UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
one)





T
            Annual
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934





For
the Fiscal Year December 31, 2007





£
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





Commission
file number: 000-51949





Valley
Commerce Bancorp


(Name of
Small Business Issuer in its charter)





California
            46-1981399(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.  Employer
      Identification No.)





200
South Court Street, Visalia, California 93291


(Address
of principal executive offices and Zip Code)





(559)
622-9000


(Issuer’s
telephone number, including area code)





[None]


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





Securities
registered pursuant to Section 12(b) of the Act:





Securities
registered pursuant to Section 12(g) of the Act:  Common Stock, No Par
Value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  £
            No  T





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.


Yes  £
            No  T





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


Yes  T
            No  £





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  £








Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:





Large
      accelerated filer £
            Accelerated
      filer £
            Non-accelerated
      filer £
            Smaller
      reporting company T(Do
      not check if asmaller
      reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  £
            No  T













As of
June 30, 2007, the
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant was $18.75 based on the average bid and asked
price.





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





Common Stock, No Par Value
            
            Outstanding at March 14,
    2008[Common
      Stock, No par value per share]
            
            2,396,435
      shares





DOCUMENTS
INCORPORATED BY REFERENCE





Document
            
            Parts Into Which
    IncorporatedProxy
      Statement for the Annual Meeting of Shareholders to be held May 20, 2008
      (Proxy Statement)
            
            Part
      III





2





TABLE OF CONTENTS





Part
      IPageItem
      1.
              Business
              5Item
      1A.
              Risk Factors
              10Item
      1B.
              Unresolved Staff Comments
              11Item
      2.
              Properties
              12Item
      3.
              Legal Proceedings
              13Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              13Part
      IIItem
      5.
              Market For Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of
      Equity  Securities
              14Item
      6.
              Selected Financial Data
              16Item
      7.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              18Item
      7A.
              Quantitative and Qualitative Disclosure About Market
      Risk
              35Item
      8.
              Financial Statements and Supplementary
    Data
              35Item
      9.
              Changes in and Disagreements With Accountants on Accounting
      and Financial Disclosure
              78Item
      9A.
              Controls and Procedures
              78Item
      9B.
              Other Information
              78Part
      IIIItem
      10.
              Directors, Executive Officers, and Corporate
      Governance.
              79Item
      11.
              Executive Compensation
              79Item
      12.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              79Item
      13.
              Certain Relationships and Related Transactions and Director
      Independence
              79Item
      14.
              Principal Accountant Fees and Services
              79Part
      IVItem
      15.
              Exhibits, Financial Statement Schedules
              79Signatures





3
 Table of Contents





PART
I





Forward-Looking
Information





Certain
matters discussed in this Annual Report on Form 10-K including, but not limited
to, those described in Item 7 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations, are forward-looking statements
that are subject to risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements. Such
risks and uncertainties include, among others: (1) significant increases in
competitive pressure in the banking and financial services industries; (2)
changes in the interest rate environment, which could reduce anticipated or
actual margins; (3) changes in the regulatory environment; (4) general economic
conditions, either nationally or regionally and especially in the Company’s
primary service area, becoming less favorable than expected and resulting in,
among other things, a deterioration in credit quality; (5) operational risks,
including data processing systems failures or fraud; (6) changes in business
conditions and inflation; (7) changes in technology; (8) changes in monetary and
tax policies; and (9) changes in the securities markets; (10) civil disturbances
or terrorist threats or acts, or apprehension about the possible future
occurrences or acts of this type; (11) outbreak or escalation of hostilities in
which the United States is involved, any declaration of war by the U.S. Congress
or any other national or international calamity, crisis or emergency;
(12)  changes in laws and regulations; (13)  recently issued
accounting pronouncements; (14) government policies, regulations, and their
enforcement (including Bank Secrecy Act-related matters, taxing statutes and
regulations; (15) restrictions on dividends that our subsidiaries are allowed to
pay to us; (16) the ability to satisfy requirements related to the
Sarbanes-Oxley Act and other regulation on internal control; and management’s
ability to manage these and other risks.  Therefore, the information
set forth in such forward-looking statements should be carefully considered when
evaluating the business prospects of the Company.





When
the Company uses in this Annual Report on Form 10-K the words “anticipate,”
“estimate,” “expect,” “project,” “intend,” “commit,” “believe” and similar
expressions, the Company intends to identify forward-looking
statements.  Such statements are not guarantees of performance and are
subject to certain risks, uncertainties and assumptions, including those
described in this Annual Report on Form 10-K.  Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated,
expected, projected, intended, committed or believed.  The future
results and shareholder values of the Company may differ materially from those
expressed in these forward-looking statements.  Many of the factors
that will determine these results and values are beyond the Company’s ability to
control or predict.  The Company undertakes no obligation to revise or
publicly release the results of any revision to these forward-looking
statements.  For those statements, the Company claims the protection
of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.





4
 Table of Contents





ITEM 1 – BUSINESS





General





The Company.  Valley
Commerce Bancorp (the “Company”) was incorporated on February 2, 2002 as a
California corporation, for the purpose of becoming the holding company for
Valley Business Bank (the “Bank,” formerly Bank of Visalia), a California state
chartered bank, through a corporate reorganization.  In the
reorganization, the Bank became the wholly-owned subsidiary of the Company, and
the shareholders of the Bank became the shareholders of the
Company.  The Company is registered as a bank holding company under
the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject
to supervision and regulation by the Board of Governors of the Federal Reserve
System (the “Board of Governors”).





At
December 31, 2007, the Company had one banking subsidiary, the
Bank.  The Company’s principal source of income is dividends from the
Bank. The cash outlays of the Company, including operating expenses and debt
service costs, as well as any future cash dividends paid to Company
shareholders, will generally be paid from dividends paid to the Company by the
Bank.  Other sources of cash include settlement of intercompany
transactions and funds received from exercise of stock options.





The
Company’s principal business is to provide, through its banking subsidiary,
financial services in its primary market area in California. The Company serves
Tulare and Fresno Counties and the surrounding area through the Bank. The
Company does not currently conduct any operations other than through the Bank.
Unless the context otherwise requires, references to the Company refer to the
Company and the Bank on a consolidated basis.





At
December 31, 2007, the Company’s assets totaled $279.1 million.  As of
January 31, 2008, the Company had a total of 80 employees and 79.1 full time
equivalent employees, including the employees of the Bank.





This
Annual Report on Form 10-K and other reports filed under the Securities Exchange
Act of 1934 with the Securities and Exchange Commission (SEC) will be accessible
on the Company’s website, www.valleybusinessbank.net,
as soon as practicable after the Company files the document with the
SEC.  These reports are also available through the SEC’s website at
www.sec.gov.





The Bank.  The Bank
was organized in 1995 and commenced business as a California state chartered
bank in 1996.  The deposits of the Bank are insured by the Federal
Deposit Insurance Corporation (the “FDIC”) up to applicable
limits.  The Bank is not a member of the Federal Reserve
System.





The
Bank’s target customers are local businesses, professionals and commercial
property owners.  The Bank’s income is derived primarily from interest
earned on loans, and, to a lesser extent, interest on investment securities,
fees for services provided to deposit customers, and fees from the brokerage of
loans.  The Bank’s major operating expenses are the interest paid on
deposits and borrowings, and general operating expenses.  In general,
the business of the Bank is not seasonal.





The Bank
conducts its business through its branch offices located in Visalia, Fresno,
Woodlake and Tipton, and a loan production office in Tulare, all in California’s
South San Joaquin Valley.  The Visalia office opened in 1996 and the
Visalia/Tulare county area is the current principal market of the
Bank.  The Woodlake and Tipton branch offices were acquired from Bank
of America in 1998, primarily to obtain core deposits.  The Fresno
Branch was acquired in 2003 to allow the Bank to commence commercial banking
operations in the Fresno metropolitan area.





In July
2005, the Bank changed its name from Bank of Visalia to Valley Business Bank to
facilitate its further expansion within the South San Joaquin
Valley.





On August
16, 2006, the Company closed escrow on the purchase of land in the city of
Tulare in the amount of $401,000.  A full service branch is being
constructed on the site and is expected to be completed in May
2008.  The new branch office will replace the Tulare loan production
office that has been operating in leased quarters since January
2005.





The Bank
intends to continue expanding within the South San Joaquin Valley by opening de
novo branches and loan production offices, and by acquiring branches from other
institutions.  New branches and loan production offices provide the
Bank with greater opportunity to expand its core deposit base and increase its
lending activities.  All future branches are subject to regulatory
approval.





5
 Table of Contents





Bank Lending Activities. The
Bank originates primarily commercial mortgage loans, secured and unsecured
commercial loans and construction loans.  It also originates a small
number of consumer and agricultural loans and brokers single-family residential
loans to other mortgage lenders.  The Bank targets small businesses,
professionals and commercial property owners in its market area for
loans.  It attracts and retains borrowers primarily on the basis of
personalized service, responsive handling of their needs, local promotional
activity, and personal contacts by officers, directors and staff.  The
majority of loans bear interest at adjustable rates tied to the Valley Business
Bank prime rate, which is administered by management and will not necessarily
change at the same time or by the same amount as the prevailing national prime
rate.  At March 14, 2008, Valley Business Bank’s prime rate was
equivalent to the prevailing national prime rate as published in the Wall Street
Journal.  The remaining loans in the Bank’s portfolio either
bear interest at adjustable rates tied to the national prime rate or are priced
with fixed rates or under custom pricing programs.  For customers
whose loan demands exceed the Bank’s lending limits, the Bank seeks to make
those loans and concurrently sell participation interests in them to other
lenders.





No
individual or single group of related accounts is considered material in
relation to the Bank’s assets or in relation to the overall business of the
Bank.  At December 31, 2007 approximately 75% of the Bank’s loan
portfolio consisted of real estate-related loans, including construction loans,
real estate mortgage loans and commercial loans secured by real estate, while
21% of the loan portfolio was comprised of commercial
loans.   Currently, the business activities of the Bank are
mainly concentrated in Tulare County, California.  Consequently, the
results of operations and financial condition of the Bank are dependent upon the
general trends in this part of the California economy and, in particular, the
residential and commercial real estate markets. In addition, the concentration
of the Bank’s operations in this area of California exposes it to greater risk
than other banking companies with a wider geographic base.





Bank Deposit
Activities.  The Bank offers a full range of deposit products
including non-interest bearing demand deposit accounts and interest-bearing
money market, savings, and time deposit accounts.  The Bank also has
access to time deposits through deposit brokers.





The
Bank’s deposits are a combination of business and consumer
accounts.  No individual deposit account or group of related deposit
accounts is considered material in relation to the Bank’s total
deposits.  The loss of any one account or group of related accounts is
not expected to have a material adverse effect on the Bank.





Other Bank
Services.  The Bank has offered Internet banking services since
July 2002.  As new technology becomes available, the Bank intends to
continue expanding its Internet based banking services for the benefit of its
customers.  The Bank also offers courier services, travelers’ checks,
safe deposit boxes, banking-by-mail, and other customary bank services. The Bank
provides certain services such as international banking transactions to its
customers through correspondent banks.





During
the past fiscal year, the Bank began offering Valley Express deposit, a remote
deposit capture product, to its customers.  These services allow
customers to scan deposit items and transmit the images to the Bank via the
Internet.  Bank management is continually engaged in the evaluation of
products and services to enable the Bank to retain and improve its competitive
position.  The Bank holds no patents or licenses (other than licenses
required by appropriate bank regulatory agencies), franchises, or
concessions.





Competition and
Growth.  The Company’s primary market area has been Tulare
County.  In California generally and in the Company’s market area
specifically, major banks and large regional banks dominate the commercial
banking industry.  Many of the Company’s competitors have
substantially greater lending limits than the Bank, as well as more locations,
more products and services, greater economies of scale and greater ability to
make investments in technology for the delivery of financial
services.





The
Company’s principal competitors for deposits and loans are major banks, other
local banks, savings and loan associations, credit unions, and
brokerages.  In addition, management anticipates that improved
technology and effective marketing strategies will enable nontraditional
competitors such as internet based financial services companies to effectively
compete for loan and deposit business.





Despite a
very competitive banking environment, the Company has grown significantly in the
last three years.  Total assets grew from $186.0 million at December
31, 2004, to $279.1 million at December 31, 2007, an increase of
50%.  Growth in the regional economy and the Company’s success in
marketing to its target customers are primarily responsible for this
growth.










6
 Table of Contents




The Company’s
growth over the last three years is detailed further in the following
table:




December 31,(dollars
      in 000’s)
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007Total
      assets
            
            $
            186,007
            
            
            $
            228,011
            
            
            $
            263,800
            
            
            $
            279,081Loans,
      net
            
            
            114,834
            
            
            
            149,991
            
            
            
            184,077
            
            
            
            199,514Deposits
            
            
            156,424
            
            
            
            192,581
            
            
            
            207,576
            
            
            
            215,386Shareholders’
      equity
            
            
            16,333
            
            
            
            21,909
            
            
            
            25,448
            
            
            
            28,873








As of
June 30, 2007 (date of latest available statistics from FDIC), there were 17
commercial banks and savings associations with a total of 66 offices in Tulare
County.  On this same date, the Company’s market share of FDIC-insured
deposits in Tulare County was approximately 6% of the total $36 billion in
deposits.  The Company believes that it can gain additional market
share in its principal market of Tulare County while it develops a core customer
base in the metropolitan Fresno area.





Regulation
and Supervision





Regulatory
Environment.  The banking and financial services industry is
extensively regulated.  Statutes, regulations and policies affecting
the industry are frequently under review by Congress and state legislatures, and
by the federal and state agencies charged with supervisory and examination
authority over banking institutions.  Changes in the statutes,
regulations, or policies that impact the Company cannot necessarily be predicted
and may have a material effect on its business and earnings.  In
addition, the operations of bank holding companies and their subsidiaries are
affected by the credit and monetary policies of the Federal Reserve Board, which
influence the over-all level of bank loans, investments and deposits, the
interest rates charged on loans and paid for deposits, the price of the dollar
in foreign exchange markets, and the level of inflation.  Set forth
below is a summary of some significant statutes, regulations and policies that
apply to the operation of banking institutions.  This summary is
qualified in its entirety by reference to the full text of such statutes,
regulations and policies.





Holding Company
Regulation.  Valley Commerce Bancorp is a bank holding company
within the meaning of the BHC Act and is registered as such with the Federal
Reserve Board.  A bank holding company is required to file with the
Federal Reserve Board annual reports and other information regarding its
business operations and those of its subsidiaries.  It is also subject
to examination by the Federal Reserve Board and is required to obtain Federal
Reserve Board approval before acquiring ownership or control of more than 5% of
the voting stock of any bank.  According to Federal Reserve Board
policy, bank holding companies are expected to act as a source of financial
strength to each of their subsidiary banks and to commit resources to support
each subsidiary.  The Federal Reserve Board has issued regulations
that describe the activities in which a bank holding company can and cannot
engage.  In general, bank holding companies can engage in the business
of banking, managing or controlling banks, furnishing services to or performing
services for their subsidiary banks, and activities closely related to
banking.





Bank
Regulation.  Federal law mandates frequent examinations of all
banks, with the costs of examinations assessed against the
bank.  Valley Business Bank’s primary federal regulator is the
FDIC.  As a California state-chartered bank whose accounts are insured
by the FDIC up to a maximum of $100,000 per depositor, the Bank is subject to
regulation, supervision and regular examination by the California Commissioner
of Financial Institutions and the FDIC, and must comply with certain regulations
of the Federal Reserve Board.  The regulations of these agencies
govern most aspects of the Bank’s business, including the making of periodic
reports, activities relating to dividends, investments, loans, borrowings,
capital requirements, certain check-clearing activities, branching, mergers and
acquisitions, reserves against deposits and numerous other
areas.  Supervision, legal action and examination by these agencies
are generally intended to protect depositors and is not intended for the
protection of shareholders.





Capital Adequacy
Requirements.  Valley Commerce Bancorp is subject to the
capital adequacy regulations of the Federal Reserve Board and Valley Business
Bank is subject to the capital adequacy regulations of the FDIC.  The
regulations incorporate both risk-based and leverage capital requirements and
define capital in terms of “core capital elements,” or Tier 1 capital, and
“supplemental capital elements,” or Tier 2 capital.  Federal law
requires the federal banking agencies to take prompt corrective action to
resolve the problems of insured financial institutions, including institutions
that fall below prescribed minimum capital ratios.  The Company’s
capital requirements and actual ratios are shown in Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources,
which is included as Item 7.





Safety and Soundness
Standards.The federal banking agencies have also adopted
guidelines establishing safety and soundness standards for insured depository
institutions.  These guidelines relate to internal controls,
information systems, internal audit systems, loan underwriting and
documentation, compensation, and interest rate exposure.  In general,
the standards are designed to assist the federal banking agencies in identifying
and addressing problems at insured depository institutions before capital
becomes impaired.  If an institution fails to meet these standards,
the appropriate federal banking agency may require the institution to submit a
compliance plan or, if an acceptable compliance plan is not submitted, institute
enforcement proceedings.  Enforcement actions may include the issuance
of cease and desist orders, termination of insurance of deposits (in the case of
a bank), the imposition of civil money penalties, the issuance of directives to
increase capital, formal and informal agreements, or removal and prohibition
orders against “institution-affiliated” parties.





7
 Table of Contents





Premiums for Deposit
Insurance.FDIC regulations implement a risk-based premium
system, whereby insured depository institutions are required to pay insurance
premiums depending on their risk classification.  Under this system,
institutions such as Valley Business Bank which are insured by the Bank
Insurance Fund are categorized into one of three capital categories (well
capitalized, adequately capitalized, and undercapitalized) and one of three
supervisory categories based on federal regulatory evaluations: financially
sound with only a few minor weaknesses (Group A); demonstrates weaknesses that
could result in significant deterioration (Group B); or poses a substantial
probability of loss (Group C).





The
Deposit Insurance Fund of the FDIC insures customer deposits up to prescribed
limits for each depositor.  The FDIC approved a final rule to
determine risk-based assessment rates on November 2, 2006. An insured depository
institution’s assessment rate under the final rule is based on the new
assessment rate schedule, its long-term debt issuer ratings or recent financial
ratios and supervisory ratings. An increase in assessments or the assessment
rate could have a material adverse effect on our business, financial condition,
results of operations or cash flows, depending on the amount of the increase.
Furthermore, the FDIC is authorized to raise insurance premiums under certain
circumstances.





Community Reinvestment
Act.  The Bank is subject to certain requirements and reporting
obligations involving Community Reinvestment Act activities.  The
Community Reinvestment Act generally requires the federal banking agencies to
evaluate the record of a financial institution in meeting the credit needs of
its local communities, including low and moderate income neighborhoods, and to
take into account a financial institution’s record of meeting its community
credit needs when evaluating applications for, among other things, domestic
branches, consummating mergers or acquisitions, or holding company
formations.  In its assessment of Community Reinvestment Act
performance, the FDIC assigns a rating of “outstanding,” “satisfactory,” “needs
to improve” or “substantial noncompliance.  The Bank has a
“satisfactory” rating.





Other Consumer Protection Laws and
Regulations.In addition to the other laws and regulations
discussed herein, the Bank is subject to certain consumer and public interest
laws and regulations that are designed to protect customers in transactions with
banks.  While this list is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home
Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection
Practices Act and the Right to Financial Privacy Act.  These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits,
making loans, collecting loans and providing other services.  Failure
to comply with these laws and regulations can subject the Bank to various
penalties, including enforcement actions, injunctions, fines or criminal
penalties, punitive damages to consumers and the loss of certain contractual
rights.





Financial Modernization
Act.The Financial Modernization Act repealed provisions of
the Glass-Steagall Act which restricted the affiliation of Federal Reserve
member banks with firms “engaged principally” in specified securities activities
and which restricted officer, director, or employee interlocks between a member
bank and any company or person “primarily engaged” in specified securities
activities.  In addition, it contains provisions that expressly
preempt any state law restricting the establishment of financial affiliations,
primarily related to insurance.  The general effect of the law is to
establish a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms, and other financial service
providers by revising and expanding the Bank Holding Company Act framework to
permit a holding company system to engage in a full range of financial
activities through a new entity known as a financial holding
company.  The Financial Modernization Act also broadens the activities
that may be conducted by national banks, banking subsidiaries of bank holding
companies, and their financial subsidiaries and provides an enhanced framework
for protecting the privacy of consumer information.





Sarbanes-Oxley
Act.The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”)
implemented legislative reforms intended to address corporate and accounting
fraud.  Sarbanes-Oxley places certain restrictions on the scope of
services that may be provided by accounting firms to their public company audit
clients. Any non-audit services being provided to a public company audit client
require pre-approval by the company’s audit committee. In addition,
Sarbanes-Oxley adopted requirements for accounting firm partner rotation after
five years. Sarbanes-Oxley requires chief executive officers and chief financial
officers, or their equivalent, to certify to the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willingly violate the certification requirement. In addition, under
Sarbanes-Oxley, counsel are required to report evidence of a material violation
of the securities laws or a breach of fiduciary duty by a company to its chief
executive officer or its chief legal officer, and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other
similar committee of the board of directors or to the board itself.





8
 Table of Contents










USA PATRIOT
Act.The terrorist attacks in September 2001 impacted the
financial services industry and led to the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (the “USA PATRIOT Act”).  Part of the USA PATRIOT Act is the
International Money Laundering Abatement and Financial Anti-Terrorism Act of
2001 (“IMLAFATA”).  IMLAFATA authorizes the Secretary of the Treasury,
in consultation with the heads of other government agencies, to adopt special
measures applicable to banks, bank holding companies and other financial
institutions. These measures may include enhanced recordkeeping and reporting
requirements for certain financial transactions that are of primary money
laundering concern, due diligence requirements concerning the beneficial
ownership of certain types of accounts, and restrictions or prohibitions on
certain types of accounts with foreign financial institutions.





Other
legislative and regulatory initiatives which could affect the Company and the
banking industry in general may be proposed or introduced, before the United
States Congress, the California legislature and other governmental bodies in the
future.  Such proposals, if enacted, may further alter the structure,
regulation and competitive relationship among financial institutions, and may
subject the Company to increased regulation, disclosure and reporting
requirements.  In addition, the various banking regulatory agencies
often adopt new rules and regulations to implement and enforce existing
legislation.  The Company cannot predict whether, or in what form, any
such legislation or regulations may be enacted or the extent to which it might
affect the Company’s business.





