at $3,380,000 and reflects the downturn in realestate values as it was significantly lower than the original appraisal.  The Company has allocated an additional$942,100 for this loan at September 30, 2009.

 

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The last significant non-performingloan identified as non-performing is a loan to finance the purchase of a 60,000sq. ft. building located in Gridley, California for $1,500,577.  The loan was included in our classified loansand risk rated substandard at September 30, 2009 due to lack of cashflow.  This loan is a governmentguaranteed loan under the USDA program with an 80% guarantee and a maximumexposure to the company of $300,115.  Theborrower manufactures and supplies equipment to the aggregate, recycle,concrete industries in Northern California and Nevada. Sales have been muchslower than expected.  To identify theCompany’s potential loss exposure and properly value, the collateral supportprovided by the property and equipment, a new appraisal was ordered in February 2009and received May 20, 2009.  The newappraisal put the value at $2,151,000 resulting in a loan to value (LTV) of70%. The company had no additional write-downs as of September 30, 2009.

 

The remainder of thenon-performing loans consists primarily of six impaired single family homeloans that total $2,073,000, ten impaired lot loans that total $3,229,000, twocommercial real estate loans that total $1,294,000, one commercial/industrialloan that totals $475,000, four single family home loans secured with 2nd deeds of trustfor $394,000, and two consumer loans that total $64,000. These loans are toborrowers who are located throughout Northern California from the Sacramentoarea to Redding.  The current appraisedvalues provided the Company with adequate margins in most cases and the bankhas allocated a specific reserve that totals an additional $15,700 on theseloans.

 

Other Real Estate

 

The largest of our ORE atSeptember 30, 2009 consists of two development loan properties to the sameborrower for a total of $2,004,000.  Theproperties were transferred to ORE on March 16, 2009. The project consistsof 46 finished lots and 61 paper lots. To identify the Company’s potential loss exposure and properly value thecollateral support provided by the property, an appraisal was received on August 18,2009.  The appraisal demonstrated thecontinuing decline in the value of the underlying project.  The Company charged off an additional $56,000against the allowance for loan losses at the date of transfer and charged offan additional $972,000 upon receipt of the new appraisal. The July 2009appraisal put the value at $2,360,000. No additional funds were recorded at September 30,2009.

 

Another developmentproperty with a fair market value of $1,476,000 at June 30, 2009 isincluded in our ORE assets.  This loanrepresents a 37% participation interest in a loan originated by another bank.The project consists of 46 lots of an original 49 lot subdivision located inNevada County, California.  The borrowermade the decision to “Deed in Lieu” the property back to the participating bankdue to slow sales and the continued weak real estate market.  To identify the Company’s potential lossexposure and properly value the collateral support provided by the property, anappraisal was ordered and received in December 2008.  This appraisal reflected the downturn in realestate values and demonstrated the continuing decline in the value of theunderlying project.  The appraisal forthe entire project supported a value of $4,400,000 of which our 37% interestrepresents approximately $1,643,000 resulting in a LTV of approximately100%.  The Company recorded a Deed inLieu of Foreclosure in February, 2009.  Afterthe Deed in Lieu was completed, the Company charged-off an additional $167,000against the allowance for loan losses upon transferring the property to ORE.

 

A single familyresidential loan for the construction of a home located at Shaver Lake, Ca.with a fair market value of $990,000 was included in ORE assets at September 30,2009.  The property transferred to ORE onAugust, 17, 2009.  To identify theCompany’s potential loss exposure and properly value the collateral supportprovided by the residence, an appraisal was received on October 6,2009.  This appraisal reflected thedownturn in real estate values and demonstrated the continuing decline in thevalue of the collateral. The appraisal estimated the value at $1,100,000.  With the decline in the appraised value, theCompany charged-off $270,000 against ORE expense as of September 30, 2009.This property is currently in escrow.