Recent
Accounting Pronouncements





Fair
Value Measurements





In
September 2006, the FASB issued Statement No. 157 (“SFAS 157”), Fair Value
Measurements.  SFAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
SFAS 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value but does not expand the use of fair
value in any new circumstances.  In this standard, the FASB clarifies
the principle that fair value should be based on the assumptions market
participants would use when pricing the asset or liability.  In
support of this principle, SFAS 157 establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions.  The
provisions of SFAS 157 are effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years.  The provisions should be applied prospectively, except for
certain specifically identified financial instruments.  The Company
adopted SFAS 157 on January 1, 2008 and management does not believe its adoption
will have a material impact on the Company’s financial position, results of
operations or cash flows.





Fair
Value Option for Financial Assets and Financial Liabilities





In
February 2007, the FASB issued Statement No. 159 (“SFAS 159”), The Fair Value
Option for Financial Assets and Financial Liabilities – Including an Amendment
of FASB Statement No. 115.  This standard permits an entity to choose
to measure many financial instruments and certain other items at fair value at
specified election dates.  The entity will report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date.  The fair value option: (a) may be
applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is irrevocable (unless a new
election date occurs); and (c) is applied only to entire instruments and not to
portions of instruments.  The provisions of SFAS 159 are effective as
of the beginning of an entity’s first fiscal year that begins after November 15,
2007.  The Company adopted SFAS 159 on January 1, 2008 and management
did not elect the fair value option for any of its financial
instruments.





Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements





In
September 2006, the FASB ratified the consensuses reached by the Task Force on
Issue No. 06-4 (“EITF 06-4”), Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.  A question arose when an employer enters into an
endorsement split-dollar life insurance arrangement related to whether the
employer should recognize a liability for the future benefits or premiums to be
provided to the employee.  EITF 06-4 indicates that an
employer





9
 Table of Contents





should
recognize a liability for future benefits and that a liability for the benefit
obligation has not been settled through the purchase of an endorsement type
policy.  An entity should apply the provisions of EITF 06-4 either
through a change in accounting principle through a cumulative-effect adjustment
to retained earnings as of the beginning of the year of adoption or a change in
accounting principle through retrospective application to all prior
periods.  The provisions of EITF 06-4 are effective for fiscal years
beginning after December 15, 2007.  The Company adopted EITF 06-04 on
January 1, 2008 and management determined that a liability of approximately
$102,000 will be recorded as of January 1, 2008, with corresponding reduction as
a cumulative-effect adjustment to retained earnings.





Accounting
for Business Combinations





In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (revised 2007), Business Combinations “SFAS No. 141(R)”).  SFAS
No. 141(R), among other things, establishes principles and requirements for how
the acquirer in a business combination (i) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquired business, (ii) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (iii) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination.  The Company is required to adopt SFAS
No. 141(R) for all business combinations for which the acquisition date is on or
after January 1, 2009.  Earlier adoption is
prohibited.  This standard will change the accounting treatment for
business combinations on a prospective basis.





ITEM 1A - RISKFACTORS





Deterioration of local real estate
values could reduce our profitability.  At December 31, 2007,
approximately 75% of the Company’s loan portfolio was secured by real
estate.  There has been a rapid increase in real estate values in our
market area in recent years peaked in mid-2007 and began to decline in the
4th
quarter of 2007.  A material downturn in such values would likely
reduce the security for many of our loans and adversely affect the ability of
many of our borrowers to repay their loan from us.





Deterioration of local economic
conditions could reduce our profitability. Our lending operations and
customer base are concentrated in Tulare and Fresno Counties which are located
in the Central Valley region of California.  General recessionary
conditions in our market area could directly affect the Company by causing us to
incur losses associated with higher default rates and decreased collateral
values in our loan portfolio.  In addition, Tulare and Fresno Counties
are among the leading counties in the United States for agricultural production
and a significant downturn in the local agricultural economy due to commodity
prices, real estate prices, public policy decisions, natural disaster, or other
factors could result in a decline in the local economy in general, which could
in turn negatively impact the Company.





The Company’s strategies for growth
may prove to be unsuccessful and reduce profitability. The Company
intends to continue expanding within the South San Joaquin Valley by opening de
novo branches and loan production offices, and by acquiring branches from other
institutions.  The success of such expansion is dependent upon the
Company’s ability to attract and retain qualified personnel, negotiate
effectively, manage a growing number of customer relationships, and maintain
cost controls and asset quality while attracting additional loans and deposits
on favorable terms.  If the Company is unsuccessful in any of these
areas, its financial performance could be adversely affected. In addition,
future expansion may result in compliance and operational deficiencies which may
require less aggressive growth or additional expenditures to expand the
operational infrastructure.





If Company’s allowance for loan
losses is not sufficient to absorb actual loan losses, our profitability could
be reduced.  The risk of loan losses is inherent in the lending
business.The Company maintains an allowance for loan losses
(ALL) based upon the Company’s actual losses over a relevant time period and
management’s assessment of all relevant factors that may cause future loss
experience to differ from its historical loss experience.  Although
the Company maintains a rigorous process for determining the ALL, it can give no
assurance that it will be sufficient to cover future loan losses.  If
the allowance for loan losses is not adequate to absorb future losses, or if
bank regulatory agencies require the Company to increase its ALL, earnings could
be significantly and adversely impacted.





Fluctuations in interest rates could
reduce profitability.The Company’s earnings depend largely
upon net interest income, which is the difference between the total interest
income earned on interest earning assets (primarily loans and investment
securities) and the total interest expense incurred on interest bearing
liabilities (primarily deposits and borrowed funds).  The interest
earned on assets and paid on liabilities are affected principally by direct
competition, and general economic conditions at the state and national level and
other factors beyond the Company’s control such as actions of the Federal
Reserve Board, the





10
 Table of Contents





general
supply of money in the economy, legislative tax policies, governmental budgetary
matters, and other state and federal economic policies.  Although the
Company maintains a rigorous process for managing the impact of possible
interest rate fluctuations on earnings, the Company can provide no assurance
that its management efforts will prevent earnings from being significantly and
adversely impacted by changes in interest rates.





Strong competition may reduce
profitability. Along with larger national and regional banks and other
local banks, the Company competes for customers with finance companies,
brokerage firms, insurance companies, credit unions, and internet-based
banks.  Certain of these competitors have advantages over the Company
in accessing funding and in providing various services, or, in the case of
credit unions, are significantly tax advantaged.  Major banks have
substantially larger lending limits than the Company and can perform certain
functions for their customers which the Company is not presently able to offer
directly.  Other existing single or multi-branch community banks, or
new community bank start-ups, have marketing strategies similar to the Company’s
and compete for the same management personnel and the same potential acquisition
and merger candidates. Ultimately, competition can reduce our profitability, as
well as make it more difficult to increase the size of our loan portfolio and
deposit base.





Loss of executive officers or key
personnel could reduce the Company’s future profitability.  The
Company depends upon the skills and reputations of its executive officers and
other key employees for its future success. The loss of any of these key persons
could adversely affect the Company. No employment or non-compete agreements have
been executed with any Company employee and therefore no assurance can be given
that the Company will be able to retain its existing key personnel or that key
personnel will not, upon leaving the Company’s employment, become employed by a
competing institution.








ITEM 1B – UNRESOLVED STAFF COMMENTS





The
Company has no unresolved staff comments with the Securities and Exchange
Commission





11
 Table of Contents





ITEM 2 – PROPERTIES





The
following table summarizes certain information about the Company’s main office
and branch offices:





Office
      location
            Year
      opened
            Approximate square
      footage
            Owned or
      leasedMain
      office
              200
      South Court Street
              Visalia,
      California
            1996
            8,700
            LeasedAdministrative
      office
              100
      Willow Plaza, Suites 101 & 105
              Visalia,
      California
            2003
            4,972
            LeasedFresno
      branch
              7391
      N.  Palm Avenue
              Fresno,
      California
            2003
            4,654
            LeasedWoodlake
      branch
              232
      North Valencia
              Woodlake,
      California
            1998
            5,000
            OwnedTipton
      branch
              174
      South Burnett
              Tipton,
      California
            1998
            5,610
            OwnedTulare
      Loan Production Office
              1635
      E. Prosperity, Suite B
              Tulare,
      California
            2005
            1,192
            Leased





The
Visalia main office is leased under a noncancelable operating lease with a
nonaffiliated third party expiring 2009 with the option to extend the lease for
two additional five-year terms.  The primary operating area consists
of approximately 8,700 square feet of space comprising the entire usable space
in a single-story building.  The lease arrangement for the primary
operating area is a “triple net lease” with monthly rent of $11,200 until the
term expires on November 30, 2009.  In the event the renewal option is
exercised, the annual rent to be paid will be equivalent to 10% of the fair
market value of the leased premises.





In close
proximity to the main office is the Willow Plaza administrative office housing
credit and finance personnel which is comprised of two connected office suites
of approximately 4,972 square feet located in a four-story office
building.  These premises are leased from a related party under
noncancelable operating leases which expire June 30, 2008 with an option to
extend for two additional years.  The lease arrangement is a “triple
net lease” with combined monthly rent of $7,408 until the term expires on June
30, 2008.  In the event the renewal option is exercised, the annual
rent to be paid will increase by approximately 3.5% in each of the extension
years.





The
Fresno branch relocated to a new office on October 1, 2007 which is leased under
a noncancelable operating lease with a nonaffiliated third party for ten years
with no option to extend.  The primary operating area consists of
approximately 4,654 square feet of space comprising the entire usable space in a
single-story building.  The lease arrangement for the primary
operating area is a “triple net lease” expiring September 30,
2017.  Monthly rent under the lease is $7,911 through the fifth year
and $9,541 for the last five years.





The
Tulare loan production office is leased under a nine month noncancelable
operating lease with a non affiliated third party, with options to renew every
six months. The primary operating area consists of approximately 1,192 square
feet of office space in a single-story building. The lease arrangement for the
primary operating area has been extended to January 1, 2008. The current monthly
rent is $1,560 over the term of the lease.  A new Tulare Branch office
constructed at an estimated total cost of $2.1 million for land, building, and
fixtures, is scheduled to open by the end of May 2008 which will result in the
closing of the Tulare loan production office.  The current lease has
been extended with a monthly option until the new branch is opened.





12
 Table of Contents





At
December 31, 2007, the total net book value of the Company’s land, buildings,
leasehold improvements and equipment was approximately
$3,037,000.  Each of the Company’s facilities is considered to be in
good condition and adequately covered by insurance.





ITEM 3 – LEGALPROCEEDINGS





From time
to time the Company may be subject to legal proceedings and claims in the
ordinary course of business. These claims, even if not meritorious, could result
in the expenditure of significant financial and managerial resources. Management
is not aware of any legal proceedings or claims that it believes could
materially harm the Company’s business or revenues.





ITEM 4 – SUBMISSIONOF MATTERS TO A VOTE OF SECURITY
HOLDERS





No matter
was submitted to a vote of shareholders during the fourth quarter of the fiscal
year covered by this annual report. The 2008 Annual Meeting of Shareholders will
be held at 6 p.m., local time, on May 20, 2008, at the Visalia Convention
Center, 303 East Acequia Avenue, Visalia, California 93291.





13
 Table of Contents





PART
II





ITEM 5 – MARKETFOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES





General





The
Company’s common stock is traded on the OTC Bulletin Board under the symbol
“VCBP.OB.”  Historically, there has been a limited over-the-counter
market for the Company’s common.  Wedbush Morgan Securities Inc. and
Howe Barnes Hoefer & Arnett Inc. have acted as market makers for the
Company’s common stock.  These market makers have no obligation to
make a market in the Company’s common stock, and they may discontinue making a
market at any time.





The
information in the following table indicates the high and low “bid” quotations
for the Company’s common stock for each quarterly period since January 1, 2006,
and is based upon information provided by market makers.  These
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission, do not reflect actual transactions, which have been very sporadic,
and do not include nominal amounts traded directly by shareholders or through
other dealers who are not market makers.  In addition, the quotations
have been adjusted for 5% stock dividends paid in June 2007 and May
2006.








High and low bid quotationsHigh
            
            
            Low2007Fourth
      quarter
            
            $
            15.45
            
            
            $
            13.50Third
      quarter
            
            
            18.65
            
            
            
            14.00Second
      quarter
            
            
            21.00
            
            
            
            18.38First
      quarter
            
            
            21.71
            
            
            
            19.432006Fourth
      quarter
            
            $
            22.86
            
            
            $
            18.95Third
      quarter
            
            
            20.00
            
            
            
            19.00Second
      quarter
            
            
            19.72
            
            
            
            18.10First
      quarter
            
            
            19.72
            
            
            
            16.78








As of
March 19, 2008, there were 415 record holders of the Company’s common stock and
approximately 456 beneficial holders.








Dividend
Policy.  The Company has not paid any cash dividends on common
stock since its inception in 1996.  The Company intends to retain any
future earnings for the development and operations of its business and
accordingly does not anticipate paying cash dividends on capital stock in the
foreseeable future.





Holders
of the Company’s common stock will be entitled to receive such cash dividends as
may be declared by the board of directors out of funds legally available for
that purpose.  The Company is subject to certain restrictions on
dividends under the California General Corporation Law.  Generally,
California law permits the Company to pay dividends not exceeding its retained
earnings.  In the alternative, the Company may pay a greater amount as
dividends if its tangible assets after the dividends would be at least 125% of
its liabilities (other than certain deferred items) and certain financial ratio
tests are met.  However, a bank holding company ordinarily cannot meet
these alternative requirements.  In addition, the Company has agreed
not to pay cash dividends if it is in default or deferring interest payments on
trust preferred securities.





The
Company’s ability to pay cash dividends will also depend to a large extent upon
the amount of cash dividends paid by the Bank to Valley Commerce
Bancorp.  The ability of the Bank to pay cash dividends will depend
upon its earnings and financial condition.  Under California law, a
California-chartered bank may pay dividends not exceeding the lesser of its
retained earnings or its net income for the last three fiscal years (less any
previous dividends; provided, with the prior regulatory approval, a bank may pay
dividends not exceeding the greatest of (a) its retained earnings, (b) its net
income for the previous fiscal year or (c) its net income for the current fiscal
year).  The Company’s ability to pay dividends is also subject to
certain covenants contained in the indentures related to its trust preferred
securities.  However, the Bank has no formal dividend policy, and
dividends are issued in the sole discretion of the Bank’s board of
directors.  There can be no assurance as to when or whether a dividend
will be paid or the amount of any dividend.  The Bank currently has a
policy of retaining earnings to support the growth of the Bank except as
necessary to enable Valley Commerce Bancorp to pay its direct expenses and
amounts due under subordinated debentures issued in connection with trust
preferred securities.





14
 Table of Contents










The
Company paid 5% stock dividends in each year from 2000 to 2007, except for
2005.  The Company issued a three-for-two stock split in September
2004.





Repurchases.  On
November 13, 2007 the Company announced that its Board of Directors authorized a
common stock repurchase plan.  The plan calls for the repurchase of up
to an aggregate of $3,000,000 of the Company’s Common Stock.  The
repurchase program commenced in November of 2007 and will continue for a period
of twelve months thereafter, subject to earlier termination at the Company’s
discretion.  The number price and timing of the repurchase shall be at
the Company’s sole discretion and the plan may be re-evaluated depending on
market conditions, liquidity needs or other factors.  The Board, based
on such re-evaluations, may suspend, terminate, modify or cancel the plan at any
time without notice.





Share
repurchases are summarized in the following table:








Period
            
            (a)
              Total
              Number
      of
              Shares
              Purchased
            
            
            (b)
              Average
              Price
      paid
              per
      share
            
            
            (c)
              Total
      number of
              Shares
      purchased as
              Part
      of publicly
              Announced
      plans or
              Programs
            
            
            (d)
              Maximum
      number (or
              Approximate
      dollar value)
              Of
      shares that may yet be
              Purchased
      under the plans
              Or
      programsNovember
      1-30
            
            
            27,440
            
            
            $
            13.91
            
            
            
            27,440
            
            
            $
            2,618,191December
      1-31
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            27,440
            
            
            $
            13.91
            
            
            
            27,440
            
            
            $
            2,618,191








Equity
Compensation Plan Information





In 1997
and 2007, the Company established Stock Option Plans for which shares of stock
are reserved for issuance to employees and directors under incentive and
nonstatutory agreements.  During 2007, 1,823 incentive stock options
and 95,684 non-statutory stock options were exercised, and 38,500 incentive
stock options were granted.  During 2006, 1,542 incentive stock
options and 22,596 non-statutory stock options were exercised, and 10,000 stock
options were granted.





The
information in the following table is provided as of the end of the fiscal year
ended December 31, 2007, with respect to compensation plans (including
individual compensation arrangements) under which equity securities are
issuable:





Plan category
            
            Column
      (a)
              Number
      of securities to
              be
      issued upon exercise of
              outstanding
      options,
              warrants
              and rights
            
            
            Weighted-average
              exercise
      price of
              outstanding
              options,
      warrants
              and
      rights
            
            
            Number
      of securities remaining
              available
      for future issuance
              under equity
      compensation plans
              (excluding
      securities
              reflected in Column (a))Equity
      compensation plans approved by security holders
            
            
            175,859
            
            
            $
            10.11
            
            
            
            83,507Equity
      compensation plans not approved by security holders
            
            None
            
            
            Not
      applicable.
            
            
            None





15
 Table of Contents





ITEM 6 – SELECTEDFINANCIAL DATA





The
following table presents a five year summary of selected financial information
which should be read in conjunction with the Company’s consolidated financial
statements and notes thereto included in Item 8, Financial Statements, and with
the Management’s Discussion and Analysis of Financial Condition and Results of
Operations which is included as Item 7.  The financial information
contained in the table is unaudited.  The results of operations for
2007 are not necessarily indicative of the results of operations that may be
expected for future years.








(dollars
      in thousands
            
            As of and for the year ended December
      31,except
      per share data)
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Statement
      of IncomeInterest
      income
            
            $
            18,470
            
            
            $
            16,750
            
            
            $
            12,504
            
            
            $
            8,737
            
            
            $
            7,188Interest
      expense
            
            
            7,131
            
            
            
            5,561
            
            
            
            2,683
            
            
            
            1,622
            
            
            
            1,426Net
      interest income
            
            
            11,339
            
            
            
            11,189
            
            
            
            9,821
            
            
            
            7,115
            
            
            
            5,762Provision
      for loan losses
            
            
            -
            
            
            
            -
            
            
            
            369
            
            
            
            138
            
            
            
            315Net
      interest income after provision for loan losses
            
            
            11,339
            
            
            
            11,189
            
            
            
            9,452
            
            
            
            6,977
            
            
            
            5,447Non-interest
      income
            
            
            1,155
            
            
            
            996
            
            
            
            888
            
            
            
            1,341
            
            
            
            1,055Non-interest
      expense
            
            
            8,699
            
            
            
            7,653
            
            
            
            6,810
            
            
            
            5,662
            
            
            
            4,648Income
      before income taxes
            
            
            3,795
            
            
            
            4,532
            
            
            
            3,530
            
            
            
            2,656
            
            
            
            1,854Income
      taxes
            
            
            1,134
            
            
            
            1,576
            
            
            
            1,367
            
            
            
            1,027
            
            
            
            705Net
      income
            
            
            2,661
            
            
            
            2,956
            
            
            
            2,163
            
            
            
            1,629
            
            
            
            1,149Per
      Share Data (4):Basic
      earnings per share
            
            $
            1.13
            
            
            $
            1.28
            
            
            $
            0.95
            
            
            $
            1.03
            
            
            $
            0.73Diluted
      earnings per share
            
            $
            1.09
            
            
            $
            1.22
            
            
            $
            0.90
            
            
            $
            0.96
            
            
            $
            0.70Book
      value - end of period
            
            $
            12.05
            
            
            $
            10.94
            
            
            $
            9.52
            
            
            $
            8.28
            
            
            $
            6.94Average
      shares outstanding-basic
            
            
            2,358,353
            
            
            
            2,312,140
            
            
            
            2,274,093
            
            
            
            1,588,022
            
            
            
            1,567,435Average
      shares outstanding-diluted
            
            
            2,448,889
            
            
            
            2,429,080
            
            
            
            2,407,603
            
            
            
            1,695,705
            
            
            
            1,636,059Shares
      outstanding - end of period
            
            
            2,396,435
            
            
            
            2,326,553
            
            
            
            2,301,209
            
            
            
            1,971,554
            
            
            
            1,509,854Balance
      SheetTotal
      loans, net
            
            $
            199,514
            
            
            $
            182,332
            
            
            $
            149,991
            
            
            $
            114,834
            
            
            $
            101,177Allowance
      for loan losses
            
            
            1,758
            
            
            
            1,746
            
            
            
            1,766
            
            
            
            1,401
            
            
            
            1,393Total
      assets
            
            
            279,081
            
            
            
            263,800
            
            
            
            228,011
            
            
            
            186,007
            
            
            
            139,611Total
      deposits
            
            
            215,386
            
            
            
            207,576
            
            
            
            192,581
            
            
            
            156,424
            
            
            
            119,668Total
      shareholders' equity
            
            
            28,873
            
            
            
            25,448
            
            
            
            21,909
            
            
            
            16,333
            
            
            
            11,020Selected
      Performance Ratios:Return
      on average assets
            
            
            0.99
            %
            
            
            1.22
            %
            
            
            1.05
            %
            
            
            1.04
            %
            
            
            0.89
            %Return
      on average equity
            
            
            9.83
            %
            
            
            12.59
            %
            
            
            10.44
            %
            
            
            13.84
            %
            
            
            11.01
            %Net
      interest margin (1)
            
            
            4.71
            %
            
            
            5.15
            %
            
            
            5.23
            %
            
            
            5.00
            %
            
            
            4.85
            %Average
      net loans as a percentage of average deposits
            
            
            91.0
            %
            
            
            85.8
            %
            
            
            78.3
            %
            
            
            80.2
            %
            
            
            81.4
            %Efficiency
      ratio
            
            
            69.6
            %
            
            
            62.8
            %
            
            
            63.6
            %
            
            
            66.2
            %
            
            
            67.4
            %





16
 Table of Contents





Selected
Financial Data (continued)








As of and for the year ended December
      31,2003
            
            2004
            
            2005
            
            2006
            
            
            2007Selected
      Asset Quality Ratios:Nonperforming
      assets to total assets
            
            
            0.7
            %
            
            
            0.0
            %(3)
            
            
            0.0
            %(3)
            
            
            
            ----
      (2)
            
            
            
            ----
      (2)Nonperforming
      loans to total loans
            
            
            1.0
            %
            
            
            0.1
            %
            
            
            0.0
            %(3)
            
            
            
            ----
      (2)
            
            
            
            ----
      (2)Net
      loan charge-offs to average loans
            
            
            0.0
            %
            
            
            0.1
            %
            
            
            0.0
            %(3)
            
            
            0.0
            %(3)
            
            
            0.0
            %Allowance
      for loan losses to total loans
            
            
            1.40
            %
            
            
            1.20
            %
            
            
            1.16
            %
            
            
            0.95
            %
            
            
            0.87
            %Allowance
      for loan losses to nonperforming loans
            
            
            138.2
            %
            
            
            1729.6
            %
            
            
            8409.5
            %
            
            
            
            ----
      (2)
            
            
            
            ----
      (2)Capital
      Ratios:BankLeverage
            
            
            9.8
            %
            
            
            8.4
            %
            
            
            11.3
            %
            
            
            11.0
            %
            
            
            11.4
            %Tier
      1 Risk-Based
            
            
            12.7
            %
            
            
            11.4
            %
            
            
            14.6
            %
            
            
            13.4
            %
            
            
            13.7
            %Total
      Risk-Based
            
            
            14.0
            %
            
            
            12.5
            %
            
            
            15.6
            %
            
            
            14.2
            %
            
            
            14.4
            %ConsolidatedLeverage
            
            
            10.0
            %
            
            
            10.8
            %
            
            
            11.5
            %
            
            
            11.1
            %
            
            
            11.5
            %Tier
      1 Risk-Based
            
            
            13.0
            %
            
            
            14.7
            %
            
            
            14.8
            %
            
            
            13.5
            %
            
            
            13.8
            %Total
      Risk-Based
            
            
            14.2
            %
            
            
            15.8
            %
            
            
            15.9
            %
            
            
            14.3
            %
            
            
            14.6
            %





Notes:
            (1)
            Interest
      income is not presented on a taxable-equivalent basis, however, the net
      interest margin was calculated on a taxable-equivalent basis by using a
      marginal tax rate of 34%





(2)
            There
      were no nonperforming loans at December 31, 2007 and
  2006





(3)
            Less
      than .05%





(4)
            All
      share and per share data has been retroactively restated to reflect
      the  September 2004 three-for-two stock split and the 5% stock
      dividends issued in June 2007, May 2006, 2004 and
  2003.





17
 Table of Contents





ITEM 7 – MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





The
following discussion and analysis should be read together with the selected
financial data appearing in Item 1, Business, and the financial statements and
notes thereto appearing in  Item 8, Financial Statements and
Supplementary Data, included in this Annual Report on Form 10-K.





Overview





The
Company is the holding company for Valley Business Bank (the “Bank”), a
California state chartered bank.  The Company’s principal business is
to provide, through its banking subsidiary, financial services in its primary
market area in California. The Company serves Tulare and Fresno Counties and the
surrounding area through the Bank. The Company derives its income primarily from
interest earned on loans, and, to a lesser extent, interest on investment
securities, fees for services provided to deposit customers, and fees from the
brokerage of loans.  The Bank’s major operating expenses are the
interest paid on deposits and borrowings, and general operating expenses,
including salaries and employee benefits and, to a lesser extent, occupancy and
equipment, data processing and operations.  The Company does not
currently conduct any operations other than through the Bank.





Critical
Accounting Policies





The
Company’s financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America
(GAAP).  The Company’s accounting policies are integral to
understanding the financial results reported.  The most complex of
these accounting policies require management’s judgment to ascertain the
valuation of assets, liabilities, commitments and contingencies.  The
Company has established detailed policies and internal control procedures that
are intended to ensure valuation methods are well controlled and consistently
applied from period to period.  In addition, the policies and
procedures are intended to ensure that the process for changing methodologies
occurs in an appropriate manner.  The accounting areas where
management’s judgment is most likely to materially impact the Company’s
financial results are:





Allowance for Loan
Losses.The allowance for loan losses is maintained to provide
for estimated credit losses that it is probable the Company will incur as of the
balance sheet date.  Loans determined to be impaired are evaluated
individually by management for determination of the specific loss, if any, that
exists as of the balance sheet date.  In addition, reserve factors are
assigned to currently performing loans by loan type based on historical loss
rates and adjusted for various qualitative factors such as economic and market
conditions, concentrations and other trends within the loan
portfolio.  When management believes that additional reserves are
needed, the allowance for loan losses is increased by recording a charge to
operations through the provision for loan losses.  The allowance is
decreased as loans are charged-off, net of recoveries.





Management
believes the allowance for loan losses is a “critical accounting estimate”
because management’s estimate of credit losses on loans not already identified
as impaired; i.e., loans that are currently performing, requires management to
carefully evaluate the pertinent facts and circumstances as of the balance sheet
date to determine how much, if any, adjustment is required to the historical
loss rate for each loan type.  In addition, estimates of credit losses
on currently performing loans are subject to change in future reporting periods
as facts and circumstances change.  For example, a decline in the
California real estate market may result in management raising its estimate of
credit losses if such estimated losses are considered probable at the balance
sheet date.





Management
reviews the adequacy of the allowance for loan losses at least
quarterly.  Further information is provided in the “Provision for Loan
Losses” and “Allowance for Loan Losses” sections of this discussion and
analysis.





Available for Sale Securities.Available-for-sale securities are required to be carried at fair
value.  Management believes this is a “critical accounting estimate”
in that the fair value of a security is based on quoted market prices or if
quoted market prices are not available, fair values are extrapolated from the
quoted prices of similar instruments.  Changes in the fair value of
available-for-sale securities impact the consolidated financial statements by
increasing or decreasing assets and shareholders’ equity.





Income Taxes.The Company files its income taxes on a consolidated basis with its
subsidiary.  The allocation of income tax expense (benefit) represents
each entity's proportionate share of the consolidated provision for income
taxes.





Deferred
income taxes reflect the estimated future tax effects of temporary differences
between the reported amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and
regulations.  Management believes this is a “critical accounting
estimate” in that an estimate of future earnings is required to support its
position that the benefit of the





18
 Table of Contents





Company’s
deferred tax assets will be realized.  If future income should prove
non-existent or less than the amount of the deferred tax assets within the tax
years to which they may be applied, the asset may not be realized and the
Company’s net income will be reduced.





The
provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes (FIN 48) have been applied to all tax positions of the
Company as of January 1, 2007.  FIN 48 prescribes a recognition
threshold and measurement standard for the financial statement recognition and
measurement of an income tax position taken or expected to be taken in a tax
return.  Only tax positions that met the more-likely-than-not
recognition threshold on January 1, 2007 were recognized or continue to be
recognized upon adoption.  The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any.  Tax positions taken are not offset or aggregated
with other positions.  Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority.  The portion of the
benefits associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination.





Stock-Based
Compensation.  Effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment (“SFAS
123 (R)”). Under SFAS 123(R), compensation cost is recognized for all awards
that vest subsequent to the date of adoption based on the grant-date fair value
estimated in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation and SFAS 123(R). We believe this is a “critical accounting
estimate” since the grant-date fair value is estimated using the Black-Scholes
option-pricing formula, which involves making estimates of the assumptions used,
including the expected term of the option, expected volatility over the option
term, expected dividend yield over the option term and risk-free interest
rate.  In addition, when determining the compensation expense to
amortize over the vesting period, management makes estimates about the expected
forfeiture rate of options.





Results
of Operations





Overview





The
Company earned net income of $2.66 million, or $1.09 per diluted share, for the
year ended December 31, 2007, compared to $2.96 million, or $1.22 per diluted
share, for the year ended December 31, 2006.  Net income was $2.16
million, or $0.90 per diluted share, for the year ended December 31,
2005.  The return on average assets was 0.99% for 2007, 1.22% for
2006, and 1.05% for 2005.  The return on average shareholders’ equity
for 2007, 2006, and 2005 was 9.83%, 12.59%, and 10.44%,
respectively.





The
decrease in earnings for 2007  resulted primarily from additional
personnel and occupancy costs associated with the Company’s continued expansion
partially offset by the increase in both net interest income and non-interest
income.  In addition, the Company’s non-interest expense increased due
to cost incurred for compliance with Sarbanes-Oxley legislation and for
improving the Company’s information technology capabilities.  The
ratio of non-interest expense to net operating revenue (efficiency ratio)
increased to 69.6% for 2007 from 62.8% for 2006 and 63.6% for
2005.  This ratio reflects changes in non-interest expense as well as
changes in revenue from interest and non-interest sources.  The
unfavorable increase in the efficiency ratio resulted primarily from the rise in
non-interest expense associated with increases in personnel and occupancy costs
related to branch and loan department growth.





At
December 31, 2007, the Company’s total assets were $279.1 million, an increase
of $15.4 million or 6% compared to December 31, 2006.  Total loans,
net of the allowance for loan losses, were $199.5 million at December 31, 2007,
representing an increase of $17.2 million or 9% compared to December 31,
2006.  Total deposits were $215.4 million at December 31, 2007,
representing an increase of $7.8 million or 4% compared to December 31,
2006.





At
December 31, 2007, the Company’s leverage ratio was 11.5% while its tier 1
risk-based capital ratio and total risk-based capital ratios were 13.8% and
14.6%, respectively.  The leverage, tier 1 risk-based capital and
total risk-based capital ratios at December 31, 2006 were 11.1%, 13.5% and
14.3%, respectively. The increase in the Company’s capital ratios in 2007
resulted from the 13% increase in equity from the retention of earnings and the
exercise of stock options which outpaced the Company’s 6% growth in
assets.





19
 Table of Contents





A
detailed presentation of the Company’s financial results as of, or for the
fiscal years ended December 31, 2007, 2006, and 2005 follows.





Net
Interest Income





The
following table presents the Company’s average balance sheet, including weighted
average yields calculated on a daily average basis and rates on a
taxable-equivalent basis, for the years indicated:





Average balances and
      weighted average yields and ratesFiscal year ended December
    31,2007
            
            
            2006
            
            
            2005Interest
            
            
            Average
            
            
            
            
            
            Interest
            
            
            Average
            
            
            
            
            
            Interest
            
            
            AverageAverage
            
            
            Income/
            
            
            Yield/
            
            
            Average
            
            
            Income/
            
            
            Yield/
            
            
            Average
            
            
            Income/
            
            
            Yield/(dollars
      in thousands)
            
            Balance
            
            
            Expense
            
            
            Cost
            
            
            Balance
            
            
            Expense
            
            
            Cost
            
            
            Balance
            
            
            Expense
            
            
            CostASSETSFederal
      funds sold
            
            $
            78
            
            
            $
            4
            
            
            
            4.74
            %
            
            $
            3,019
            
            
            $
            138
            
            
            
            4.57
            %
            
            $
            8,244
            
            
            $
            229
            
            
            
            2.78
            %Available-for-sale
      investment securities:Taxable
            
            
            35,438
            
            
            
            1,582
            
            
            
            4.46
            %
            
            
            36,984
            
            
            
            1,445
            
            
            
            3.91
            %
            
            
            40,564
            
            
            
            1,461
            
            
            
            3.60
            %Exempt
      from Federal income taxes
            
            
            19,012
            
            
            
            771
            
            
            
            6.14
            %
            
            
            17,936
            
            
            
            719
            
            
            
            6.07
            %
            
            
            7,856
            
            
            
            303
            
            
            
            5.84
            %Total
      securities (1)
            
            
            54,450
            
            
            
            2,353
            
            
            
            5.05
            %
            
            
            54,920
            
            
            
            2,164
            
            
            
            4.61
            %
            
            
            48,420
            
            
            
            1,764
            
            
            
            3.97
            %Loans
      (2) (3)
            
            
            194,734
            
            
            
            16,113
            
            
            
            8.27
            %
            
            
            166,620
            
            
            
            14,448
            
            
            
            8.67
            %
            
            
            134,008
            
            
            
            10,511
            
            
            
            7.84
            %Total
      interest-earning assets (1)
            
            
            249,262
            
            
            
            18,470
            
            
            
            7.57
            %
            
            
            224,559
            
            
            
            16,750
            
            
            
            7.62
            %
            
            
            190,672
            
            
            
            12,504
            
            
            
            6.64
            %Noninterest-earning
      assets, net of allowance for loan losses
            
            
            18,363
            
            
            
            
            
            
            
            
            
            
            
            17,244
            
            
            
            
            
            
            
            
            
            
            
            16,280Total
      assets
            
            $
            267,625
            
            
            
            
            
            
            
            
            
            
            $
            241,803
            
            
            
            
            
            
            
            
            
            
            $
            206,952LIABILITIES
      AND SHAREHOLDERS’ EQUITYDeposits:Interest
      bearing
            
            $
            83,020
            
            
            $
            2,382
            
            
            
            2.87
            %
            
            $
            73,534
            
            
            $
            1,996
            
            
            
            2.71
            %
            
            $
            61,057
            
            
            $
            829
            
            
            
            1.36
            %Time
      deposits less than $100,000
            
            
            20,717
            
            
            
            968
            
            
            
            4.67
            %
            
            
            20,268
            
            
            
            820
            
            
            
            4.05
            %
            
            
            18,927
            
            
            
            460
            
            
            
            2.43
            %Time
      deposits $100,000 or more
            
            
            49,400
            
            
            
            2,453
            
            
            
            4.97
            %
            
            
            34,220
            
            
            
            1,491
            
            
            
            4.36
            %
            
            
            24,864
            
            
            
            739
            
            
            
            2.97
            %Total
      interest-bearing deposits
            
            
            153,137
            
            
            
            5,803
            
            
            
            3.79
            %
            
            
            128,022
            
            
            
            4,307
            
            
            
            3.36
            %
            
            
            104,848
            
            
            
            2,028
            
            
            
            1.93
            %Short-term
      debt
            
            
            13,608
            
            
            
            695
            
            
            
            5.11
            %
            
            
            11,488
            
            
            
            611
            
            
            
            5.32
            %
            
            
            1,423
            
            
            
            53
            
            
            
            3.72
            %Long-term
      debt
            
            
            8,289
            
            
            
            362
            
            
            
            4.37
            %
            
            
            8,836
            
            
            
            380
            
            
            
            4.30
            %
            
            
            9,227
            
            
            
            393
            
            
            
            4.26
            %Junior
      subordinated deferrable interest debentures
            
            
            3,093
            
            
            
            271
            
            
            
            8.76
            %
            
            
            3,093
            
            
            
            263
            
            
            
            8.50
            %
            
            
            3,093
            
            
            
            209
            
            
            
            6.76
            %Total
      interest-bearing liabilities
            
            
            178,127
            
            
            
            7,131
            
            
            
            4.00
            %
            
            
            151,439
            
            
            
            5,561
            
            
            
            3.67
            %
            
            
            118,951
            
            
            
            2,683
            
            
            
            2.26
            %Noninterest
      bearing deposits
            
            
            60,465
            
            
            
            
            
            
            
            
            
            
            
            65,440
            
            
            
            
            
            
            
            
            
            
            
            65,698Other
      liabilities
            
            
            1,964
            
            
            
            
            
            
            
            
            
            
            
            1,438
            
            
            
            
            
            
            
            
            
            
            
            1,949Total
      liabilities
            
            
            240,556
            
            
            
            
            
            
            
            
            
            
            
            218,317
            
            
            
            
            
            
            
            
            
            
            
            186,238Shareholders’
      equity
            
            
            27,069
            
            
            
            
            
            
            
            
            
            
            
            23,486
            
            
            
            
            
            
            
            
            
            
            
            20,714Total
      liabilities and shareholders’ equity
            
            $
            267,625
            
            
            
            
            
            
            
            
            
            
            $
            241,803
            
            
            
            
            
            
            
            
            
            
            $
            206,952Net
      interest income and margin (1)
            
            
            
            
            
            $
            11,339
            
            
            
            4.71
            %
            
            
            
            
            
            $
            11,189
            
            
            
            5.15
            %
            
            
            
            
            
            $
            9,821
            
            
            
            5.23
            %





(1)
            Interest
      income is not presented on a taxable-equivalent basis, however, the
      average yield was calculated on a taxable-equivalent basis by using a
      marginal tax rate of 34%.


(2)
            Nonaccrual
      loans are included in total loans.  Interest income is included
      on nonaccrual loans only to the extent cash payments have been received.
      No interest was received on nonaccrual loans for any of the years
      shown.


(3)
            Interest
      income includes amortized loan fees of $305, $633, and $622 for 2007,
      2006, and 2005, respectively.





20
 Table of Contents





The
following table sets forth a summary of the changes in interest income and
interest expense from changes in average earning assets and interest-bearing
liabilities (volume) and changes in average interest rates for the years
indicated.











Changes in net
      interest income due to changes in volumes and rates2007
      vs 2006
            
            
            2006
      vs 2005Increase
      (decrease) due to change in:
            
            
            Increase
      (decrease) due to change in:Average
            
            
            Average
            
            
            
            
            
            Average
            
            
            AverageVolume
            
            
            Rate (1)
            
            
            Total
            
            
            Volume
            
            
            Rate (1)
            
            
            Total(In
      thousands)Increase
      (decrease) in interest income:Federal
      funds sold
            
            $
            (134
            )
            
            $
            -
            
            
            $
            (134
            )
            
            $
            (145
            )
            
            $
            54
            
            
            $
            (91
            )Investment
      securitiesTaxable
            
            
            (60
            )
            
            
            197
            
            
            
            137
            
            
            
            (129
            )
            
            
            113
            
            
            
            (16
            )Exempt
      from Federal Income taxes
            
            
            65
            
            
            
            13
            
            
            
            78
            
            
            
            589
            
            
            
            18
            
            
            
            607Total
      securities
            
            
            5
            
            
            
            210
            
            
            
            215
            
            
            
            460
            
            
            
            131
            
            
            
            591Loans
            
            
            2,438
            
            
            
            (773
            )
            
            
            1,665
            
            
            
            2,558
            
            
            
            1,379
            
            
            
            3,937Total
      interest income
            
            
            2,309
            
            
            
            (563
            )
            
            
            1,746
            
            
            
            2,873
            
            
            
            1,564
            
            
            
            4,437(Decrease)
      increase  in interest expense:Interest-bearing
      deposits
            
            
            257
            
            
            
            129
            
            
            
            386
            
            
            
            169
            
            
            
            998
            
            
            
            1,167Time
      deposits less than $100,000
            
            
            18
            
            
            
            130
            
            
            
            148
            
            
            
            33
            
            
            
            327
            
            
            
            360Time
      certificates $100,000 or more
            
            
            661
            
            
            
            301
            
            
            
            962
            
            
            
            278
            
            
            
            474
            
            
            
            752Total
      interest-bearing deposits
            
            
            936
            
            
            
            560
            
            
            
            1,496
            
            
            
            480
            
            
            
            1,799
            
            
            
            2,279Short-term
      debt
            
            
            113
            
            
            
            (29
            )
            
            
            84
            
            
            
            375
            
            
            
            183
            
            
            
            558Long-term
      debt
            
            
            (24
            )
            
            
            6
            
            
            
            (18
            )
            
            
            (17
            )
            
            
            4
            
            
            
            (13
            )Junior
      subordinated deferrable interest debentures
            
            
            -
            
            
            
            8
            
            
            
            8
            
            
            
            -
            
            
            
            54
            
            
            
            54Total
      interest expense
            
            
            1,025
            
            
            
            545
            
            
            
            1,570
            
            
            
            838
            
            
            
            2,040
            
            
            
            2,878Increase
      (decrease) in net interest income
            
            $
            1,284
            
            
            $
            (1,108
            )
            
            $
            176
            
            
            $
            2,035
            
            
            $
            (476
            )
            
            $
            1,559





(1)
Factors contributing to both changes in rate and volume have been attributed to
changes in rates.





2007 compared to 2006.Total
interest income increased from $16.7 million in 2006 to $18.5 million in 2007
due to higher average interest earning assets partially offset by a slight
decline in the yield earned on average interest-earning
assets.  Average earning assets in 2007 were $24.7 million or 11%
greater than in 2006 due to an increase of $28.1 million or 17% in average loans
outstanding.  The average yield on loans was 8.27% and 8.67% for 2007
and 2006, respectively, while the average tax equivalent yield on investment
securities was 5.05% and 4.61%, respectively.  The increase in average
loans was due to the Company’s continued marketing efforts which resulted in
growth in real estate mortgage and construction segments of the loan
portfolio.  The majority of the loan portfolio is priced with floating
interest rates. Therefore, the decrease in weighted average yield on loans
resulted primarily from the Federal funds rate decreases that occurred in the
latter part of 2007.  In addition, competitive pressures for high
quality credits and consumer demand for fixed interest rate loans, and reduced
loan fees during the 2007 period caused the yields to decline
slightly.  The increase in weighted average tax equivalent yield on
investment securities resulted primarily from the higher yields earned on
taxable investment securities.





Total
interest expense increased $1.5 million or 35% from $5.6 million in 2006 to $7.1
million in 2007.  Average interest-bearing deposits increased by $25.1
million or 20% in 2007 while average noninterest-bearing deposits decreased by
$5.0 million or 8% in 2007.  During 2007, market interest rate
pressure on deposit accounts and increased competition for deposits caused the
Company to increase the interest rates paid on its interest-bearing deposits
compared with rates paid in 2006.  Although the Federal Reserve
decreased interest rates in October of 2007, the movement of deposit volume to
higher interest rate categories was evident through the end of
2007.





Interest
expense on short-term borrowings from the Federal Home Loan Bank of San
Francisco (FHLB) increased from $0.6 million in 2006 to $0.7 million in
2007.  This was due primarily to average volume of this debt
increasing from $11.5 million in 2006 to $13.6 million in 2007 as the Company
relied more heavily on this source to fund asset growth.





21
 Table of Contents





As noted
above, non-interest bearing deposits decreased with average balances of $60.5
million and $65.4 million in 2007 and 2006, respectively.  These
deposits represented 28% of average total deposits during 2007, compared with
34% of average total deposits during 2006.  This further highlights
the Company’s reliance on interest-bearing deposits and short-term borrowings to
fund asset growth in 2007.





Net
interest income before provision for loan losses increased to $11.3 million for
2007 from $11.2 million for 2006, an increase of $150,000 or 1%.  The
increase generally resulted from growth of earning assets offset in part by
rising costs of funds.  The increase in net interest income
attributable to higher volume of average interest-earning assets in 2007 was
$2.3 million while the increase attributable to higher volume of average
interest-bearing liabilities was $1.0 million, a net increase of $1.3
million.  The decrease in net interest income attributable to lower
interest rates on average interest-earning assets was $0.6 million and was
compounded by a $0.5 million decrease in net interest income resulting from
higher interest rates on average interest-bearing liabilities.




The
Company’s net interest margin on a tax equivalent basis for 2007 was 4.71%
compared to 5.15% in 2006, a decrease of 44 basis points.  As
discussed above, the growth in average interest-earning assets outpaced the
growth in net interest income.