 

The remainder of thenon-performing assets includes twenty-five SFR lots that have a current valueof $3,804,000 and are in ORE.  There arethirteen single family homes that are included in ORE at a combined balance of$2,900,000.  The amounts included in OREare supported by current appraisals received by the Company, all within thepast 12 months. In addition, there are seven commercial real estate propertiesthat are included in ORE at September 30, 2009 at a combined balance of$2,310,000 supported by current appraisals. When loans are placed into ORE, the Company determines the fair marketvalue less the estimated selling costs. The shortfalls are charged to the allowance for loan losses at the timeof transfer.  Properties placed in OREare reviewed continuously and the Company will reappraise the property if it isdeemed necessary.  At a minimum,properties are appraised at least annually. If values have dropped, the Company will establish a valuation allowancefor the ORE through a separate provision for losses on ORE.

 

Troubled DebtRestructuring

 

Restructured loanstotaled $25,459,000 at September 30, 2009, an increase of $8,554,000 fromthe total at June 30, 2009. Restructured loans consist of thirteenland/development loans for a total of $15,065,000.  All of these land/development loans areconsidered impaired and are carried the fair market value of the underlyingcollateral. Eleven of these loans totaling $12,243,000 are included as part ofthe non-performing loans. Eight other restructured loans were constructionloans that rolled over to long term SFR mortgage loans for a total of$6,313,000. Two of these loans are considered impaired, total $2,506,000 

 

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and are on non-accrual.There are also three restructured commercial real estate loans totaling$3,701,000.  One of these real estateloans is considered impaired, carried at $1,602,000, and is included as part ofthe non-performing loans. All of these commercial real estate loans haveguarantees under the USDA guarantee program. One of the restructured loans is secured with a 2nd on personal residencestotaling $45,000.  There are also tworestructured commercial loans totaling $335,000. Except for the loans mentionedabove, the remaining restructured loans are performing as agreed and were allcurrent at September 30, 2009.  Noadditional funds were lent to the borrowers of the restructured loans.

 

**Allowance for Loan Losses Activity**

 

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

 

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

 

Ourmethodology is, and has been, consistently followed.  However, as we addnew products, increase in complexity, and expand our geographic coverage, weexpect to enhance our methodology to keep pace with the size and complexity ofthe loan portfolio.  On an ongoing basis we engage outside firms toindependently assess our methodology, and to perform independent credit reviewsof our loan portfolio.  The FDIC and the California Department ofFinancial Institutions review the allowance for loan losses as an integral partof the examination process.  Management believes that our currentmethodology is appropriate given our size and level of complexity. Further, management believes that the allowance for loan losses is adequate asof September 30, 2009 to cover known and inherent risks in the loanportfolio.  However, fluctuations in credit quality, or changes ineconomic conditions or other factors could cause management to increase ordecrease the allowance for loan losses as necessary.

 

TheBoard of Directors of the Bank reviews the adequacy of the allowance for loanlosses at least quarterly to include consideration of the relative risks in theportfolio and current economic conditions.  The allowance is adjustedbased on that review if, in the judgment of the Board of Directors andmanagement, changes are warranted.  The allowance for loan losses totaled$12,771,000 or 2.75% of total loans at September 30, 2009 and $7,826,000or 1.58% at December 31, 2008.  Net charge-offs for the three andnine months ended September 30, 2009 were $2,347,000 and $8,139,000,respectively. The Company has a separate reserve for unfunded loan commitmentsof $209,000 as of September 30, 2009 and $293,000 as of December 31,2008 that is included in other liabilities on the balance sheet.

 

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

 