2006 compared to
2005.  Total interest income increased from $12.5 million in
2005 to $16.7 million in 2006 due to higher average interest earning assets and
higher yields during 2006.  Average earning assets in 2006 were $33.9
million or 18% greater than in 2005 due to an increase of $32.6 million or 24%
in average loans outstanding, and an increase of $6.5 million or 13% in average
available-for-sale investment securities.  The average yield on loans
was 8.67% and 7.84% for 2006 and 2005, respectively, while the average tax
equivalent yield on investment securities was 4.61% and 3.97%,
respectively.  The increase in average loans was due to the Company’s
continued marketing efforts which resulted in growth in real estate mortgage and
construction segments of the loan portfolio, while the increase in average
investment securities resulted from the purchase of municipal
bonds.  The increase in weighted average yield on loans resulted
primarily from the Federal funds rate increases that occurred in the latter part
of 2005 as well as the four 25-basis point increases in the Federal funds rate
that occurred during 2006.  The increase in weighted average tax
equivalent yield on investment securities resulted primarily from the higher
yields earned on municipal bonds.





Total
interest expense increased from $2.7 million in 2005 to $5.6 million in
2006.  This was due primarily to an increase of $2.3 million or 112%
in interest on deposits.  Average interest-bearing deposits increased
by $23.2 million or 22% in 2006 while average noninterest-bearing deposits were
unchanged.  During 2006, higher market interest rate pressure on
deposit accounts and increased competition for deposits caused the Company to
increase the interest rates paid on its interest-bearing deposits to levels
which were significantly higher than in 2005.  In addition interest
expense increased due to a decrease in average noninterest-bearing deposits as a
percentage of average total deposits.  For 2006, this percentage was
34%, compared to 39% for 2005.  Although the Federal Reserve
discontinued raising interest rates in June of 2006, the movement of deposit
volume to higher interest rate categories was evident through the end of
2006.





Interest
expense on short-term borrowings from the Federal Home Loan Bank of San
Francisco (FHLB) increased from $53,000 in 2005 to $611,000 in
2006.  This was due primarily to average volume of this debt
increasing from $1.4 million in 2005 to $11.5 million in 2006 as the Company
relied more heavily on this source to fund asset growth.





As noted
above, average non-interest bearing deposits remained basically unchanged at
$65.4 million and $65.7 million for 2006 and 2005,
respectively.  These deposits represented 34% of average total
deposits during 2006, but only 39% of average total deposits during
2005.  This further highlights the increased reliance on
interest-bearing deposits and short-term borrowings to fund asset growth in
2006.





Net
interest income before provision for loan losses increased to $11.2 million for
2006 from $9.8 million for 2005, an increase of $1.4 million or
14%.  The increase generally resulted from growth of earning assets in
a rising rate environment offset in part by rising costs of
funds.  The change in net interest income attributable to higher
volume of average interest-earning assets in 2006 was an increase of $2.9
million while the change attributable to higher volume of average
interest-bearing liabilities was a decrease of $0.9 million, a net increase of
$2.0 million.  The increase in net interest income attributable to
higher interest rates on average interest-earning assets was $1.4 million and
was offset by a $2.1 million decrease in net interest income resulting from
higher interest rates on average interest-bearing liabilities.





The
Company’s net interest margin for 2006 was 5.15% compared to 5.23% in 2005, a
decrease of 8 basis points.  As discussed above, rising interest costs
for deposits and other funding sources outpaced the rise in asset yields during
2006.





22
 Table of Contents





Provision
for Loan Losses





The
provision for loan losses, which is included in operations to support the
required level of the allowance for loan losses, is based on credit experience
and management’s ongoing evaluation of loan portfolio risk and economic
conditions.  The Company did not record a provision for loan losses in
2007 or 2006 based on management’s assessment of the loan portfolio and related
credit quality.  The provision for loan losses was $369,000 in
2005.  See the sections below titled “Allowance for Loan
Losses.”





Non-Interest
Income





Non-interest
income for 2007 totaled $1.2 million compared with $996,000 in 2006 and $888,000
in 2005.  The components of non-interest income during each year were
as follows:





Non-interest
      incomeYears
      Ended December 31,
            
            
            Change
      during year(in
      thousands)
            
            2007
            
            
            2006
            
            
            2005
            
            
            2007
            
            
            2006Service
      charges
            
            $
            591
            
            
            $
            547
            
            
            $
            514
            
            
            $
            44
            
            
            $
            33(Loss)
      gain  on sale of available-for-sale investment
      securities
            
            
            (1
            )
            
            
            (53
            )
            
            
            (48
            )
            
            
            52
            
            
            
            (5
            )Mortgage
      loan brokerage fees
            
            
            77
            
            
            
            125
            
            
            
            136
            
            
            
            (48
            )
            
            
            (11
            )Earnings
      on cash surrender value of life insurance policies
            
            
            258
            
            
            
            153
            
            
            
            104
            
            
            
            105
            
            
            
            49Other
            
            
            230
            
            
            
            224
            
            
            
            182
            
            
            
            6
            
            
            
            42Total
      non-interest income
            
            $
            1,155
            
            
            $
            996
            
            
            $
            888
            
            
            $
            159
            
            
            $
            108








2007 Compared to
2006.Non-interest income increased during 2007 due primarily
to increased earnings on bank-owned life insurance policies purchased in
2006.  Income from service charges on deposit accounts increased by
$44,000 in 2007 due mainly to a $27,000 increase in account analysis charges,
and a $14,000 increase in NSF and overdraft charges   Other
non-interest income includes FHLB dividend income which was $79,000 in 2007 and
$55,000 in 2006.  FHLB dividend income increased in 2007 due to
mandatory additional investments in FHLB stock resulting from higher short term
borrowings.  A slowing residential real estate market caused a $48,000
decrease in mortgage loan brokerage fees.





2006 Compared to
2005.  Non-interest income increased during 2006 due primarily
to the purchase of bank-owned life insurance policies resulting in increased
earnings on cash surrender value of life insurance.  Income from
service charges on deposit accounts increased in 2006 due to a $5,000 increase
in service charges, a $19,000 increase in account analysis charges and a $5,000
increase in NSF and overdraft charges.  Other non-interest income
increased by $42,000 due to FHLB dividend income which was $65,000 higher in
2006 and decreases in other accounts.  FHLB dividend income increased
in 2006 due to mandatory additional investments in FHLB stock resulting from
higher short term borrowings.  A slowing residential real estate
market caused a $11,000 decrease in mortgage loan brokerage fees.





23
 Table of Contents





Non-Interest
Expense





Total non-interest expense was $8.70
million in 2007, up $1.05 or 3%, from the $7.65 million in non-interest expense
in 2006.  The following table presents the major components of
non-interest expense for the years indicated.








Non-interest
      expenseYears Ended
    December 31,
            
            
            Change during year(in
      thousands)
            
            2007
            
            
            2006
            
            
            2005
            
            
            2007
            
            
            2006Salaries
      and employee benefits
            
            $
            4,770
            
            
            $
            4,261
            
            
            $
            3,777
            
            
            $
            509
            
            
            $
            484Occupancy
      and equipment
            
            
            1,073
            
            
            
            890
            
            
            
            757
            
            
            
            183
            
            
            
            133Data
      processing
            
            
            495
            
            
            
            460
            
            
            
            422
            
            
            
            35
            
            
            
            38Operations
            
            
            480
            
            
            
            454
            
            
            
            414
            
            
            
            26
            
            
            
            40Professional
      and legal
            
            
            508
            
            
            
            330
            
            
            
            311
            
            
            
            178
            
            
            
            19Advertising
      and business development
            
            
            305
            
            
            
            268
            
            
            
            258
            
            
            
            37
            
            
            
            10Telephone
      and postal
            
            
            213
            
            
            
            206
            
            
            
            171
            
            
            
            7
            
            
            
            35Supplies
            
            
            188
            
            
            
            180
            
            
            
            237
            
            
            
            8
            
            
            
            (57
            )Assessment
      and insurance
            
            
            197
            
            
            
            114
            
            
            
            125
            
            
            
            83
            
            
            
            (11
            )Amortization
      expense
            
            
            63
            
            
            
            63
            
            
            
            63
            
            
            
            -
            
            
            
            -Other
      expenses
            
            
            407
            
            
            
            427
            
            
            
            275
            
            
            
            (20
            )
            
            
            152Total
      non-interest expense
            
            $
            8,699
            
            
            $
            7,653
            
            
            $
            6,810
            
            
            $
            1,046
            
            
            $
            843





2007 Compared to
2006.The increase in non-interest expense resulted primarily
from increased employee costs associated with the Company’s growth and the
highly competitive environment for qualified bank personnel.  Salary
and employee benefits increased by $509,000 including $445,000 for promotional
and merit pay raises and the increase in full time equivalents from 77 to 79
employees, and a $205,000 increase in health and post retirement
benefits.  These increases were partially offset by an increase in
deferred salary costs of $136,000 associated with loan originations which are
amortized over the estimated life of the loan.





Occupancy
and equipment costs increased $183,000 in 2007 due to increased maintenance and
repairs, depreciation on leasehold improvements, increased computer system
maintenance and upgrades, and rent increases.  Operations costs
increased $26,000 due to significantly higher correspondent bank charges which
is reflective of the Company’s growth.  Professional and legal costs
increased $178,000 in 2007 primarily due to the incurred professional
fees related to the implementation of requirements under Section 404 of the
Sarbanes-Oxley Act.  Assessment and insurance costs increased $83,000
due to an increase in FDIC assessment rate for deposit
insurance.   Other expenses decreased $20,000 due to a $53,000
decrease in employee recruitment and hiring costs.





2006 Compared to
2005.The increase in non-interest expense resulted primarily
from increased employee costs associated with the Company’s growth and the
highly competitive environment for qualified bank personnel.  Salary
and benefits increased by $484,000 due to promotional and merit pay raises,
increased cost of employee benefits, expanded employee incentive programs, and
the addition of 4 full-time positions.  Also included in 2006 salaries
and employee benefits was a salary continuation plan designed to retain bank
officers.  This plan was implemented in the latter part of 2006 and
added $37,000 to 2006 expense.





Occupancy
and equipment costs increased $133,000 in 2006 due to increased maintenance and
repairs, leasehold improvements and computer system
upgrades.  Operations costs increased $40,000 due to significantly
higher costs in the areas of correspondent bank charges and courier/armored car
charges, both of which were reflective of the Company’s
growth.  Telephone and postal costs increased $35,000 due to upgrades
to bundled telephone and internet services. Other expenses increased $152,000
due to a $58,000 increase in employee recruitment and hiring costs, a $26,000
increase in employee and director training expenses, and a $17,000 increase in
staff related expenses.













24
 Table of Contents




Provision
for Income Taxes


The
provision for income taxes for 2007 decreased to $1.13 million compared to $1.58
million in 2006 and $1.37 million in 2005.  The decrease in the
provision for income taxes for the 2007 period was mainly due to a decrease in
pre-tax net income and increases in tax exempt sources of revenue including
municipal bonds and earnings on bank-owned life insurance.  The
increase for the 2006 period was primarily due to increased pretax net income.
The Company’s effective tax rate was 29.9% for 2007 compared to 34.8% and 38.7%
in 2006 and 2005, respectively.





Financial
Condition





Investment
Securities





The
outstanding balance and composition of the portfolio as of the end of 2007 was
fairly consistent with the composition of the portfolio as of the end of
2006.  The investment portfolio balances in U.S. Treasuries,
mortgage-backed securities, municipal obligations and corporate debt securities
were 31%, 30%, 34% and 5%, respectively, at December 31, 2007 versus 26%, 23%,
34% and 7%, respectively, at December 31, 2006.  The Company purchases
investment securities to maintain liquidity and manage interest rate risk within
board approved parameters, as well as to generate interest
revenues.  The investment security portfolio consists of obligations
of U.S. Treasury and government agencies, mortgage-backed securities of U.S.
government sponsored enterprises, obligations of states and political
subdivisions, and other investment grade securities.





The
Company’s investments in mortgage-backed securities of U.S. Government agencies
provide both an increase in yields over U.S. Treasury and Agency securities and
provide cash flows for liquidity and reinvestment opportunities.  At
December 31, 2007, total balances in these mortgage-backed securities amounted
to $17.0 million up from $12.2 million at December 31, 2006.  Although
these pass-through securities typically have final maturities of between ten and
fifteen years, the pass-through nature of the monthly principal and interest
payments is expected to significantly reduce the average life of these
securities.





Obligations
of states and political subdivisions (municipal securities) provide attractive
tax equivalent yields for the Company.  Since the majority of the
interest earnings on these securities are not taxable for Federal purposes the
investment in municipal securities results in a reduction in the effective tax
rate of the Company.





At
December 31, 2007 and 2006, all investment securities were classified as
available-for-sale.  In classifying its investments as
available-for-sale, securities are reported at fair value, with unrealized gains
and losses excluded from earnings and reported, net of taxes, as accumulated
other comprehensive loss within shareholders’ equity.





The
following tables set forth the estimated market value of available-for-sale
investment securities at the dates indicated:








December31, 2007(in
      thousands)
            
            Amortized
      Cost
            
            
            Unrealized
      Gains
            
            
            Unrealized
      Losses
            
            
            Fair ValueU.S.
      Treasury and government  agencies
            
            $
            17,544
            
            
            $
            80
            
            
            $
            (70
            )
            
            $
            17,554Mortgage-backed
      securities
            
            
            16,853
            
            
            
            192
            
            
            
            (85
            )
            
            
            16,960Municipal
      securities
            
            
            19,304
            
            
            
            42
            
            
            
            (227
            )
            
            
            19,119Corporate
      debt securities
            
            
            3,005
            
            
            
            1
            
            
            
            (24
            )
            
            
            2,982Total
            
            $
            56,706
            
            
            $
            315
            
            
            $
            (406
            )
            
            $
            56,615





December31, 2006Amortized
      Cost
            
            
            Unrealized
      Gains
            
            
            Unrealized
      Losses
            
            
            Fair ValueU.S.
      government  agencies
            
            $
            20,325
            
            
            $
            6
            
            
            $
            (282
            )
            
            $
            20,049Mortgage-backed
      securities
            
            
            12,422
            
            
            
            65
            
            
            
            (250
            )
            
            
            12,237Municipal
      securities
            
            
            18,950
            
            
            
            142
            
            
            
            (36
            )
            
            
            19,056Corporate
      debt securities
            
            
            4,033
            
            
            
            -
            
            
            
            (77
            )
            
            
            3,956Total
            
            $
            55,730
            
            
            $
            213
            
            
            $
            (645
            )
            
            $
            55,298





25
 Table of Contents





Management
periodically evaluates each investment security for other than temporary
impairment, relying primarily on industry analyst reports, observation of market
conditions and interest rate fluctuations.  Management believes it
will be able to collect all amounts due according to the contractual terms of
the underlying investment securities and that the noted decline in fair value is
considered temporary and due only to interest rate fluctuations.





26
 Table of Contents





The
following table summarizes the amounts and distribution of investment securities
and their weighted average yields as of December 31, 2007.  Expected
maturities may differ from contractual maturities where the issuers of the
securities have the right to call or prepay obligations without
penalty.








Maturities of securities available for
      saleAfter
      one
            
            
            After
      fiveWithin
            
            
            but
      within
            
            
            but
      within
            
            
            AfterOne year
            
            
            five years
            
            
            ten years
            
            
            ten years
            
            
            Total(dollars
      in  thousands)
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            Yield
            
            
            Amount
            
            
            YieldU.S.
      Treasury and government agencies
            
            $
            7,484
            
            
            
            3.51
            %
            
            $
            5,057
            
            
            
            4.30
            %
            
            $
            5,004
            
            
            
            5.34
            %
            
            $
            -
            
            
            
            -
            
            
            $
            17,545
            
            
            
            4.40
            %Mortgage-backed
      securities
            
            
            211
            
            
            
            3.85
            %
            
            
            1,939
            
            
            
            3.83
            %
            
            
            4,394
            
            
            
            4.65
            %
            
            
            10,309
            
            
            
            5.21
            %
            
            
            16,853
            
            
            
            4.75
            %Municipal
      securities (1)
            
            
            -
            
            
            
            -
            
            
            
            19
            
            
            
            7.23
            %
            
            
            2,388
            
            
            
            6.17
            %
            
            
            16,896
            
            
            
            6.04
            %
            
            
            19,303
            
            
            
            5.86
            %Corporate
      debt securities
            
            
            3,005
            
            
            
            3.61
            %
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,005
            
            
            
            5.66
            %Total
            
            $
            10,700
            
            
            
            3.54
            %
            
            $
            7,015
            
            
            
            4.18
            %
            
            $
            11,786
            
            
            
            5.25
            %
            
            $
            27,205
            
            
            
            5.73
            %
            
            $
            56,706
            
            
            
            4.96
            %





(1)
Yields shown are not computed on a tax equivalent basis.





Loan
Portfolio





The
Company’s lending activities are geographically concentrated in the South San
Joaquin Valley, primarily in Tulare and Fresno counties.  The Company
offers both fixed and floating rate loans and obtains collateral in the form of
real property, business assets and deposit accounts but looks to business and
personal cash flows as the primary source of repayment.





The
following table sets forth the breakdown of loans outstanding by type at the
dates indicated by amount and percentage of the portfolio:








LOAN
      PORTFOLIO(in
      thousands)
            
            December 31, 2007
            
            
            December 31, 2006
            
            
            December 31, 2005
            
            
            December 31, 2004
            
            
            December 31, 2003Commercial
            
            $
            41,824
            
            
            
            21
            %
            
            $
            41,104
            
            
            
            22
            %
            
            $
            40,271
            
            
            
            26
            %
            
            $
            34,389
            
            
            
            29
            %
            
            $
            27,900
            
            
            
            27
            %Real
      estate – mortgage (1)
            
            
            106,873
            
            
            
            53
            %
            
            
            92,639
            
            
            
            50
            %
            
            
            72,753
            
            
            
            48
            %
            
            
            60,688
            
            
            
            52
            %
            
            
            55,406
            
            
            
            54
            %Real
      estate – construction
            
            
            44,896
            
            
            
            22
            %
            
            
            44,273
            
            
            
            24
            %
            
            
            32,560
            
            
            
            21
            %
            
            
            14,694
            
            
            
            13
            %
            
            
            10,925
            
            
            
            11
            %Agricultural
            
            
            4,988
            
            
            
            3
            %
            
            
            4,693
            
            
            
            3
            %
            
            
            4,432
            
            
            
            3
            %
            
            
            4,535
            
            
            
            4
            %
            
            
            4,885
            
            
            
            5
            %Consumer
      and other
            
            
            2,995
            
            
            
            1
            %
            
            
            1,805
            
            
            
            1
            %
            
            
            2,376
            
            
            
            2
            %
            
            
            2,388
            
            
            
            2
            %
            
            
            3,786
            
            
            
            3
            %Subtotal
            
            
            201,576
            
            
            
            100
            %
            
            
            184,514
            
            
            
            100
            %
            
            
            152,392
            
            
            
            100
            %
            
            
            116,694
            
            
            
            100
            %
            
            
            102,902
            
            
            
            100
            %Deferred
      loan fees, net
            
            
            (304
            )
            
            
            
            
            
            
            (436
            )
            
            
            
            
            
            
            (635
            )
            
            
            
            
            
            
            (459
            )
            
            
            
            
            
            
            (332
            )Allowance
      for loan losses
            
            
            (1,758
            )
            
            
            
            
            
            
            (1,746
            )
            
            
            
            
            
            
            (1,766
            )
            
            
            
            
            
            
            (1,401
            )
            
            
            
            
            
            
            (1,393
            )Total
      loans, net
            
            $
            199,514
            
            
            
            
            
            
            $
            182,332
            
            
            
            
            
            
            $
            149,991
            
            
            
            
            
            
            $
            114,834
            
            
            
            
            
            
            $
            101,177








(1)
            Consists
      primarily of commercial mortgage
loans.





27
 Table of Contents





Retail
loan products are offered primarily for the benefit of commercial business
owners and professionals who typically maintain depository and other lending
relationships with the Company.  Loans outstanding at December 31,
2007 increased by $17.1 million or 9% compared to December 31,
2006.  Although the Company’s marketing efforts are focused primarily
on commercial loans, the strongest growth for 2007 occurred in the real estate
mortgage segment of the portfolio, which was indicative of continued economic
growth in the Company’s lending territory despite a slow down in the latter part
of the year..  Tulare and Fresno counties are two of the top counties
in the United States for agricultural production, but are growing in population
more rapidly than many other areas of California due to the low cost of real
estate relative to California’s urban areas.





The
following table presents the maturity distribution of the loan portfolio as of
December 31, 2007.  The table shows the distribution of such loans
between those loans with fixed interest rates and those with floating (variable)
interest rates.  Floating rates generally fluctuate with changes in
the prime rate.  A majority of the Company’s floating rate loans have
rate floors.  During 2007, the Company’s volume of loans with fixed
interest rates increased due to customer demand.  Management considers
the risk associated with fixed interest rate loans in its periodic analysis of
interest rate risk.








Maturity of
      loans(in
      thousands)
            
            Within one year
            
            
            After
      one but within fiveyears
            
            
            After five years
            
            
            TotalCommercial
            
            $
            21,752
            
            
            $
            13,927
            
            
            $
            6,145
            
            
            $
            41,824Real
      estate – mortgage (1)
            
            
            922
            
            
            
            11,835
            
            
            
            94,116
            
            
            
            106,873Real
      estate – construction
            
            
            26,043
            
            
            
            10,741
            
            
            
            8,112
            
            
            
            44,896Agriculture
            
            
            2,750
            
            
            
            1,110
            
            
            
            1,128
            
            
            
            4,988Consumer
      and other
            
            
            1,465
            
            
            
            1,269
            
            
            
            261
            
            
            
            2,995Total
            
            $
            52,932
            
            
            $
            38,882
            
            
            $
            109,762
            
            
            $
            201,576Loans
      with fixed interest rates
            
            
            5,390
            
            
            
            22,345
            
            
            
            82,128
            
            
            
            109,863Loans
      with floating interest rates
            
            
            47,542
            
            
            
            16,537
            
            
            
            27,634
            
            
            
            91,713Total
            
            $
            52,932
            
            
            $
            38,882
            
            
            $
            109,762
            
            
            $
            201,576





(1)
Consists primarily of commercial mortgage loans.








Nonperforming
Assets.As of December 31, 2007 and 2006 there were no
nonaccrual loans, loans past due 90 days and still accruing interest,
restructured loans, or other real estate owned.  Nonaccrual loans and
total nonperforming assets at December 31, 2005 totaled $21,000.





Generally,
loans are placed on nonaccrual status when full collectibility of principal or
interest is uncertain or when principal or interest is past due for 90 days
(unless the loan is well secured and in the process of
collection).  From the time a loan is placed on nonaccrual status,
interest previously accrued but not collected is reversed from interest
income.  Any interest or principal payments received on a nonaccrual
loan are normally applied as a principal reduction.  A nonaccrual loan
may be restored to accrual status when none of its principal and interest is
past due and unpaid, and certain other factors are
satisfied.  Classification of a loan as nonaccrual does not
necessarily indicate that collection of principal and interest will be
uncollectible in whole or in part.





Impaired Loans.A
loan is considered impaired when collection of all amounts due according to the
original contractual terms is not probable.  The category of impaired
loans is not coextensive with the category of nonaccrual loans, although the two
categories may overlap in part or in full and did overlap in full at December
31, 2007, 2006, and 2005.  There were no impaired loans at December
31, 2007 or 2006.  The recorded investment in loans that were
considered to be impaired totaled $21,000 at December 31, 2005.  There
was no specific allowance for loan losses for impaired loans at December 31,
2007, 2006, and 2005.  The average recorded investment in impaired
loans for the years ended December 31, 2007, 2006, and 2005 was not considered
significant for reporting purposes.  At December 31, 2007, the Company
had not identified any other potential problem loans that would result in those
loans being included as nonperforming loans at a future date.










28
 Table of Contents




Allowance
for Loan Losses




The
Company attempts to minimize credit risk through its underwriting and credit
review policies.  The Company’s credit review process includes
internally prepared credit reviews as well as contracting with an outside firm
to conduct periodic credit reviews.  The Company’s management and
lending officers evaluate the loss exposure of classified and impaired loans on
a quarterly basis, or more frequently as loan conditions change.  The
Board of Directors, through the loan committee, reviews the asset quality of new
and criticized loans on a monthly basis and reports the findings to the full
Board of Directors.  In management's opinion, this loan review system
facilitates the early identification of potential criticized loans.





The
allowance for loan losses is established through charges to earnings in the form
of the provision for loan losses.  Loan losses are charged to and
recoveries are credited to the allowance for loan losses.  The
allowance for loan losses is maintained at a level deemed appropriate by
management to provide for known and inherent risks in loans.  The
adequacy of the allowance for loan losses is based upon management's continuing
assessment of various factors affecting the collectibility of loans; including
current economic conditions, maturity of the portfolio, size of the portfolio,
industry concentrations, borrower credit history, collateral, the existing
allowance for loan losses, independent credit reviews, current charges and
recoveries to the allowance for loan losses and the overall quality of the
portfolio as determined by management, regulatory agencies, and independent
credit review consultants retained by the Company.  There is no
precise method of predicting specific losses or amounts which may ultimately be
charged off on particular segments of the loan portfolio.  The
collectibility of a loan is subjective to some degree, but must relate to the
borrower’s financial condition, cash flow, quality of the borrower’s management
expertise, collateral and guarantees, and state of the local
economy.





The
federal financial regulatory agencies issued a new interagency policy statement
in December 2006 on the allowance for loan and lease losses along with
supplemental frequently asked questions. When determining the adequacy of the
allowance for loan losses, the Company follows these guidelines. The policy
statement revises and replaces a 1993 policy statement on the allowance for loan
and lease losses.  The agencies issued the revised policy statement in
view of today’s uncertain economic environment and the presence of
concentrations in untested loan products in the loan portfolios of insured
depository institutions.  The policy statement has also been revised
to conform to accounting principles generally accepted in the United States of
America (“GAAP”) and post-1993 supervisory guidance.   The policy
statement reiterates that each institution has a responsibility for developing,
maintaining and documenting a comprehensive, systematic, and consistently
applied process appropriate to its size and the nature, scope, and risk of its
lending activities for determining the amounts of the allowance for loan and
lease losses  and the provision for loan and lease losses and states
that each institution should ensure controls are in place to consistently
determine the allowance for loan and lease losses  in accordance with
GAAP, the institution’s stated policies and procedures, management’s best
judgment and relevant supervisory guidance.





The
policy statement also restates that insured depository institutions must
maintain an allowance for loan and lease losses  at a level that is
appropriate to cover estimated credit losses on individually evaluated loans
determined to be impaired as well as estimated credit losses inherent in the
remainder of the loan and lease portfolio, and that estimates of credit losses
should reflect consideration of all significant factors that affect the
collectibility of the portfolio as of the evaluation date.  The policy
statement states that prudent, conservative, but not excessive, loan loss
allowances that represent management’s best estimate from within an acceptable
range of estimated losses are appropriate.  In addition, the Company
incorporates the Securities and Exchange Commission Staff Accounting Bulletin
No. 102, which represents the SEC staff’s view related to methodologies and
supporting documentation for the Allowance for Loan and Lease Losses that should
be observed by all public companies in complying with the federal securities
laws and the Commission’s interpretations.





The
Company’s methodology for assessing the adequacy of the allowance for loan
losses consists of several key elements, which include but are not limited
to:





§
            specific
      allocation for problem graded loans, if any (“classified
      loans”),


§
            general
      or formula allocation,


§
            and
      discretionary allocation based on loan portfolio
    segmentation.





The
Company’s methodology incorporates the following accounting pronouncements, as
amended, in determining the adequacy of the allowance for loan
losses:





§
            Statement
      of Financial Accounting Standards (“SFAS”) No. 5 - “Accounting for
      Contingencies”,


§
            SFAS
      No.114 - “Accounting by Creditors for Impairment of a Loan”
      and


§
            SFAS
      118 - “Accounting by Creditors for Impairment of a Loan - Income
      Recognition and Disclosures.”





29
 Table of Contents





Specific
allocations are established based on management’s periodic evaluation of loss
exposure inherent in classified, impaired, and other loans in which management
believes that the collection of principal and interest under the original terms
of the loan agreement are in question.  For purposes of this analysis,
classified loans are grouped by internal risk classifications which are “special
mention”, “substandard”, “doubtful”, and “loss”.  Special mention
loans are currently performing but are potentially weak, as the borrower has
begun to exhibit deteriorating trends, which if not corrected, could jeopardize
repayment of the loan and result in further downgrade.  Substandard
loans have well-defined weaknesses which, if not corrected, could jeopardize the
full satisfaction of the debt.  A loan classified as “doubtful” has
critical weaknesses that make full collection of the obligation
improbable.  Classified loans, as defined by the Company, include
loans categorized as substandard and doubtful.  Loans classified as
loss are immediately charged off.





Formula
allocations are calculated by applying loss factors to outstanding loans with
similar characteristics.  Loss factors are based on the Company’s
historical loss experience as adjusted for changes in the business cycle and on
the internal risk grade of those loans and may be adjusted for significant
factors that, in management's judgment, affect the collectibility of the
portfolio as of the evaluation date.  The formula allocation analysis
incorporates loan losses over the past seven years adjusted for changes in the
business cycle.  Loss factors are adjusted to recognize and quantify
the estimated loss exposure resulting from changes in market conditions and
trends in the Company’s loan portfolio.





The
discretionary allocation is based upon management’s evaluation of various loan
segment conditions that are not directly measured in the determination of the
formula and specific allowances.  The conditions may include, but are
not limited to, general economic and business conditions affecting the key
lending areas of the Company, credit quality trends, collateral values, loan
volumes and concentrations, and other business conditions.





The
allowance for loan losses totaled $1.76 million or 0.87% of total loans at
December 31, 2007 compared to $1.75 million or 0.95% at December 31, 2006, and
$1.77 million or 1.16% at December 31, 2005.  No provision for loan
losses was recorded in 2007 due to continued strong credit quality and the
absence of nonperforming loans.  Management believes that the
allowance for loan losses was adequate at December 31, 2007.  However,
no prediction of the ultimate level of loans charged off in future years can be
made with any certainty.





The
following table summarizes the changes in the allowance for loan losses for the
periods indicated:





Changes in allowance
      for loan lossesYear ended December31,(dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance,
      beginning
            
            $
            1,746
            
            
            $
            1,766
            
            
            $
            1,401
            
            
            $
            1,393
            
            
            $
            1,062Provision
      for  loan losses
            
            
            -
            
            
            
            -
            
            
            
            369
            
            
            
            138
            
            
            
            315Charge-offs
            
            
            -
            
            
            
            (21
            )
            
            
            (4
            )
            
            
            (148
            )
            
            
            (17
            )Recoveries
            
            
            12
            
            
            
            1
            
            
            
            -
            
            
            
            18
            
            
            
            33Balance,
      ending
            
            $
            1,758
            
            
            $
            1,746
            
            
            $
            1,766
            
            
            $
            1,401
            
            
            $
            1,393Net
      charge-offs to average loans outstanding
            
            
            .000
            %
            
            
            .013
            %
            
            
            .003
            %
            
            
            0.120
            %
            
            
            (0.02
            )%Average
      loans outstanding
            
            
            194,734
            
            
            $
            166,620
            
            
            $
            134,008
            
            
            $
            107,262
            
            
            $
            90,153Ending
      allowance to total loans outstanding
            
            
            0.87
            %
            
            
            0.95
            %
            
            
            1.16
            %
            
            
            1.20
            %
            
            
            1.36
            %





Deposits





Deposits
are obtained primarily from local businesses and residents.  The
average deposits and the average rates paid for 2007, 2006, and 2005 are
presented in the “Results of Operations” section under the heading “Net Interest
Income.”  Average total deposits for 2007 were $213.6 million compared
to $193.5 million for 2006, an increase of $20.1 million or 10%.  In
December 2006, the Company acquired brokered time deposits totaling $9.9
million.  The Company utilized brokered deposits as a way of
diversifying its funding sources and the $9.9 million in funds were used
primarily to reduce FHLB short-term borrowings.  Average brokered
deposits were $8.8 million in 2007.





In 2007,
the Company continued its strong marketing effort to attract local deposits,
particularly from business customers.  However, the interest rate
environment in 2007 was not conducive to attracting and retaining core
deposits.  Total deposits at December 31, 2007 were $215.4 million
compared to $207.6 million at December 31, 2006, an increase of $7.8 million or
4%.  If the
brokered time deposits acquired in late 2006 are excluded, total deposits at
December 31, 2007 increased by $148 million or 7%.





30
 Table of Contents





The
following chart sets forth the distribution of the Company’s average daily
deposits for the periods indicated.








For
      the Year ended December 31,2007
            
            
            2006
            
            
            2005Average
            
            
            
            
            
            Average
            
            
            
            
            
            AverageAverage
            
            
            Yield/
            
            
            Average
            
            
            Yield/
            
            
            Average
            
            
            Yield/(dollars
      in thousands)
            
            Balance
            
            
            Rate
            
            
            Balance
            
            
            Rate
            
            
            Balance
            
            
            RateDeposits:Non-interest
      bearing deposits
            
            $
            60,465
            
            
            
            
            
            $
            65,440
            
            
            
            
            
            $
            65,698Interest-bearing
      deposits:Interest
      bearing demand deposits
            
            $
            27,052
            
            
            
            2.84
            %
            
            $
            21,530
            
            
            
            2.81
            %
            
            $
            20,266
            
            
            
            1.90
            %Money
      market accounts
            
            
            47,308
            
            
            
            3.27
            %
            
            
            42,047
            
            
            
            3.08
            %
            
            
            31,308
            
            
            
            1.20
            %Savings
            
            
            8,660
            
            
            
            0.80
            %
            
            
            9,957
            
            
            
            0.96
            %
            
            
            9,483
            
            
            
            0.71
            %Time
      deposits
            
            
            70,117
            
            
            
            4.88
            %
            
            
            54,488
            
            
            
            4.24
            %
            
            
            43,791
            
            
            
            2.74
            %Total
      interest-bearing deposits
            
            
            153,137
            
            
            
            3.79
            %
            
            
            128,022
            
            
            
            3.36
            %
            
            
            104,848
            
            
            
            1.93
            %Total
      deposits
            
            $
            213,602
            
            
            
            
            
            
            $
            193,462
            
            
            
            
            
            
            $
            170,546





The
following table summarizes by time remaining to maturity, the amount of
certificates of deposit issued in amounts of $100,000 or more as of December 31,
2007.








Maturities of
      certificates of deposit of $100,000 or more(dollars
      in thousands)
            
            Balance
            
            
            Percent
      of totalThree
      months or less
            
            $
            14,935
            
            
            
            34
            %Over
      three months through nine months
            
            
            24,545
            
            
            
            56
            %Over
      nine months through twelve months
            
            
            3,791
            
            
            
            8
            %Over
      twelve months
            
            
            743
            
            
            
            2
            %Total
      certificates of deposit of $100,000 and more
            
            $
            44,014
            
            
            
            100
            %








Borrowings





Federal Home Loan
Bank.  The Company maintains a borrowing relationship with the
Federal Home Loan Bank of San Francisco (FHLB) which offers both long-term and
short-term borrowing facilities.  The Company has pledged investment
securities and qualifying loans as collateral for its borrowing lines as
required by FHLB.





At
December 31, 2007, long-term debt outstanding from the FHLB totaled $8.1 million
compared to $8.5 million at December 31, 2006.  The Company incurred
long-term debt from FHLB at various times to match the cash flow characteristics
of certain fixed rate loans made by the Company.  There was no new
long-term debt incurred during 2007 and the reduction from the prior year was
attributable to scheduled principal repayments.  Average total
long-term borrowings from FHLB totaled $8.3 million for 2007 at an average cost
of 4.37% compared to average long-term borrowings of $8.8 million at an average
cost of 4.30% for 2006.





There
were $21.8 million in short-term borrowings from FHLB at December 31, 2007
compared to $17.6 at December 31, 2006.  The Company utilized
short-term borrowings from FHLB to fund a portion of its asset growth in 2007 as
rising interest rates adversely affected the ability of the Company to attract
new core deposits at desirable rates.  Average total short-term
borrowings from FHLB totaled $13.6 million for 2007 at an average cost of 5.11%
compared to average short-term borrowings of $11.5 million in 2006 at an average
cost of 5.32%.  The decrease in interest rates on short-term
borrowings was reflective of the decrease in short-term market rates that
occurred in the latter part of 2007.





31
 Table of Contents





Other Borrowing
Arrangements.  In addition to FHLB borrowing lines, the Company
maintains short-term unsecured borrowing arrangements with correspondent banks
to meet unforeseen cash needs.  These borrowing lines totaled $10.0
million at December 31, 2007 and $13.0 million at December 31,
2006.  The borrowing lines are utilized infrequently and there were no
balances outstanding at December 31, 2007 and 2006.





Junior Subordinated Deferrable
Interest Debentures.During 2003, the Company formed Valley
Commerce Trust I with a capital investment of $93,000 for the sole purpose of
issuing trust preferred securities.  During the second quarter of
2003, Valley Commerce Trust I issued trust preferred securities for gross
proceeds of $3.0 million and invested this amount plus the $93,000 of capital
proceeds in floating rate junior subordinated deferrable interest debentures
issued by the Company.  The Subordinated Debentures mature on April 7,
2033 and are repriced quarterly to an interest rate that is the sum of 3-month
Libor plus 3.30%.  The interest rate at December 31, 2007 and December
31, 2006 was 8.54% and 8.67%, respectively.





Trust
preferred securities are includable in the Company’s Tier 1 capital for
regulatory purposes subject to certain limitations.  The action taken
to form Valley Commerce Trust I and issue trust preferred securities was made
for the purpose of enhancing the Company’s capital position and to provide for
the continued growth of the Bank.





Off-Balance
Sheet Items





As of
December 31, 2007 and December 31, 2006, commitments to extend credit and
letters of credit were the only financial instruments with off-balance sheet
risk.  As of December 31, 2007 and December 31, 2006, commitments to
extend credit totaled $53.5 million and $44.1 million, respectively, and letters
of credit totaled $209,000 and $1.2 million, respectively.  The
Company has not entered into any contracts for financial derivative instruments
such as futures, swaps, options or similar instruments.





Contractual
Obligations





The
Company’s contractual obligations are comprised of junior subordinated
deferrable interest debentures, operating leases for branch, administrative and
other office space in Visalia, Fresno, and Tulare which expire at various dates
through 2009, and salary continuation plans.  As of December 31, 2007,
contractual obligations of the Company are as follows:








Contractual Obligations Due by
      Period(dollars
      in thousands)
            
            Total
            
            
            Less than 1 year
            
            
            1 to 3 years
            
            
            3 to 5 years
            
            
            More than 5 yearsLong-term
      debt obligations:Junior
      subordinated deferrable Interest debentures
            
            $
            3,093
            
            
            
            
            
            
            
            
            
            
            
            $
            3,093Operating
      lease obligations
            
            
            1,328
            
            
            $
            47
            
            
            $
            542
            
            
            $
            195
            
            
            
            544Other
      long-term liabilities:Salary
      continuation
            
            
            946
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            946Total
      contractual liabilities
            
            $
            5,367
            
            
            $
            47
            
            
            $
            542
            
            
            $
            195
            
            
            $
            4,583








Capital
Resources





Federal
regulations establish guidelines for calculating “risk-adjusted” capital
ratios.  These guidelines, which apply to banks and bank holding
companies, establish a systematic approach of assigning risk weights to assets
and commitments making capital requirements more sensitive to differences in
risk profiles.  For these purposes, “Tier 1” capital consists of
common equity, non-cumulative perpetual preferred stock, trust preferred
securities subject to regulatory limitation, and minority interests in the
equity accounts of consolidated subsidiaries and excludes
goodwill.  “Tier 2” capital consists of cumulative perpetual preferred
stock, limited-life preferred stock, mandatory convertible securities,
subordinated debt and (subject to a limit of 1.25% of risk-weighted assets)
general loan loss reserves.  In calculating the relevant ratio, a
company’s assets and off-balance sheet commitments are risk-weighted; thus, for
example, loans are included at 100% of their book value while assets considered
less risky are included at a percentage of their book value (20%, for example,
for U. S. Government Agency securities, and 0% for vault cash and U. S.
Government Treasury securities).





32
 Table of Contents





The Board
of Directors regularly reviews the Company’s capital ratios to ensure that
capital exceeds the prescribed regulatory minimums and is otherwise adequate to
meet future needs.  The following table summarizes the Company’s
risk-based capital ratios as of December 31, 2007 and December 31,
2006:





Capital and capital
      adequacy ratiosYear endedDecember31,2007
            
            
            2006(dollars
      in thousands)
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioLeverage
      RatioValley
      Commerce Bancorp and Subsidiary
            
            $
            31,927
            
            
            
            11.5
            %
            
            $
            28,654
            
            
            
            11.1
            %Minimum
      regulatory requirement
            
            $
            11,101
            
            
            
            4.0
            %
            
            $
            10,346
            
            
            
            4.0
            %Valley
      Business Bank
            
            $
            31,538
            
            
            
            11.4
            %
            
            $
            28,336
            
            
            
            11.0
            %Minimum
      requirement for “Well-Capitalized” institution
            
            $
            13,871
            
            
            
            5.0
            %
            
            $
            12,926
            
            
            
            5.0
            %Minimum
      regulatory requirement
            
            $
            11,097
            
            
            
            4.0
            %
            
            $
            10,341
            
            
            
            4.0
            %Tier 1 Risk-Based
      Capital RatioValley
      Commerce Bancorp and Subsidiary
            
            $
            31,927
            
            
            
            13.8
            %
            
            $
            28,654
            
            
            
            13.5
            %Minimum
      regulatory requirement
            
            $
            9,233
            
            
            
            4.0
            %
            
            $
            8,500
            
            
            
            4.0
            %Valley
      Business Bank
            
            $
            31,538
            
            
            
            13.7
            %
            
            $
            28,336
            
            
            
            13.4
            %Minimum
      requirement for “Well-Capitalized” institution
            
            $
            13,844
            
            
            
            6.0
            %
            
            $
            12,738
            
            
            
            6.0
            %Minimum
      regulatory requirement
            
            $
            9,230
            
            
            
            4.0
            %
            
            $
            8,492
            
            
            
            4.0
            %Total Risk-Based
      Capital RatioValley
      Commerce Bancorp and Subsidiary
            
            $
            33,684
            
            
            
            14.6
            %
            
            $
            30,399
            
            
            
            14.3
            %Minimum
      regulatory requirement
            
            $
            18,465
            
            
            
            8.0
            %
            
            $
            17,000
            
            
            
            8.0
            %Valley
      Business Bank
            
            $
            33,296
            
            
            
            14.4
            %
            
            $
            30,081
            
            
            
            14.2
            %Minimum
      requirement for “Well- Capitalized” institution
            
            $
            23,074
            
            
            
            10.0
            %
            
            $
            21,230
            
            
            
            10.0
            %Minimum
      regulatory requirement
            
            $
            18,459
            
            
            
            8.0
            %
            
            $
            16,984
            
            
            
            8.0
            %








At
December 31, 2007 and December 31, 2006, all of the Company’s capital ratios
were in excess of minimum regulatory requirements, and Valley Business Bank
exceeded the minimum requirements of a “well capitalized”
institution.





In the
second quarter of 2003, Valley Commerce Trust I issued $3.0 million of trust
preferred securities.  Trust preferred securities are includable in
Tier 1 capital, subject to regulatory limitation.  At December 31,
2007, and December 31, 2006, the entire $3.0 million was included in Tier 1
capital.





The
Company’s average equity as a percentage of average assets was 10.11 % for 2007
and 9.71% for 2006.  Year-end shareholders’ equity as a percentage of
year-end assets was 10.35% and 9.65% at December 31, 2007 and 2006,
respectively.  The increase in these ratios reflects 2007 earnings and
capital received from the exercise of stock options partially offset by stock
repurchased.





The
Company issued a 5% stock dividend in 2007 and 2006.  The Company has
not declared or paid cash dividends since inception.  Stock splits and
dividends are not dilutive to capital ratios.





As
discussed above, the Company commenced a stock repurchase program as of November
2007.





33
 Table of Contents





Liquidity
Management





Liquidity
is the ability to provide funds to meet customers’ loan and deposit needs and to
fund operations in a timely and cost effective manner.  The Company’s
primary source of funds is deposits.  On an ongoing basis, management
anticipates funding needs for loans, asset purchases, maturing deposits, and
other needs and initiates deposit promotions as needed.  Management
measures the Company’s liquidity position monthly through the use of short-term
and medium-term internal liquidity calculations.  These are monitored
on an ongoing basis by the Board of Directors and the Company’s Asset Liability
Management Committee.