**Table Eight: Allowance for Loan Losses**

 
| ** **                                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands, except for  percentages)**                               | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Average  loans outstanding                                                |       | $                                          | 467,975    |                                      | $          | 502,417 |   | $ | 479,885 |   | $ | 476,660 |   |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Allowance  for possible loan losses at beginning of period                |       | $                                          | 9,218      |                                      | $          | 6,241 |   | $ | 7,826 |   | $ | 6,092 |   |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Loans  charged off:                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Commercial                                                                |       | (228                                       | )          | (3                                        | )          | (630 | ) | (46 | ) |
| Real  estate                                                              |       | (2,059                                     | )          | (341                                      | )          | (6,923 | ) | (514 | ) |
| Consumer                                                                  |       | (138                                       | )          | (80                                       | )          | (666 | ) | (85 | ) |
| Total                                                                     |       | (2,425                                     | )          | (424                                      | )          | (8,219 | ) | (645 | ) |
| Recoveries  of loans previously charged off:                              |       |                                       |       |                                      |       |   |   |   |   |
| Commercial                                                                |       | —                                     |       | 1                                         |       | 1 |   | 1 |   |
| Real  estate                                                              |       | 71                                         |       | 4                                         |       | 71 |   | 4 |   |
| Consumer                                                                  |       | 7                                          |       | 1                                         |       | 8 |   | 2 |   |
| Total                                                                     |       | 78                                         |       | 6                                         |       | 80 |   | 7 |   |
| Net  loan charge offs                                                     |       | (2,347                                     | )          | (418                                      | )          | (8,139 | ) | (638 | ) |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Additions  to allowance charged to operating expenses                     |       | 5,900                                      |       | 750                                       |       | 13,000 |   | 1,425 |   |
| Additions  to allowance from reserve for unfunded commitments             |       | —                                     |       | (49                                       | )          | 84 |   | (355 | ) |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Gross  allowance for loan losses at end of period                         |       | $                                          | 12,771     |                                      | $          | 6,524 |   | $ | 12,771 |   | $ | 6,524 |   |
|                                                                      |       |                                       |       |                                      |       |   |   |   |   |
| Ratio  of net charge-offs to average loans outstanding                    |       | 0.52                                       | %          | 0.08                                      | %          | 1.71 | % | 0.13 | % |
| Provision  for possible loan losses to average loans outstanding          |       | 1.26                                       | %          | 0.15                                      | %          | 2.71 | % | 0.30 | % |
| Allowance  for loan losses to loans net of deferred fees at end of period |       | 2.75                                       | %          | 1.29                                      | %          | 2.75 | % | 1.29 | % |

 

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

 

**Deposits**

 

AtSeptember 30, 2009, total deposits were $490,316,000 representing adecrease of $36,169,000 (6.9%) over the December 31, 2008 balance of$526,485,000.  Non-interest bearing demand deposits decreased in the firstnine months of 2009 by $8.7 million (10.6%) to $73.4 million. Interest bearingdemand deposits decreased by $1.1 million (0.7%) to $148.2 million whilesavings deposits increased $5.3 million (4.9%) to $112.4 million. Certificateof deposit balances decreased by $31.6 million (16.8%) to $156.3 million.Brokered deposits totaled $20 million of which $19.9 million are from existingBank customers who elected to participate in the Certificate of Deposit AccountRegistry Service (CDARS) reciprocal deposits program.

 

TheEmergency Economic Stabilization Act of 2008 included a provision for an increase inthe amount of deposits insured by the FDIC to $250,000. In addition, the Bankis participating in the FDIC Transaction Account Guarantee Program. Under thatprogram, through June 30, 2010, all noninterest-bearing transactionaccounts are fully guaranteed by the FDIC for the entire amount in the account.Coverage under the Transaction Account Guarantee Program is in addition to andseparate from the coverage available under the FDIC’s general deposit insurancerules. Participating institutions are currently assessed a 10 basis pointsurcharge on the additional insured deposits.

 

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**Capital Resources**

 

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

 

AtSeptember 30, 2009 shareholders’ equity was $34,167,000 representing adecrease of $5,972,000 over the December 31, 2008 balance of $40,139,000.

 

On June 30, 2008 theCompany borrowed $4 million from one of its correspondent banks which wasdown-streamed to Butte Community Bank in the form of additional common stockissued to the holding company.  This note has a current principal balanceof $3.5 million, was originally for a two year period with a maturity date of June 30,2010 and an interest rate equal to the three month LIBOR rate plus 8.125%adjusted quarterly, or 8.41% at September 30, 2009.