Despite
the Company’s successful history of establishing and retaining deposit
relationships with business customers, the rising interest rate environment of
the past few years has curtailed the availability of favorably priced
deposits.  Accordingly, the Company has relied upon wholesale funding
resources to supplement local deposit growth.  These include expansion
of borrowing lines with FHLB and correspondent banks, and utilization of
brokered time deposits.  At December 31, 2007, the Company had
available credit of $26.2 million from the FHLB and $10.0 million from
correspondent banks.





The
Company’s off-balance sheet financing arrangements are primarily limited to
commitments to extend credit and standby letters of credit, which totaled $53.5
million and $209,000, respectively, at December 31, 2007.  Management
monitors these arrangements monthly in the overall assessment of the Company’s
liquidity needs. The Company has no other off-balance sheet arrangements that
are likely to have a material effect on its financial condition, results of
operations, liquidity, capital expenditures or capital resources.  The
Company does not retain a repurchase option or contingent interest in any of its
loan participations.





As
discussed above, the Company’s wholly-owned subsidiary, Valley Commerce Trust I,
issued trust preferred securities for gross proceeds of $3.0 million on April 7,
2003.  Quarterly interest payments on these securities are considered
in management’s normal evaluation of liquidity needs.  Although the
trust preferred securities do not mature until April 7, 2033, Valley Commerce
Trust I has the option to redeem the trust preferred securities on or at any
time after April 7, 2008.   The securities may not be redeemed
prior to this date without penalty.  The Company will carefully
evaluate the impact on capital and liquidity if and when consideration is given
to redemption of trust preferred securities.





The
Company’s strategic objectives include expanding through opening of “de novo”
branches and loan production offices and acquiring branch offices from other
institutions.   The addition of branch offices is expected to
involve significant cash outlays; e.g., for buildings, improvements, and
equipment.





In 2005,
the Company opened a loan production office in Tulare.  The Company
also purchased land in Tulare which closed escrow in 2006 and will be used for
construction of a full service branch office to be opened in
2008.  The Company’s planning efforts consider the impact of known and
anticipated cash outlays so that sufficient liquidity is maintained for both
capital and operational needs.




34
 Table of Contents


ITEM 7A – QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
applicable.







ITEM
8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA








The
independent auditors’ report and financial statements listed below are included
herein:








PageI.
            Report
      of Independent Registered Public Accounting Firm
            36II.
            Consolidated
      Balance Sheet as of December 31, 2007 and 2006
            37III.
            Consolidated
      Statement of Income for the years ended December 31, 2007, 2006 and
      2005
            38IV.
            Consolidated
      Statement of Changes in Shareholders’ Equity for the years ended December
      31, 2007, 2006 and 2005
            39V.
            Consolidated
      Statement of Cash Flows for the years ended December 31, 2007, 2006 and
      2005
            41VI.
            Notes
      to Consolidated Financial Statements
            43





35
 Table of Contents





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The
Shareholders and


Board
of Directors


Valley
Commerce Bancorp





We have
audited the accompanying consolidated balance sheet of Valley Commerce Bancorp
and subsidiary (the "Company") as of December 31, 2007 and 2006, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31,
2007.  These consolidated financial statements are the responsibility
of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provided a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Valley Commerce
Bancorp and subsidiary as of December 31, 2007 and 2006, and the consolidated
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.











Sacramento,
California


March 19,
2008





36
 Table of Contents





VALLEY
COMMERCE BANCORP AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEET





December
31, 2007 and 2006








2007
            
            
            2006ASSETSCash
      and cash equivalents
            
            $
            9,297,346
            
            
            $
            13,265,547Available-for-sale
      investment securities, at fair value (Notes 3 and 7)
            
            
            56,615,000
            
            
            
            55,298,000Loans,
      less allowance for loan losses of $1,757,591 in 2007 and $1,745,582
      in 2006 (Notes 4, 7, 9 and 13)
            
            
            199,514,271
            
            
            
            182,331,506Bank
      premises and equipment, net (Note 5)
            
            
            3,037,063
            
            
            
            1,832,177Cash
      surrender value of bank-owned life insurance (Note 14)
            
            
            6,184,531
            
            
            
            5,934,563Accrued
      interest receivable and other assets (Note 12)
            
            
            4,432,665
            
            
            
            5,002,900Total
      assets
            
            $
            279,080,876
            
            
            $
            263,664,693LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Non-interest
      bearing
            
            $
            66,992,568
            
            
            $
            63,019,956Interest
      bearing (Note 6)
            
            
            148,393,500
            
            
            
            144,556,213Total
      deposits
            
            
            215,386,068
            
            
            
            207,576,169Accrued
      interest payable and other liabilities
            
            
            1,778,548
            
            
            
            1,399,787Short-term
      debt (Note 7)
            
            
            21,804,000
            
            
            
            17,600,000Long-term
      debt (Note 7)
            
            
            8,146,049
            
            
            
            8,547,638Junior
      subordinated deferrable interest debentures (Note 8)
            
            
            3,093,000
            
            
            
            3,093,000Total
      liabilities
            
            
            250,207,665
            
            
            
            238,216,594Commitments
      and contingencies (Note 9)Shareholders'
      equity (Note 10):Serial
      preferred stock - no par value; 10,000,000 shares authorized; none
      issued
            
            
            -
            
            
            
            -Common
      stock - no par value; 30,000,000 shares authorized; issued and outstanding
      – 2,396,435 shares in 2007 and 2,215,765 shares in 2006
            
            
            23,511,066
            
            
            
            20,683,720Retained
      earnings
            
            
            5,423,324
            
            
            
            5,040,381Accumulated
      other comprehensive loss, net of taxes (Notes 3 and 15)
            
            
            (61,179
            )
            
            
            (276,002
            )Total
      shareholders' equity
            
            
            28,873,211
            
            
            
            25,448,099Total
      liabilities and shareholders’ equity
            
            $
            279,080,876
            
            
            $
            263,664,693





The
accompanying notes are an integral


part of
these consolidated financial statements





37
 Table of Contents





VALLEY
COMMERCE BANCORP AND SUBSIDIARY


CONSOLIDATED
STATEMENT OF INCOME





For
the Years Ended December 31, 2007, 2006 and 2005








2007
            
            
            2006
            
            
            2005Interest
      income:Interest
      and fees on loans
            
            $
            16,113,423
            
            
            $
            14,448,209
            
            
            $
            10,511,090Interest
      on investment securities:Taxable
            
            
            1,581,892
            
            
            
            1,444,707
            
            
            
            1,459,998Exempt
      from Federal income taxes
            
            
            771,368
            
            
            
            719,117
            
            
            
            303,267Interest
      on Federal funds sold
            
            
            3,658
            
            
            
            137,749
            
            
            
            229,197Total
      interest income
            
            
            18,470,341
            
            
            
            16,749,782
            
            
            
            12,503,552Interest
      expense:Interest
      on deposits (Note 6)
            
            
            5,802,852
            
            
            
            4,306,344
            
            
            
            2,028,091Interest
      on short-term borrowings (Note 7)
            
            
            695,062
            
            
            
            610,911
            
            
            
            52,523Interest
      on long-term borrowings (Note 7)
            
            
            362,665
            
            
            
            380,212
            
            
            
            393,303Interest
      on junior subordinated deferrable interest debentures (Note
    8)
            
            
            270,690
            
            
            
            263,310
            
            
            
            208,787Total
      interest expense
            
            
            7,131,269
            
            
            
            5,560,777
            
            
            
            2,682,704Net
      interest income before provision for loan losses
            
            
            11,339,072
            
            
            
            11,189,005
            
            
            
            9,820,848Provision
      for loan losses (Note 4)
            
            
            -
            
            
            
            -
            
            
            
            368,768Net
      interest income after provision for loan losses
            
            
            11,339,072
            
            
            
            11,189,005
            
            
            
            9,452,080Non-interest
      income:Service
      charges
            
            
            590,900
            
            
            
            546,514
            
            
            
            513,859Loss
      on sale of available-for-sale investment securities, net (Note
      3)
            
            
            (1,145
            )
            
            
            (52,737
            )
            
            
            (48,494
            )Mortgage
      loan brokerage fees
            
            
            76,636
            
            
            
            125,085
            
            
            
            136,183Earnings
      on cash surrender value of lifepolicies (Note
      14)
            
            
            258,134
            
            
            
            153,394
            
            
            
            103,851Other
            
            
            230,140
            
            
            
            223,693
            
            
            
            182,347Total
      non-interest income
            
            
            1,154,665
            
            
            
            995,949
            
            
            
            887,746Non-interest
      expense:Salaries
      and employee benefits (Notes 4 and 14)
            
            
            4,770,498
            
            
            
            4,260,909
            
            
            
            3,777,496Occupancy
      and equipment (Notes 5 and 9)
            
            
            1,073,196
            
            
            
            890,337
            
            
            
            756,664Other
      (Note 11)
            
            
            2,855,193
            
            
            
            2,501,930
            
            
            
            2,275,859Total
      non-interest expense
            
            
            8,698,887
            
            
            
            7,653,176
            
            
            
            6,810,019Income
      before provision for income taxes
            
            
            3,794,850
            
            
            
            4,531,778
            
            
            
            3,529,807Provision
      for income taxes (Note 12)
            
            
            1,134,000
            
            
            
            1,576,000
            
            
            
            1,367,000Net
      income
            
            $
            2,660,850
            
            
            $
            2,955,778
            
            
            $
            2,162,807Basic
      earnings per share (Note 10)
            
            $
            1.13
            
            
            $
            1.28
            
            
            $
            0.95Diluted
      earnings per share (Note 10)
            
            $
            1.09
            
            
            $
            1.22
            
            
            $
            0.90





The
accompanying notes are an integral


part of
these consolidated financial statements.





38
 Table of Contents





VALLEY
COMMERCE BANCORP AND SUBSIDIARY


CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY





For
the Years Ended December 31, 2007, 2006 and 2005





AccumulatedOtherCompre-
            
            
            Total
            
            
            TotalCommon Stock
            
            
            
            
            
            hensive
            
            
            Share-
            
            
            Compre-Retained
            
            
            Loss
            
            
            holders’
            
            
            hensiveShares
            
            
            Amount
            
            
            Earnings
            
            
            (Net of Taxes)
            
            
            Equity
            
            
            IncomeBalance,
      January 1, 2005
            
            
            1,788,258
            
            
            $
            14,451,969
            
            
            $
            1,959,281
            
            
            $
            (78,612
            )
            
            $
            16,332,638Comprehensive
      income (Note 15):Net
      income
            
            
            
            
            
            
            
            
            
            
            2,162,807
            
            
            
            
            
            
            
            2,162,807
            
            
            $
            2,162,807Other
      comprehensive loss, net of tax:Net
      change in unrealized losses on available-for-sale investment
      securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (466,509
            )
            
            
            (466,509
            )
            
            
            (466,509
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,696,298Proceeds
      from sale of stock (Note 10):
            
            
            299,250
            
            
            
            3,880,321
            
            
            
            
            
            
            
            
            
            
            
            3,880,321Balance,
      December 31, 2005
            
            
            2,087,508
            
            
            
            18,332,290
            
            
            
            4,122,088
            
            
            
            (545,121
            )
            
            
            21,909,257Comprehensive
      income (Note 15):Net
      income
            
            
            
            
            
            
            
            
            
            
            2,955,778
            
            
            
            
            
            
            
            2,955,778
            
            
            $
            2,955,778Other
      comprehensive loss, net of tax:Net
      change in unrealized losses on available-for-sale investment
      securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            269,119
            
            
            
            269,119
            
            
            
            269,119Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            3,224,897Stock
      dividend
            
            
            104,123
            
            
            
            2,032,481
            
            
            
            (2,032,481
            )Cash
      paid for fractional shares
            
            
            
            
            
            
            
            
            
            
            (5,004
            )
            
            
            
            
            
            
            (5,004
            )Stock
      options exercised and  related tax benefit
            
            
            24,134
            
            
            
            280,230
            
            
            
            
            
            
            
            
            
            
            
            280,230Stock-based
      compensation expense
            
            
            
            
            
            
            38,719
            
            
            
            
            
            
            
            
            
            
            
            38,719Balance,
      December 31, 2006
            
            
            2,215,765
            
            
            
            20,683,720
            
            
            
            5,040,381
            
            
            
            (276,002
            )
            
            
            25,448,099Comprehensive
      income (Note 15):Net
      income
            
            
            
            
            
            
            
            
            
            
            2,660,850
            
            
            
            
            
            
            
            2,660,850
            
            
            $
            2,660,850Other
      comprehensive income, net of tax:Net
      change in unrealized losses on available-for-sale investment
      securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            214,823
            
            
            
            214,823
            
            
            
            214,823Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,875,673Stock
      dividend
            
            
            110,603
            
            
            
            2,158,974
            
            
            
            (2,158,974
            )Cash
      paid for fractional shares
            
            
            
            
            
            
            
            
            
            
            (5,392
            )
            
            
            
            
            
            
            (5,392
            )Stock
      repurchase
            
            
            (27,440
            )
            
            
            (268,267
            )
            
            
            (113,541
            )
            
            
            
            
            
            
            (381,808
            )Stock
      options exercised and related tax benefit
            
            
            97,507
            
            
            
            892,229
            
            
            
            
            
            
            
            
            
            
            
            892,229Stock-based
      compensation expense
            
            
            
            
            
            
            44,410
            
            
            
            
            
            
            
            
            
            
            
            44,410Balance,
      December 31, 2007
            
            
            2,396,435
            
            
            $
            23,511,066
            
            
            $
            5,423,324
            
            
            $
            (61,179
            )
            
            $
            28,873,211


(Continued)





39
 Table of Contents





VALLEY
COMMERCE BANCORP AND SUBSIDIARY


CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY


(Continued)


For
the Years Ended December 31, 2007, 2006 and 2005











2007
            
            
            2006
            
            
            2005Disclosure
      of reclassification amount, net of taxes (Note 15):Unrealized
      holding gains (losses) arising during the year
            
            $
            214,054
            
            
            $
            235,394
            
            
            $
            (496,223
            )Less:
      reclassification adjustment for losses included in net
    income
            
            
            (769
            )
            
            
            (33,725
            )
            
            
            (29,714
            )Net
      change in unrealized losses on available-for-sale investment
      securities
            
            $
            214,823
            
            
            $
            269,119
            
            
            $
            (466,509
            )








The
accompanying notes are an integral


part of
these consolidated financial statements.





40
 Table of Contents





VALLEY
COMMERCE BANCORP AND SUBSIDIARY


CONSOLIDATED
STATEMENT OF CASH FLOWS





For
the Years Ended December 31, 2007, 2006 and 2005





2007
            
            
            2006
            
            
            2005Cash
      flows from operating activities:Net
      income
            
            $
            2,660,850
            
            
            $
            2,955,778
            
            
            $
            2,162,807Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
            
            
            -
            
            
            
            -
            
            
            
            368,768(Decrease)
      increase in deferred loan origination fees, net
            
            
            (131,895
            )
            
            
            (199,771
            )
            
            
            176,033Depreciation
            
            
            315,365
            
            
            
            242,116
            
            
            
            194,531Amortization
      of intangibles
            
            
            62,538
            
            
            
            62,538
            
            
            
            62,538Net
      loss on sale of available-for-sale investment securities,
    net
            
            
            1,145
            
            
            
            52,737
            
            
            
            48,494Dividends
      on Federal Home Loan Bank stock
            
            
            (79,100
            )
            
            
            (54,900
            )
            
            
            (29,300
            )Accretion
      (amortization) of investment securities, net
            
            
            (23,459
            )
            
            
            38,099
            
            
            
            819,551Loss
      on disposition of premises and equipment
            
            
            16,470
            
            
            
            -
            
            
            
            8,208Provision
      for deferred income taxes
            
            
            (77,000
            )
            
            
            2,000
            
            
            
            (251,000
            )Tax
      benefits on stock-based compensation
            
            
            (335,893
            )
            
            
            (125,828
            )
            
            
            -Increase
      in cash surrender value of bank owned life insurance
            
            
            (249,968
            )
            
            
            (153,394
            )
            
            
            (103,851
            )Stock-based
      compensation expense
            
            
            44,410
            
            
            
            38,719
            
            
            
            -Decrease
      (increase) in accrued interest receivable and other assets
            
            
            627,659
            
            
            
            (354,558
            )
            
            
            (512,561
            )Increase
      in accrued interest payable and other liabilities
            
            
            378,761
            
            
            
            111,387
            
            
            
            453,812Net
      cash provided by operating activities
            
            
            209,883
            
            
            
            2,614,923
            
            
            
            3,398,030Cash
      flows from investing activities:Proceeds
      from matured and called available-for-sale investment
      securities
            
            
            7,615,000
            
            
            
            1,658,100
            
            
            
            4,500,000Proceeds
      from sales of available-for-sale investment securities
            
            
            1,533,619
            
            
            
            2,731,795
            
            
            
            3,951,507Purchases
      of available-for-sale investment securities
            
            
            (12,530,396
            )
            
            
            (11,082,486
            )
            
            
            (24,836,258
            )Proceeds
      from principal repayments from available-for-sale mortgage-backed
      securities
            
            
            2,427,545
            
            
            
            2,152,829
            
            
            
            2,462,904Net
      increase in loans
            
            
            (17,050,870
            )
            
            
            (32,141,121
            )
            
            
            (35,701,170
            )Redemption
      (purchase) of Federal Home Loan Bank stock, net
            
            
            246,400
            
            
            
            (714,100
            )
            
            
            (405,000
            )Purchase
      of premises and equipment
            
            
            (1,544,749
            )
            
            
            (850,977
            )
            
            
            (392,469
            )Proceeds
      from sale of premises and equipment
            
            
            8,028
            
            
            
            -
            
            
            
            -Premiums
      paid for life insurance policies
            
            
            -
            
            
            
            (3,000,000
            )
            
            
            -Net
      cash used in investing activities
            
            
            (19,295,423
            )
            
            
            (41,245,960
            )
            
            
            (50,420,486
            )





(Continued)





41
 Table of Contents





VALLEY
COMMERCE BANCORP AND SUBSIDIARY


CONSOLIDATED
STATEMENT OF CASH FLOWS


(Continued)


For
the Years Ended December 31, 2007, 2006 and 2005








2007
            
            
            2006
            
            
            2005Cash
      flows from financing activities:Net
      increase (decrease) increase in noninterest bearing and interest-bearing
      deposits
            
            $
            14,956,957
            
            
            $
            (655,498
            )
            
            $
            25,884,925Net
      (decrease) increase in time deposits
            
            
            (7,147,058
            )
            
            
            15,650,553
            
            
            
            10,272,285Proceeds
      from the issuance of stock
            
            
            -
            
            
            
            -
            
            
            
            3,880,321Proceeds
      from exercised stock options
            
            
            556,336
            
            
            
            154,402
            
            
            
            -Cash
      paid to repurchase common stock
            
            
            (381,808
            )
            
            
            -
            
            
            
            -Tax
      benefits from stock-based compensation
            
            
            335,893
            
            
            
            125,828
            
            
            
            -Net
      increase in short-term borrowings
            
            
            4,204,000
            
            
            
            17,600,000
            
            
            
            -Payments
      on long-term advances
            
            
            (401,589
            )
            
            
            (591,982
            )
            
            
            (182,852
            )Cash
      paid to repurchase fractional shares
            
            
            (5,392
            )
            
            
            (5,004
            )
            
            
            -Net
      cash provided by financing activities
            
            
            12,117,339
            
            
            
            32,278,299
            
            
            
            39,854,679Decrease
      in cash and cash equivalents
            
            
            (3,968,201
            )
            
            
            (6,352,738
            )
            
            
            (7,167,777
            )Cash
      and cash equivalents at beginning of year
            
            
            13,265,547
            
            
            
            19,618,285
            
            
            
            26,786,062Cash
      and cash equivalents at end of year
            
            $
            9,297,346
            
            
            $
            13,265,547
            
            
            $
            19,618,285Supplemental
      disclosure of cash flow information:Cash
      paid during the year for:Interest
      expense
            
            $
            7,184,869
            
            
            $
            5,472,442
            
            
            $
            2,613,323Income
      taxes
            
            $
            740,000
            
            
            $
            1,750,000
            
            
            $
            1,453,000Non-cash
      investing activities:Net
      decrease (increase) in unrealized loss on available-for-sale
      securities
            
            $
            340,454
            
            
            $
            458,074
            
            
            $
            (761,802
            )








The
accompanying notes are an integral


part of
these consolidated financial statements.





42
 Table of Contents





VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








1.
            THE
      BUSINESS OF VALLEY COMMERCE BANCORP





On
February 2, 2002, Valley Commerce Bancorp (the "Company") was incorporated as a
bank holding company for the purpose of acquiring Valley Business Bank (the
"Bank"), formerly Bank of Visalia, in a one bank holding company
reorganization.  The new corporate structure provides the Company and
the Bank greater flexibility to expand and diversify.  The
reorganization was completed on November 21, 2002, subsequent to which the Bank
continued its operations as previously conducted, but as a wholly owned
subsidiary of the Company.





The Bank
commenced operations in 1996 under the name Bank of Visalia and changed its name
during 2005 to Valley Business Bank.  The Bank operates branches in
Visalia, Fresno, Woodlake and Tipton, and a loan production office in
Tulare.  The Bank's deposits are insured by the Federal Deposit
Insurance Corporation (FDIC) up to applicable legal limits.  The
Bank's primary source of revenue is generated from providing loans to customers
who are predominately small and middle market businesses and individuals
residing in the surrounding areas.





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Consolidation and Basis of
Presentation





The
consolidated financial statements include the accounts of the Company and the
accounts of its wholly-owned subsidiary, Valley Business Bank.  All
significant intercompany balances and transactions have been
eliminated.





Valley
Commerce Trust I, a wholly-owned subsidiary formed for the exclusive purpose of
issuing trust preferred securities, is not consolidated into the Company's
consolidated financial statements and, accordingly, is accounted for under the
equity method.  The Company’s investment in the Trust is included in
accrued interest receivable and other assets on the consolidated balance
sheet.  The junior subordinated debentures issued and guaranteed by
the Company and held by the Trust are reflected as debt in the consolidated
balance sheet.





The
accounting and reporting policies of Valley Commerce Bancorp and subsidiary
conform with accounting principles generally accepted in the United States of
America and prevailing practices within the banking industry.





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions.  These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from these
estimates.





Segment
Information





Management
has determined that since all of the banking products and services offered by
the Company are available in each branch of the Bank, all branches are located
within the same economic environment and management does not allocate resources
based on the performance of different lending or transaction activities, it is
appropriate to aggregate the Bank branches and report them as a single operating
segment.  No customer accounts for more than 10 percent of revenues
for the Company or the Bank.





43
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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)





2.
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(Continued)





Reclassifications





Certain
reclassifications have been made to prior years’ balances to conform to
classifications used in 2007.





Stock
Dividends





On May
15, 2007 and February 21, 2006 the Board of Directors declared a 5% stock
dividend payable on June 20, 2007 and May 16, 2006, respectively, to
shareholders of record on June 6, 2007 and April 28, 2006,
respectively.  All per share and stock option data in the consolidated
financial statements have been retroactively restated to reflect the stock
dividend.





Cash and Cash
Equivalents





For the
purpose of the statement of cash flows, cash, due from banks and Federal funds
sold are considered to be cash equivalents.  Generally, Federal funds
are sold for one day periods.  Cash held with other federally insured
institutions in excess of FDIC insured limits as of December 31, 2007 was
$981,000.





Investment
Securities





Investments
are classified as available-for-sale.  Available-for-sale securities
are reported at fair value, with unrealized gains and losses excluded from
earnings and reported, net of taxes, as accumulated other comprehensive income
(loss) within shareholders' equity.





Gains or
losses on the sale of securities are computed on the specific identification
method.  Interest earned on investment securities is reported in
interest income, net of applicable adjustments for accretion of discounts and
amortization of premiums.





Investment
securities are evaluated for impairment on at least a quarterly basis and more
frequently when economic or market conditions warrant such an evaluation to
determine whether a decline in their value is other than
temporary.  Management utilizes criteria such as the magnitude and
duration of the decline and the intent and ability of the Company to retain its
investment in the issues for a period of time sufficient to allow for an
anticipated recovery in fair value, in addition to the reasons underlying the
decline, to determine whether the loss in value is other than
temporary.  The term "other than temporary" is not intended to
indicate that the decline is permanent, but indicates that the prospects for a
near-term recovery of value is not necessarily favorable, or that there is a
lack of evidence to support a realizable value equal to or greater than the
carrying value of the investment.  Once a decline in value is
determined to be other than temporary, the value of the security is reduced and
a corresponding charge to earnings is recognized.





44
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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)





2.
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(Continued)





Investment in Federal Home
Loan Bank Stock





As a
member of the Federal Home Loan Bank System, the Bank is required to maintain an
investment in the capital stock of the Federal Home Loan Bank.  The
investment is carried at cost.  At December 31, 2007, 2006, and 2005,
Federal Home Loan Bank stock totaled $1,658,600, $1,825,900, and $1,056,900
respectively.  On the consolidated balance sheet, Federal Home Loan
Bank stock is included in accrued interest receivable and other
assets.





Loans





Loans are
stated at principal balances outstanding.  Interest is accrued daily
based upon outstanding loan balances.  However, when, in the opinion
of management, loans are considered to be impaired and the future collectibility
of interest and principal is in serious doubt, loans are placed on nonaccrual
status and the accrual of interest income is suspended.  Any interest
accrued but unpaid is charged against income.  Payments received are
applied to reduce principal to the extent necessary to ensure
collection.  Subsequent payments on these loans, or payments received
on nonaccrual loans for which the ultimate collectibility of principal is not in
doubt, are applied first to earned but unpaid interest and then to
principal.





A loan is
considered impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due (including both
principal and interest) in accordance with the contractual terms of the loan
agreement.  An impaired loan is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical matter, at the loan's observable market price or the fair value
of collateral if the loan is collateral dependent.





Substantially
all loan origination fees, commitment fees, direct loan origination costs and
purchased premiums and discounts on loans are deferred and recognized as an
adjustment of yield, to be amortized to interest income over the contractual
term of the loan.  The unamortized balance of deferred fees and costs
is reported as a component of net loans.





The
Company may acquire loans through a business combination or a purchase for which
differences may exist between the contractual cash flows and the cash flows
expected to be collected due, at least in part, to credit
quality.  When the Company acquires such loans, the yield that may be
accreted (accretable yield) is limited to the excess of the Company's estimate
of undiscounted cash flows expected to be collected over the Company's initial
investment in the loan.  The excess of contractual cash flows over
cash flows expected to be collected may not be recognized as an adjustment to
yield, loss, or a valuation allowance.  Subsequent increases in cash
flows expected to be collected generally are recognized prospectively through
adjustment of the loan's yield over its remaining life.  Decreases in
cash flows expected to be collected are recognized as an
impairment.  The Company may not "carry over" or create a valuation
allowance in the initial accounting for loans acquired under these
circumstances.  At December 31, 2007 and 2006, there were no loans
being accounted for under this policy.





45
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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)





2.
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(Continued)





Allowance for Loan
Losses





The
allowance for loan losses is maintained to provide for losses related to
impaired loans and other losses that can be expected to occur in the normal
course of business.  The determination of the allowance is based on
estimates made by management, to include consideration of the character of the
loan portfolio, specifically identified problemloans,
potential losses inherent in the portfolio taken as a whole and economic
conditions in the Company's service area.





Classified
loans and loans determined to be impaired are evaluated by management for
specific risk of loss. In addition, reserve factors are assigned to currently
performing loans based on historical loss rates for each identified loan type
adjusted to reflect current economic and market conditions.





The
allowance is established through a provision for loan losses which is charged to
expense.  Management reviews the adequacy of the allowance for loan
losses at least quarterly, to include consideration of the relative risks in the
portfolio and current economic conditions. The allowance is adjusted based on
that review if, in management’s judgment, changes are warranted.





Allowance for Losses Related
to Undisbursed Loan Commitments





The
Company maintains a separate allowance for losses related to undisbursed loan
commitments.  Management estimates the amount of probable losses by
applying a loss reserve factor to the unused portion of undisbursed lines of
credit.  The allowance totaled $40,000 at December 31, 2007 and 2006,
respectively and is included in accrued interest payable and other liabilities
in the consolidated balance sheet.





Other Real
Estate





Other
real estate includes real estate acquired in full or partial settlement of loan
obligations.  When property is acquired, any excess of the Bank's
recorded investment in the loan balance and accrued interest income over the
estimated fair market value of the property is charged against the allowance for
loan losses.  Subsequent gains or losses on sales or writedowns
resulting from impairment are recorded in other income or expenses as
incurred.  The Company did not hold other real estate as of December
31, 2007 and 2006.





Bank Premises and
Equipment





Bank
premises and equipment are carried at cost.  Depreciation is
determined using the straight-line method over the estimated useful lives of the
related assets.  The useful lives of premises are estimated to be
twenty to thirty years.  The useful lives of furniture, fixtures and
equipment are estimated to be two to ten years.  Leasehold
improvements are amortized over the life of the asset or the life of the related
lease, whichever is shorter.  When assets are sold or otherwise
disposed of, the cost and related accumulated depreciation or amortization are
removed from the accounts, and any resulting gain or loss is recognized in
income for the period.  The cost of maintenance and repairs is charged
to expense as incurred.





Intangible
Assets





Intangible
assets consist of core deposit intangibles related to branch acquisitions and
are amortized using the straight-line method over ten years.  The Bank
periodically evaluates whether events and circumstances have occurred that may
affect the estimated useful life or the remaining balance of the core deposit
intangibles resulting in impairment of the intangible
asset.  Amortization expense totaled $62,538 for each of the years in
the three-year period ended December 31, 2007.  The core deposit
intangibles totaled $7,718 and $70,256 at December 31, 2007 and 2006,
respectively.





46
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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)





2.
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(Continued)





Income
Taxes





The
Company files its income taxes on a consolidated basis with its
subsidiary.  The allocation of income tax expense (benefit) represents
each entity's proportionate share of the consolidated provision for income
taxes.





Deferred
tax assets and liabilities are recognized for the tax consequences of temporary
differences between the reported amount of assets and liabilities and their tax
bases.  Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.  On
the consolidated balance sheet, net deferred tax assets are included in accrued
interest receivable and other assets.





Accounting for Uncertainty
in Income Taxes





On
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”).  FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes.  FIN 48 prescribes a recognition threshold and
measurement standard for the financial statement recognition and measurement of
an income tax position taken or expected to be taken in a tax
return.  In addition, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.





The
provisions of FIN 48 have been applied to all tax positions of the Company
as of January 1, 2007.  Only tax positions that met the
more-likely-than-not recognition threshold on January 1, 2007 were
recognized or continue to be recognized upon adoption.  The Company
previously recognized income tax positions based on management's estimate of
whether it was reasonably possible that a liability had been incurred for
unrecognized income tax benefits by applying FASB Statement No. 5, Accounting for
Contingencies.  The adoption of FIN 48 did not have a
material impact on the Company's financial position, results of operations or
cash flows.





When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained.  The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any.  Tax positions taken are not
offset or aggregated with other positions.  Tax positions that meet
the more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority.  The portion of the
benefits associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination.





Interest
expense and penalties associated with unrecognized tax benefits, if any, are
classified as income tax expense in the consolidated statement of
income.





47
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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)





2.
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(Continued)





Earnings
Per Share





Basic
earnings per share (EPS), which excludes dilution, is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period.  Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock, such as stock options, result in the issuance of common
stock.  The treasury stock method has been applied to determine the
dilutive effect of stock options in computing diluted EPS.





Stock-Based
Compensation





At
December 31, 2007, the Company had two stock-based compensation plans, the
Valley Commerce Bancorp Amended and Restated 1997 Stock Option Plan and the
Valley Commerce Bancorp 2007 Equity Incentive Plan, which are more fully
described in Note 10.  Effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123(R), Share Based Payment (“SFAS
123(R)”), using the modified prospective application transition method, which
requires recognizing expense for options granted prior to the adoption date
equal to the fair value of the unvested amounts over their remaining vesting
period based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123 Accounting for Stock Based
Compensationand compensation cost for all share based payments granted
subsequent to January 1, 2006 based on the grant date fair values estimated in
accordance with the provisions of SFAS 123(R). The Company applied the
alternative transition method in calculating its pool of excess tax benefits
available to absorb future tax deficiencies as provided by FSP FAS 123(R)-3,
Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards. During
the year ended December 31, 2006, 10,500 options were awarded. Prior periods
have not been restated to reflect the results of operations in 2005 as if the
Company had recorded compensation expense based on the fair value of the options
granted as prescribed by SFAS No. 123.





Prior to
January 1, 2006, the Company accounted for the stock-based compensation plan
under the recognition and measurement principles of Accounting Practice Bulletin
Opinion No. 25, (“APB 25”) Accounting for Stock Issued to
Employees, and related Interpretations.  No stock-based
compensation expense was reflected in net income, as all options granted under
the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant.





During
the years ended December 31, 2007 and 2006, the Company recorded expenses of
$44,410 and $38,719, respectively as a result of adopting SFAS
123(R).  The Company’s net income for years ended December 31, 2007
and 2006 was $31,402 and $31,510, respectively, lower than if management had
continued to account for share-based compensation under APB 25.  For
the years ended December 31, 2007 and 2006 basic and diluted earnings per did
not change as a result of the adoption of SFAS 123(R).




As of
December 31, 2007, there was $292,766 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under
Incentive and Stock Option Plans described more fully in Note 10. That cost is
expected to be recognized over a weighted average period of 2.8
years.





In
accordance with SFAS 123 (R), beginning in 2006 the Company has presented excess
tax benefits from the exercise of stock-based compensation awards as a financing
activity in the consolidated statement of cash flows.





48
 Table of Contents





VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)





2.
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(Continued)





The
following table illustrates the pro forma effect on consolidated net income and
earnings per share in 2005 as if the Company had recorded compensation expense
based on the fair value of the options granted as prescribed by SFAS No.
123:








For
      the YearEnded December 31,
2005(In
      Thousands)Net
      income as reported
            
            $
            2,162,807Deduct:
      Total stock-based compensation expense determined under the fair value
      based method for all awards, net of related tax effects
            
            
            (29,000
            )Pro
      forma net income
            
            $
            2,133,807Basic
      earnings per share - as reported
            
            $
            0.95Basic
      earnings per share - pro forma
            
            $
            0.94Diluted
      earnings per share - as reported
            
            $
            0.90Diluted
      earnings per share - pro forma
            
            $
            0.89








The
Company determines the fair value of the options previously granted on the date
of grant using a Black-Scholes option pricing model that uses assumptions based
on expected option life, expected stock volatility and the risk-free interest
rate. The expected volatility assumptions used by the Company are based on the
historical volatility of the Company’s common stock over the most recent period
commensurate with the estimated expected life of the Company’s stock
options.  The Company bases its expected life assumption on its
historical experience and on the terms and conditions of the stock options it
grants to employees. The risk-free rate is based on the U.S. Treasury yield
curve for the periods within the contractual life of the options in effect at
the time of the grant. The Company also makes assumptions regarding estimated
forfeitures that will impact the total compensation expenses recognized under
the Plans.





The fair
value of each option is estimated on the date of grant using the following
assumptions.





There
were 38,500 stock options granted in 2007 and 10,500 in 2006.  There
were no stock options granted in 2005. The fair value of each option granted in
2007 and 2006 was estimated on the date of grant using an option-pricing model
with the following assumptions:








2007
            
            
            2006Weighted
      average fair value of options granted
            
            $
            7.42
            
            
            $
            7.99Dividend
      yield
            
            
            N/A
            
            
            
            N/AExpected
      volatility
            
            
            28.22
            %
            
            
            11.27
            %Risk-free
      interest rate
            
            
            3.49
            %
            
            
            5.11
            %Expected
      option life
            
            7.5
      years
            
            
            7.5
      years





49
 Table of Contents





VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)





2.
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(Continued)





Impact of New Financial
Accounting Standards





Fair
Value Measurements





In
September 2006, the FASB issued Statement No. 157 (“SFAS 157”), Fair Value
Measurements.  SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value but does not expand the use
of fair value in any new circumstances.  In this standard, the FASB
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing the asset or liability.  In
support of this principle, SFAS 157 establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions.  The
provisions of SFAS 157 are effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years.  The provisions should be applied prospectively, except for
certain specifically identified financial instruments.  The Company
adopted SFAS 157 on January 1, 2008 and management does not believe its adoption
will have a material impact on the Company’s financial position, results of
operations or cash flows.





Fair
Value Option for Financial Assets and Financial Liabilities





In
February 2007, the FASB issued Statement No. 159 (“SFAS 159”), The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115.  This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value at specified
election dates.  The entity will report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each
subsequent reporting date.  The fair value option: (a) may be applied
instrument by instrument, with a few exceptions, such as investments otherwise
accounted for by the equity method; (b) is irrevocable (unless a new election
date occurs); and (c) is applied only to entire instruments and not to portions
of instruments.  The provisions of SFAS 159 are effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007.  The Company adopted SFAS 159 on January 1, 2008 and management
did not elect the fair value option for any of its financial
instruments.





Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements


In
September 2006, the FASB ratified the consensuses reached by the Task Force on
Issue No. 06-4 (“EITF 06-4”), Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.  A question arose when an employer enters into an
endorsement split-dollar life insurance arrangement related to whether the
employer should recognize a liability for the future benefits or premiums to be
provided to the employee.  EITF 06-4 indicates that an employer should
recognize a liability for future benefits and that a liability for the benefit
obligation has not been settled through the purchase of an endorsement type
policy.  An entity should apply the provisions of EITF 06-4 either
through a change in accounting principle through a cumulative-effect adjustment
to retained earnings as of the beginning of the year of adoption or a change in
accounting principle through retrospective application to all prior
periods.  The provisions of EITF 06-4 are effective for fiscal years
beginning after December 15, 2007.  The Company adopted EITF 06-04 on
January 1, 2008 and management determined that a liability of approximately
$102,000 will be recorded as of January 1, 2008, with a corresponding reduction
as a cumulative-effect adjustment to retained earnings.





50
 Table of Contents





VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)





2.
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES
(Continued)





Impact of New Financial
Accounting Standards (Continued)





Accounting
for Business Combinations





In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141 (revised 2007), Business
Combinations“SFAS No. 141(R)”).  SFAS No. 141(R), among other
things, establishes principles and requirements for how the acquirer in a
business combination (i) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquired business, (ii) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (iii) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial
effects of the business combination.  The Company is required to adopt
SFAS No. 141(R) for all business combinations for which the acquisition date is
on or after January 1, 2009.  Earlier adoption is
prohibited.  This standard will change the accounting treatment for
business combinations on a prospective basis.





3.
            AVAILABLE-FOR-SALE
      INVESTMENT SECURITIES





The
amortized cost and estimated fair value of available-for-sale investment
securities at December 31, 2007 and 2006 consisted of the
following:








2007Gross
            
            
            Gross
            
            
            EstimatedAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            ValueDebt
      securities:U.S.
      Treasury and Government agencies
            
            $
            17,544,088
            
            
            $
            80,246
            
            
            $
            (70,334
            )
            
            $
            17,554,000Mortgage-backed
      securities
            
            
            16,853,448
            
            
            
            191,633
            
            
            
            (85,081
            )
            
            
            16,960,000Municipal
      securities
            
            
            19,303,490
            
            
            
            41,984
            
            
            
            (226,474
            )
            
            
            19,119,000Corporate
      debt securities
            
            
            3,005,110
            
            
            
            651
            
            
            
            (23,761
            )
            
            
            2,982,000$
            56,706,136
            
            
            $
            314,514
            
            
            $
            (405,650
            )
            
            $
            56,615,000








Net
unrealized losses on available-for-sale investment securities totaling $91,136
were recorded, net of $29,957 in tax benefits, as accumulated other
comprehensive loss within shareholders' equity at December 31,
2007.  Proceeds and realized losses from the sale of
available-for-sale investment securities for the year ended December 31, 2007
totaled $1,508,855 and $1,145, respectively.








2006Gross
            
            
            Gross
            
            
            EstimatedAmortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            FairCost
            
            
            Gains
            
            
            Losses
            
            
            ValueDebt
      securities:U.S.
      Government agencies
            
            $
            20,324,780
            
            
            $
            6,276
            
            
            $
            (282,056
            )
            
            $
            20,049,000Mortgage-backed
      securities
            
            
            12,422,446
            
            
            
            65,105
            
            
            
            (250,551
            )
            
            
            12,237,000Municipal
      securities
            
            
            18,949,602
            
            
            
            141,331
            
            
            
            (34,933
            )
            
            
            19,056,000Corporate
      debt securities
            
            
            4,032,762
            
            
            
            -
            
            
            
            (76,762
            )
            
            
            3,956,000$
            55,729,590
            
            
            $
            212,712
            
            
            $
            (644,302
            )
            
            $
            55,298,000





51
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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








3.
            AVAILABLE-FOR-SALE INVESTMENT
      SECURITIES (Continued)





Net
unrealized losses on available-for-sale investment securities totaling $431,590
were recorded, net of $155,588 in tax benefits, as accumulated other
comprehensive loss within shareholders' equity at December 31,
2006.  Proceeds and realized losses from the sale of
available-for-sale investment securities for the year ended December 31, 2006
totaled $3,907,737 and $52,737, respectively. Proceeds and realized gains from
the sale of available-for-sale investment securities for the year ended December
31, 2005 totaled $3,951,507 and $48,494, respectively.





Investment
securities with unrealized losses at December 31, 2007 are summarized and
classified according to the duration of the loss period as follows:








Less than 12 Months
            
            
            12 Months or More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesDebt
      securities:U.S.
      Treasury and Government agencies
            
            $
            1,489,000
            
            
            $
            (3,015
            )
            
            $
            8,741,000
            
            
            $
            (67,306
            )
            
            $
            10,230,000
            
            
            $
            (70,321
            )Mortgage-backed
      securities
            
            
            992,000
            
            
            
            (598
            )
            
            
            5,687,000
            
            
            
            (84,449
            )
            
            
            6,679,000
            
            
            
            (85,047
            )Municipal
      securities
            
            
            12,384,000
            
            
            
            (212,787
            )
            
            
            1,035,000
            
            
            
            (13,450
            )
            
            
            13,419,000
            
            
            
            (226,237
            )Corporate
      debt
            
            
            -
            
            
            
            -
            
            
            
            2,478,000
            
            
            
            (23,761
            )
            
            
            2,478,000
            
            
            
            (23,761
            )Securities
            
            $
            14,865,000
            
            
            $
            (216,400
            )
            
            $
            17,941,000
            
            
            $
            188,966
            
            
            $
            32,806,000
            
            
            $
            (405,366
            )











Investment
securities with unrealized losses at December 31, 2006 are summarized and
classified according to the duration of the loss period as follows:





Less than 12 Months
            
            
            12 Months or More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedValue
            
            
            Losses
            
            
            Value
            
            
            Losses
            
            
            Value
            
            
            LossesDebt
      securities:U.S.
      Government Agencies
            
            $
            364,000
            
            
            $
            (4,459
            )
            
            $
            18,689,000
            
            
            $
            (277,597
            )
            
            $
            19,053,000
            
            
            $
            (282,056
            )Mortgage-backed
      Securities
            
            
            1,357,000
            
            
            
            (3,795
            )
            
            
            7,529,000
            
            
            
            (246,806
            )
            
            
            8,886,000
            
            
            
            (250,601
            )Municipal
      securities
            
            
            4,004,000
            
            
            
            (14,759
            )
            
            
            2,341,000
            
            
            
            (20,174
            )
            
            
            6,345,000
            
            
            
            (34,933
            )Corporate
      debt
            
            
            -
            
            
            
            -
            
            
            
            3,956,000
            
            
            
            (76,762
            )
            
            
            3,956,000
            
            
            
            (76,762
            )Securities
            
            $
            5,725,000
            
            
            $
            (23,013
            )
            
            $
            32,515,000
            
            
            $
            (621,339
            )
            
            $
            38,240,000
            
            
            $
            (644,352
            )





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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








3.
            AVAILABLE-FOR-SALE INVESTMENT
      SECURITIES (Continued)





U.S. Treasury and Government
Agencies





At
December 31, 2007, the Company held 31 U.S. Treasury and Government agency
securities of which 3 were in a loss position for less than twelve months and 18
were in a loss position and had been in a loss position for twelve months or
more.  Management believes the unrealized losses on the Company's
investments in direct obligations of the U.S. Treasury Government Agencies were
caused by interest rate increases.  The contractual terms of those
investments do not permit the issuer to settle the securities at a price less
than the amortized costs of the investment.  Because the decline in
market value is attributable to changes in interest rates and not credit
quality, and because the Company has the ability and intent to hold those
investments until a recovery of fair value, which may be maturity, the Company
does not consider those investments to be other-than-temporarily impaired at
December 31, 2007.