 

TheBoard of Directors of the Company authorized the payment of quarterly cashdividends of $0.08, $0.04 and $0.04 per share for the first, second, and thirdquarters, respectively, in 2008 and chose to suspend paying dividends in thefourth quarter of 2008 and the first three quarters of 2009. The payment ofdividends in the future is subject to the discretion of the Board of Directorsof the Company and will depend on earnings, the financial condition of theCompany and other relevant factors.

 

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.  The Bank’s ratio of total risk-basedcapital to risk adjusted assets was 8.9% at September 30, 2009 and 10.4%at December 31, 2008.  Tier 1 risk-based capital to risk-adjustedassets was 7.6% at September 30, 2009 and 9.1% at December 31, 2008.

 

TableNine below lists the Company’s and the Bank’s capital ratios at September 30,2009 and December 31, 2008, as well as the minimum ratios required underregulatory definitions of capital adequacy.

 

**TableNine: Capital Ratios**

 
| **Capital to Risk-Adjusted Assets** | ** ** | **At September 30, 2009** | ** ** | **At December 31,  2008** | ** ** | **Minimum Regulatory  Requirement** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-------------------------------------|------------|
| ** **                          |       |                           |       |                           |       |                                |       |
| Company                             |       |                           |       |                           |       |                                |       |
| Leverage  ratio                     |       | 6.2                            | %          | 8.1                            | %          | 4.0                                 | %          |
|                                |       |                           |       |                           |       |                                |       |
| Tier  1 Risk-Based Capital          |       | 6.7                            | %          | 8.8                            | %          | 4.0                                 | %          |
|                                |       |                           |       |                           |       |                                |       |
| Total  Risk-Based Capital           |       | 8.0                            | %          | 10.0                           | %          | 8.0                                 | %          |
| ** **                          |       |                           |       |                           |       |                                |       |
| Bank                                |       |                           |       |                           |       |                                |       |
| Leverage  ratio                     |       | 6.8                            | %          | 8.2                            | %          | 4.0                                 | %          |
|                                |       |                           |       |                           |       |                                |       |
| Tier  1 Risk-Based Capital          |       | 7.6                            | %          | 9.1                            | %          | 4.0                                 | %          |
|                                |       |                           |       |                           |       |                                |       |
| Total  Risk-Based Capital           |       | 8.9                            | %          | 10.4                           | %          | 8.0                                 | %          |

 

Capitalratios are reviewed on a regular basis to ensure that capital exceeds theprescribed regulatory minimums and is adequate to meet future needs.  Allratios exceeded the regulatory definition of “Minimum” at September 30,2009 and December 31, 2008.

 

At September 30,2009, the Company and the Bank were considered “adequately” capitalized. TheCompany’s capital position and other liquidity sources provide depositcustomers with an important level of safety and confidence in the Company thatis essential in these uncertain economic times.

 

As a result of a recentregulatory examination, the Bank must obtain the prior written consent of itsprimary regulators before paying dividends and has agreed to increase itsLeverage Ratio to 10.0%.  In addition,the Bank is to maintain other capital ratios above well capitalizedthresholds.   Management is currentlyadjusting its capital plan in order to conform to this 

 

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requirement throughrestructuring of the balance sheet and the addition of new capital in the formof common stock.  In addition, an amendmentto the Company bylaws to allow issuance of preferred stock was approved by theshareholders at the annual meeting that was held June 4, 2009. The Companyis considering various transactions that might enhance its capital position.

 

**Item 3.  Quantitative andQualitative Disclosures about Market Risk**

 

**Market Risk Management**

 

*Overview*.  Market risk is therisk of loss from adverse changes in market prices and rates.  The Company’smarket risk arises primarily from interest rate risk inherent in its loan,investment, deposit and borrowing portfolios.  The goal for managing theassets and liabilities of the Company is to maximize shareholder value andearnings while maintaining a high quality balance sheet without exposing theCompany to undue interest rate risk.

 

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

 

*Asset/Liability Management*.  Activities involvedin asset/liability management include, but are not limited to, lending,accepting and placing deposits, investing in securities, issuing trustpreferred securities and borrowings.  Interest rate risk is the primarymarket risk associated with asset/liability management.  Sensitivity ofearnings to interest rate changes arises when yields on assets change in adifferent time period or in a different amount from that of interest costs onliabilities.  To mitigate interest rate risk, the structure of the balancesheet is managed with the goal that movements of interest rates on assets andliabilities are correlated and contributes to earnings even in periods ofvolatile interest rates.  The asset/liability management policy setslimits on the acceptable amount of variance in net interest margin and marketvalue of equity under changing interest environments.  The Company 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-modeling techniques, the Company isable to estimate the potential impact of changing interest rates onearnings.  A balance sheet forecast is prepared monthly using inputs ofactual loans, securities and interest bearing liabilities (i.e.deposits/borrowings) positions as the beginning base.  The forecastbalance sheet is processed against seven interest rate scenarios.  Thesescenarios include a 100, 200 and 300 basis point rising rate forecast, a flatrate forecast and a 100, 200 and 300 basis point falling rate forecast whichtake place within a one year time frame.

 

Thenet interest income is measured during the year assuming a gradual change inrates over the twelve-month horizon.  The Company’s net interest income,as forecast below, was modeled utilizing a forecast balance sheet projectedfrom balances as of the date indicated.

 

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

 

**TableTen:  Interest Rate Risk Simulation of Net Interest as of September 30,2009 and December 31, 2008**

** **
| **(In thousands)**                       | ** ** | **$ Change in NII  from Current  12 Month Horizon  September 30, 2009** | ** ** | **$ Change in NII  from Current  12 Month Horizon  December 31, 2008** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| Variation  from a constant rate scenario |       |                                                                              |       |                                                                             |       |
| +200bp                                   |       | $                                                                                 | 2,374      |                                                                             | $          | 3,522 |   |
| -  200bp                                 |       | $                                                                                 | (20        | )                                                                                | $          | 328 |   |

 

Assumptionsare inherently uncertain, and, consequently, the model cannot precisely measurenet interest income or precisely predict the impact of changes in interestrates on net interest income. Actual results will differ from simulated resultsdue to timing, magnitude and frequency of interest rate changes, as well aschanges in market conditions and management strategies which might moderate thenegative consequences of interest rate deviations. In the model above, thesimulation shows that the Company is asset sensitive over the one-year horizonas increasing rates have a greater positive impact on net interest income thandeclining rates. The model also shows that even in a declining interest rateenvironment, net interest income is impacted minimally as a result of interestrate floors on loans.

 

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**Inflation**

 

Theimpact of inflation on a financial institution differs significantly from thatexerted on manufacturing, or other commercial concerns, primarily because itsassets and liabilities are largely monetary.  In general, inflationprimarily affects the Company and it subsidiaries through its effect on marketrates of interest, which affects the Company’s ability to attract loancustomers.  Inflation affects the growth of total assets by increasing thelevel of loan demand, and potentially adversely affects capital adequacybecause loan growth in inflationary periods can increase at rates higher thanthe rate capital grows through retention of earnings, which may be generated inthe future.  In addition to its effects on interest rates, inflationincreases overall operating expenses.

 

In an inflationaryenvironment, people tend to reduce overall spending and begin tosave more. But as individuals andbusinesses curtail expenditures in an effort to trim costs; thiscauses the gross domestic product (GDP) to decline.Unemployment rates rise becausecompanies lay off workers to cut costs.  It is these combined factors thatcause the economy to fall into a recession.  The current economic slow down is evidencedby continued negative growth in GDP for the third quarter.

 

**Liquidity**

 

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

 

TheCompany’s sources of liquidity consist of cash and due from correspondentbanks, overnight funds sold to correspondent banks, unpledged marketableinvestments and loans held for sale.  On September 30, 2009,consolidated liquid assets totaled $35.9 million or 6.5% of total assetscompared to $58.3 million or 9.8% of total assets on December 31,2008.  In addition to liquid assets, the Company maintains short-termlines of credit in the amount of $15,000,000 with correspondent banks. There were no borrowings outstanding under these arrangements at September 30,2009.

 

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

 

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

 

**Off-Balance Sheet Items**

 

TheCompany has certain ongoing commitments under operating leases.  Thesecommitments do not significantly impact operating results. As of September 30,2009 and December 31, 2008, commitments to extend credit and letters ofcredit were the only financial instruments 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 September 30, 2009 and December 31, 2008 wereapproximately $106,142,000 and $154,482,000, respectively.  Such loansrelate primarily to revolving lines of credit and other commercial loans, andto real estate construction loans.  As apercentage of net loans, these off-balance sheet items represent 23.5% and31.7%, respectively. Of the loan commitments outstanding at September 30,2009, $26,820,000 are real estate construction loan commitments  that are not expected to fund within the nexttwelve months due to the current downturn in the real estate market. Theremaining commitments primarily relate to revolving lines of credit or othercommercial loans, and many of these are expected to expire without being drawnupon. Therefore, the total commitments do not necessarily represent future cashrequirements.

 

**Other Matters**

 

**Item 4.  Controls andProcedures**

 

(a) DisclosureControls and Procedures: An evaluation of the Company’s disclosure controls andprocedures (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’sChief Executive Officer, Chief Financial Officer and other members of theCompany’s senior management as of the 

 

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endof the Company’s fiscal quarter ended September 30, 2009. The Company’sChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures as currently in effect are effective in ensuringthat the information required to be disclosed by the Company in the reports itfiles or submits under the Exchange Act is (i) accumulated andcommunicated to the Company’s management (including the Chief Executive Officerand Chief Financial Officer) to allow timely decisions regarding requireddisclosure, and (ii) recorded, processed, summarized and reported withinthe time periods specified in the Commission’s rules and forms.

 

(b) InternalControl Over Financial Reporting: An evaluation of any changes in the Company’sinternal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)), that occurred during the Company’s fiscal quarter ended September 30,2009, was carried out under the supervision and with the participation of theCompany’s Chief Executive Officer, Chief Financial Officer and other members ofthe Company’s senior management. The Company’s Chief Executive Officer andChief Financial Officer concluded that no change identified in connection withsuch evaluation has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**Item 5.  Subsequent Events**

 

None.

 

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**PART II— OTHER INFORMATION**

 

Item 1.  Legal Proceedings.

 

None.

 

Item 1A. Risk Factors

 

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors”in our Annual Report on Form 10-K for the year ended December 31,2008, 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 ofProceeds.

 

TheBoard of Directors approved a plan at their March 2007 meeting torepurchase up to $6,000,000 of the outstanding common stock of theCompany.  The plan states that stockrepurchases may be made from time to time on the open market or throughprivately negotiated transactions.   Thetiming of purchases and the exact number of shares to be purchased depends onmarket conditions.  The share repurchaseplan does not include specific price targets or timetables and may be suspendedat any time.

 

Duringthe nine months ended September 30, 2009, no shares of common stock wererepurchased under the share repurchase program. There is approximately$5,671,796 remaining that may yet be purchased under the plan.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

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

 

None.

 

Item 5.  Other Information.

 

None.

 

Item 6.  Exhibits

 

(a) Exhibits

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

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|                    | COMMUNITY  VALLEY BANCORP           |
|-------------------------|-------------------------------------|
|                    |
| November 16,  2009 |                                | *By:* | */s/  Keith C. Robbins* |
|                    |                                |   |   |
|                    |                                |   | Keith C. Robbins |
|                    |                                |   |   |
|                    |                                | President,  Chief Executive Officer |
|                    |                                |   |   |
| November 16,  2009 |                                | *By:* | */s/  John F. Coger* |
|                    |                                |   |
|                    |                                | John F. Coger |
|                    |                                |   |
|                    | Executive  Vice President, CFO, COO |
|                         |                                     |  |  |  |

 

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