Mortgage-backed
Obligations





At
December 31, 2007, the Company held 45 mortgage-backed obligations of which 1
was in a loss position for less than twelve months and 27 were in a loss
position and had been in a loss position for twelve months or
more.  Management believes the unrealized losses on the Company's
investments in mortgage obligations were caused by interest rate
increases.  The contractual cash flows of these investments are
guaranteed by an agency of the U.S. government.  Accordingly, it is
expected that the securities will not be settled at a price less than the
amortized cost of the Company's investment. Because the decline in market value
is attributable to changes in interest rates and not credit quality, and because
the Company has the ability and intent to hold those investments until a
recovery of fair value, which may be maturity, the Company does not consider
those investments to be other-than-temporarily impaired at December 31,
2007.





Obligations of States and
Political Subdivision





At
December 31, 2007, the Company held 60 obligations of states and political
subdivision securities of which 37 were in a loss position for less than twelve
months and 3 were in a loss position and had been in a loss position for twelve
months or more.  Management believes the unrealized losses on the
Company's investments in obligations of states and political subdivision
securities were primarily caused by interest rate increases.  Because
the Company has the ability and intent to hold those investments until a
recovery of fair value, which may be maturity, the Company does not consider
those investments to be other-than-temporarily impaired at December 31,
2007.





Corporate Debt
Securities





At
December 31, 2007, the Company held 6 corporate debt securities of which 5 were
in a loss position and had been in a loss position for twelve months or
more.  Management believes the unrealized losses on the Company's
investments in corporate debt securities were caused primarily by interest rate
increases.  Because the decline in market value is attributable to
changes in interest rates and not credit quality, and because the Company has
the ability and intent to hold those investments until a recovery of fair value,
which may be maturity, the Company does not consider those investments to be
other-than-temporarily impaired at December 31, 2007.





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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








3.
            AVAILABLE-FOR-SALE INVESTMENT
      SECURITIES (Continued)





The
amortized cost and estimated fair value of investment securities at December 31,
2007 by contractual maturity are shown below.  Expected maturities
will differ from contractual maturities because the issuers of the securities
may have the right to call or prepay obligations with or without call or
prepayment penalties.





EstimatedAmortized
            
            
            FairCost
            
            
            ValueWithin
      one year
            
            $
            10,489,277
            
            
            $
            10,416,000After
      one year through five years
            
            
            5,076,526
            
            
            
            5,091,000After
      five years through ten years
            
            
            7,390,928
            
            
            
            7,453,000After
      ten years
            
            
            16,895,957
            
            
            
            16,695,00039,852,688
            
            
            
            39,655,000Investment
      securities not due at a single maturity date:Mortgage-backed
      securities
            
            
            16,853,448
            
            
            
            16,960,000$
            56,706,136
            
            
            $
            56,615,000





At
December 31, 2007 and 2006, all investment securities were pledged to secure
either public deposits or borrowing arrangements.





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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








4.
            LOANS
      AND THE ALLOWANCE FOR LOAN LOSSES





Outstanding
loans are summarized below:





December 31,2007
            
            
            2006Commercial
            
            $
            41,823,876
            
            
            $
            41,103,607Real
      estate - mortgage
            
            
            106,872,707
            
            
            
            92,639,046Real
      estate – construction
            
            
            44,896,223
            
            
            
            44,272,460Agricultural
            
            
            4,987,839
            
            
            
            4,693,307Consumer
      and other
            
            
            2,994,997
            
            
            
            1,804,343201,575,642
            
            
            
            184,512,763Deferred
      loan fees, net
            
            
            (303,780
            )
            
            
            (435,675
            )Allowance
      for loan losses
            
            
            (1,757,591
            )
            
            
            (1,745,582
            )$
            199,514,271
            
            
            $
            182,331,506





Certain
loans were pledged to secure borrowing arrangements (see Note 7).





Changes
in the allowance for loan losses were as follows:





Year Ended
December 31,2007
            
            
            2006
            
            
            2005Balance,
      beginning of year
            
            $
            1,745,582
            
            
            $
            1,766,115
            
            
            $
            1,400,818Provision
      charged to operations
            
            
            -
            
            
            
            -
            
            
            
            368,768Losses
      charged to allowance
            
            
            -
            
            
            
            (20,833
            )
            
            
            (3,471
            )Recoveries
            
            
            12,009
            
            
            
            300
            
            
            
            -Balance,
      end of year
            
            $
            1,757,591
            
            
            $
            1,745,582
            
            
            $
            1,766,115





At
December 31, 2007 and 2006, there were no loans considered to be
impaired.  The average recorded investment in impaired loans for the
years ended December 31, 2006 and 2005 was $8,680 and $26,476, respectively.
Interest income recognized by the Company on a cash basis during the years ended
December 31, 2007, 2006, and 2005 was not considered significant.





At
December 31, 2007 and 2006, there were no nonaccrual loans.  There was
no interest foregone on nonaccrual loans for the years ended December 31, 2007,
2006, and 2005.





Salaries
and employee benefits totaling $687,155, $551,154 and $221,278 have been
deferred as loan origination costs during the years ended December 31, 2007,
2006 and 2005, respectively.





55
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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








5.
            PREMISES
      AND EQUIPMENT





Premises
and equipment consisted of the following:





December 31,2007
            
            
            2006Furniture
      and equipment
            
            
            2,334,786
            
            
            
            1,836,403Construction
      in progress
            
            
            756,617
            
            
            
            53,889Premises
            
            
            614,477
            
            
            
            614,477Leasehold
      improvements
            
            
            522,057
            
            
            
            303,286Land
            
            
            452,320
            
            
            
            452,3204,680,257
            
            
            
            3,260,375Less
      accumulated depreciation and amortization
            
            
            (1,643,194
            )
            
            
            (1,428,198
            )3,037,063
            
            
            
            1,832,177





Depreciation
and amortization included in occupancy and equipment expense totaled $315,365,
$242,116 and $194,531 for the years ended December 31, 2007, 2006 and 2005,
respectively.





6.
            INTEREST-BEARING
      DEPOSITS





Interest-bearing
deposits consisted of the following:





December 31,2007
            
            
            2006Savings
            
            $
            8,355,350
            
            
            $
            8,575,919Money
      market
            
            
            48,844,837
            
            
            
            40,000,066NOW
      accounts
            
            
            29,076,881
            
            
            
            26,716,738Time,
      $100,000 or more
            
            
            44,013,799
            
            
            
            47,871,287Other
      time
            
            
            18,102,633
            
            
            
            21,392,203$
            148,393,500
            
            
            $
            144,556,213





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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








6.
            INTEREST-BEARING
      DEPOSITS (Continued)





Aggregate
annual maturities of time deposits are as follows:





Year
      EndingDecember 31,2008
            
            $
            60,394,5422009
            
            
            1,461,6542010
            
            
            260,236$
            62,116,432





Interest
expense recognized on interest-bearing deposits consisted of the
following:





Year Ended
December 31,2007
            
            
            2006
            
            
            2005Savings
            
            $
            68,879
            
            
            $
            95,780
            
            
            $
            67,109Money
      market
            
            
            1,545,160
            
            
            
            1,175,225
            
            
            
            376,226NOW
      accounts
            
            
            767,979
            
            
            
            723,834
            
            
            
            385,852Time,
      $100,000 or more
            
            
            2,453,317
            
            
            
            1,491,363
            
            
            
            738,638Other
      time
            
            
            967,517
            
            
            
            820,142
            
            
            
            460,266$
            5,802,852
            
            
            $
            4,306,344
            
            
            $
            2,028,091





7.
            BORROWING
      ARRANGEMENTS





Lines of
Credit





The Bank
had unsecured lines of credit with two correspondent banks which, in the
aggregate, amounted to $13,000,000 at December 31, 2007 and
2006.  There were no borrowings outstanding under either of these
borrowing arrangements as of December 31, 2007 and 2006.





Federal Home Loan Bank
Advances





At
December 31, 2007 and 2006 the Bank could borrow up to 49% of pledged real
estate mortgage loans from the Federal Home Loan Bank of San Francisco
(FHLB).  As of December 31, 2007 and 2006, the Bank had pledged loans
with total carrying values of $56,102,000 and $55,260,000,
respectively.  At December 31, 2007 borrowings were comprised of
$21,804,000 in short-term (one day) adjustable rate debt with an interest rate
of 3.25%, and $8,146,049 of long-term fixed rate debt with a weighted average
interest rate and maturity of 4.38% and 2.2 years, respectively. At December 31,
2006, the Company had $17,600,000 in short-term (one) day adjustable rate debt
with an interest rate of 5.25% and long-term debt totaling $8,547,638 with a
weighted average interest rate and maturity of 4.33% and 3.1 years,
respectively.





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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








7.
            BORROWING ARRANGEMENTS
      (Continued)





Federal Home Loan Bank
Advances (continued)





As of
December 31, 2007 and 2006, outstanding long-term advances from the Federal Home
Loan Bank (FHLB) consisted of the following:





2007
            
            2006Amount
            
            
            Rate
            
            Maturity Date
            
            Amount
            
            
            Rate
            
            Maturity Date$
            200,000
            
            
            
            2.27
            %
            March
      26, 2007$
            900,000
            
            
            
            3.08
            %
            March
      6, 2008
            
            
            900,000
            
            
            
            3.08
            %
            March
      6, 20081,600,000
            
            
            
            2.67
            %
            May
      27,2008
            
            
            1,600,000
            
            
            
            2.67
            %
            May
      27, 2008250,000
            
            
            
            3.71
            %
            October
      22, 2008
            
            
            250,000
            
            
            
            3.71
            %
            October
      22, 2008900,000
            
            
            
            3.94
            %
            April
      27, 2009
            
            
            900,000
            
            
            
            3.94
            %
            April
      27, 2009400,000
            
            
            
            4.51
            %
            May
      12, 2009
            
            
            400,000
            
            
            
            4.51
            %
            May
      12, 2009953,614
            
            
            
            7.41
            %
            June
      22, 2010
            
            
            978,361
            
            
            
            7.41
            %
            June
      22, 2010100,000
            
            
            
            5.09
            %
            May
      12, 2011
            
            
            100,000
            
            
            
            5.09
            %
            May
      12, 2011792,435
            
            
            
            4.01
            %
            December
      6, 2011
            
            
            969,277
            
            
            
            4.01
            %
            December
      6, 20111,250,000
            
            
            
            4.44
            %
            December
      6, 2011
            
            
            1,250,000
            
            
            
            4.44
            %
            December
      6, 20111,000,000
            
            
            
            6.02
            %
            January 2, 2012
            
            
            1,000,000
            
            
            
            6.02
            %
            January 2, 2012$
            8,146,049
            
            
            
            
            
            
            
            $
            8,547,638





Future
principal payments of outstanding FHLB advances are as follows:





Year
      EndingDecember 31,2008
            
            $
            2,961,7022009
            
            
            1,522,3462010
            
            
            1,100,3512011
            
            
            1,561,6502012
            
            
            1,000,000$
            8,146,049





58
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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








8.
            JUNIOR
      SUBORDINATED DEFERRABLE INTEREST
DEBENTURES





Valley
Commerce Trust I is a Delaware business trust formed by the Company with capital
of $93,000 for the sole purpose of issuing trust preferred securities fully and
unconditionally guaranteed by the Company.  During the second quarter
of 2003, Valley Commerce Trust I (the "Trust") issued 3,000 Floating Rate
Capital Trust Pass-Through Securities ("Trust Preferred Securities"), with a
liquidation value of $1,000 per security, for gross proceeds of
$3,000,000.  The entire proceeds of the issuance were invested by the
Trust in $3,093,000 of Floating Rate Junior Subordinated Deferrable Interest
Debentures (the "Subordinated Debentures") issued by the Company, with identical
maturity, repricing and payment terms as the Trust Preferred
Securities.  The Subordinated Debentures represent the sole assets of
the Trust. The Subordinated Debentures mature on April 7, 2033, bear a current
interest rate of 8.54% (based on 3-month LIBOR plus 3.30%), with repricing and
payments due quarterly.  The Subordinated Debentures are redeemable by
the Company, subject to receipt by the Company of prior approval from the
Federal Reserve Board of Governors, on any January 7, April 7, July 7 or October
7 on or after April 7, 2008.  The redemption price is par plus accrued
interest, except in the case of redemption under a special event which is
defined in the debenture.  The Trust Preferred Securities are subject
to mandatory redemption to the extent of any early redemption of the junior
subordinated debentures and upon maturity of the junior subordinated debentures
on April 7, 2033.





Holders
of the Trust Preferred Securities are entitled to a cumulative cash distribution
on the liquidation amount of $1,000 per security at an initial rate per annum of
4.59%.  For each successive period beginning on January 7, April 7,
July 7 or October 7 of each year, the rate will be adjusted to equal the 3-month
LIBOR plus 3.30% provided, however, that prior to July 7, 2008, such annual rate
does not exceed 12.50%.  As of December 31, 2007, the rate was
8.54%.  The Trust has the option to defer payment of the distributions
for a period of up to five years, as long as the Company is not in default on
the payment of interest on the junior subordinated debentures.  The
Trust Preferred Securities were sold and issued in private transactions pursuant
to an exemption from registration under the Securities Act of 1933, as
amended.  The Company has guaranteed, on a subordinated basis,
distributions and other payments due on the Trust Preferred
Securities.





The
unamortized deferred costs related to the junior subordinated debentures, which
are included in other assets on the consolidated balance sheet, at December 31,
2007 and 2006 were $3,000 and $21,000, respectively, and the amortization for
each of the three years ended December 31, 2007 was $18,000.





59
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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








9.
            COMMITMENTS
      AND CONTINGENCIES





Leases





The
Company leases its Fresno and Visalia branch offices, its Tulare loan production
office, and its administrative office under noncancelable operating leases which
expire in September 2017, November 2009, January 2008, and June 2008,
respectively.  The Visalia branch office lease contains two options to
renew the lease for five year periods.  Future minimum lease payments
are as follows:





Year
      EndingDecember 31,2008
            
            $
            275,9492009
            
            
            218,1422010
            
            
            94,9422011
            
            
            94,9422012
            
            
            99,828Thereafter
            
            
            543,820$
            1,327,623





Rental
expense included in occupancy and equipment expense totaled $309,657, $293,504,
and $250,968 for the years ended December 31, 2007, 2006 and 2005,
respectively.





Federal Reserve
Requirements





Banks are
required to maintain reserves with the Federal Reserve Bank equal to a
percentage of their reservable deposits.  The Company had no
reservable deposits.





Financial Instruments With
Off-Balance-Sheet Risk





The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business in order to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit and letters of credit.  These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized on the consolidated balance sheet.





The
Company's exposure to credit loss in the event of nonperformance by the other
party for commitments to extend credit and letters of credit is represented by
the contractual amount of those instruments.  The Company uses the
same credit policies in making commitments and letters of credit as it does for
loans included on the consolidated balance sheet.





60
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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








9.
            COMMITMENTS AND CONTINGENCIES(Continued)





Financial Instruments With
Off-Balance-Sheet Risk (Continued)





The
following financial instruments represent off-balance-sheet credit
risk:





December 31,2007
            
            
            2006Commitments
      to extend credit
            
            $
            53,452,752
            
            
            $
            44,128,000Standby
      letters of credit
            
            $
            209,463
            
            
            $
            1,169,000





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  Since some of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.  The Bank evaluates
each customer's creditworthiness on a case-by-case basis.  The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the
borrower.  Collateral held varies, but may include real property, bank
deposits, debt or equity securities or business assets.





Standby
letters of credit are conditional commitments written to guarantee the
performance of a customer to a third party.  These guarantees are
primarily related to the purchases of inventory by commercial customers and are
typically short-term in nature.  Credit risk is similar to that
involved in extending loan commitments to customers and, accordingly, evaluation
and collateral requirements similar to those for loan commitments are
used.  The fair value of the liability related to the Company’s
stand-by-letters of credit, which represents the fees received for issuing the
guarantee, was not considered significant at December 31, 2007 or
2006.  The Company recognizes these fees as revenue over the term of
the commitment or when the commitment is used.





At
December 31, 2007, consumer loan commitments represent approximately 4% of total
commitments and are generally unsecured.  Commercial loan commitments
represent approximately 73% of total commitments and are generally secured by
various assets of the borrower.  Real estate loan commitments
represent the remaining 23% of total commitments and are generally secured by
property with a loan-to-value ratio not to exceed 80%.





Significant Concentrations
of Credit Risk





The
Company grants real estate mortgage, real estate construction, commercial,
agricultural and consumer loans to customers throughout the cities of Visalia,
Tulare, Fresno, Woodlake and Tipton, California.





Although
the Company has a diversified loan portfolio, a substantial portion of its
portfolio is secured by commercial and residential real
estate.  However, personal and business income represent the primary
source of repayment for a majority of these loans.








61
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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








9.
            COMMITMENTS AND CONTINGENCIES(Continued)





Contingencies





The
Company is subject to legal proceedings and claims which arise in the ordinary
course of business.  In the opinion of management, the amount of
ultimate liability with respect to such actions will not materially affect the
financial position or results of operations of the Company.





10.
            SHAREHOLDERS'
      EQUITY





Dividend
Restrictions





The
Company's ability to pay cash dividends is dependent on dividends paid to it by
the Bank and limited by California corporation law.  Under California
law, the holders of common stock of the Company are entitled to receive
dividends when and as declared by the Board of Directors, out of funds legally
available, subject to certain restrictions.  The California general
corporation law prohibits the Company from paying dividends on its common stock
unless: (i) its retained earnings, immediately prior to the dividend payment,
equals or exceeds the amount of the dividend or (ii) immediately after giving
effect to the dividend, the sum of the Company's assets (exclusive of goodwill
and deferred charges) would be at least equal to 125% of its liabilities (not
including deferred taxes, deferred income and other deferred liabilities) and
the current assets of the Company would be at least equal to its current
liabilities, or, if the average of its earnings before taxes on income and
before interest expense for the two preceding fiscal years was less than the
average of its interest expense for the two preceding fiscal years, at least
equal to 125% of its current liabilities.





Dividends
from the Bank to the Company are restricted under California law to the lesser
of the Bank's retained earnings or the Bank's net income for the latest three
fiscal years, less dividends previously declared during that period, or, with
the approval of the Department of Financial Institutions, to the greater of the
retained earnings of the Bank, the net income of the Bank for its last fiscal
year, or the net income of the Bank for its current fiscal year.  As
of December 31, 2007, the maximum amount available for dividend distribution
under this restriction was approximately $8,866,000.  In addition, the
Company's ability to pay dividends is subject to certain covenants contained in
the indentures relating to the Trust Preferred Securities issued by the business
trust (see Note 8).





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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








10.           SHAREHOLDERS' EQUITY(Continued)








Earnings Per
Share





A
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations is as follows:





WeightedAverageNumber
      ofNet
            
            
            Shares
            
            
            Per
      ShareFor the Year Ended
            
            Income
            
            
            Outstanding
            
            
            AmountDecember 31,
      2007Basic
      earnings per share
            
            
            2,660,850
            
            
            
            2,358,353
            
            
            $
            1.13Effect
      of dilutive stock options
            
            
            
            
            
            
            90,536Diluted
      earnings per share
            
            
            2,660,850
            
            
            
            2,449,889
            
            
            $
            1.09December 31,
      2006Basic
      earnings per share
            
            
            2,955,778
            
            
            
            2,312,140
            
            
            
            1.28Effect
      of dilutive stock options
            
            
            
            
            
            
            116,940Diluted
      earnings per share
            
            
            2,955,778
            
            
            
            2,429,080
            
            
            
            1.22December 31,
      2005Basic
      earnings per share
            
            
            2,162,807
            
            
            
            2,274,093
            
            
            
            0.95Effect
      of dilutive stock options
            
            
            
            
            
            
            133,510Diluted
      earnings per share
            
            
            2,162,807
            
            
            
            2,407,603
            
            
            
            0.90





Shares of
common stock issuable under stock options for which the exercise prices are
greater than the average market prices are not included in the computation of
diluted earnings per share due to their antidilutive effect.  There
were 10,500 options excluded form the computation of diluted earnings per share
for the year ended December 31, 2007.  There were no options excluded
from the computation of diluted earnings per share for the years ended December
31, 2006 and 2005.





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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








10.
            SHAREHOLDERS' EQUITY(Continued)





Stock-Based
Compensation





The
Company has two active share base compensation plans. On May 15, 2007, the
Company’s shareholders approved the Valley Commerce Bancorp 2007 Equity
Incentive Plan (“Incentive Plan”).  The Incentive Plan provides for
awards of stock options, restricted stock awards, qualified performance based
awards and stock grants.  Under the Incentive Plan, 122,007 shares of
common stock are reserved for issuance to employees and directors under
incentive and nonstatutory agreements. During the year ended December
31, 2007 a total of 38,500 options were granted under the Incentive Plan.
On February 17, 2007 the Valley Commerce Bancorp Amended and Restated 1997 Stock
Option Plan (“Prior Plan”) expired. Under the Prior Plan, 137, 359 shares of
common stock are reserved for issuance. Subsequent to the 10,500 options granted
during the year ended December 31, 2006, there were no additional options
granted under the Prior Plan and no further grants may be made under this plan.
The purpose of the plans is to promote the long-term success of the Company and
the creation of shareholder value.  The Board of Directors believes
that the availability of stock options and other forms of stock awards will be a
key factor in the ability of the Company to attract and retain qualified
individuals.





The plans
require that the option price may not be less than the fair market value of the
stock at the date the option is granted, and that the stock must be paid in full
at the time the option is exercised.  Payment in full for the option
price must be made in cash or with Company common stock previously acquired by
the optionee and held by the optionee for a period of at least six
months.  The plans do not provide for the settlement of awards in cash
and new shares are issued upon option exercise.  The options expire on
dates determined by the Board of Directors, but not later than ten years from
the date of grant.  Upon grant, options vest ratably over a one to
five year period.  The prior plan, the Valley Commerce Bancorp Amended
and Restated 1997 stock option plan (“Prior Plan”) was established in 1997 and
expired on February 17, 2007.  A total of 38,500 options were granted
under the Incentive Plan and 137,359 options were granted under the Prior
Plan.





A summary
of the activity within the Plans follows:








For
      the Year Ended December 31, 2007WeightedWeighted
            
            AverageAverage
            
            RemainingExercise
            
            Contractual
            
            AggregateShares
            
            
            Price
            
            Term
            
            Intrinsic
      ValueIncentive:Options
      outstanding at January 1, 2006
            
            
            37,515
            
            
            $
            8.20Options
      granted
            
            
            -
            
            
            
            -Options
      exercised
            
            
            (1,619
            )
            
            
            7.76Options
      cancelled
            
            
            -
            
            
            
            -Options
      outstanding at December 31, 2006
            
            
            35,896
            
            
            
            8.20Options
      granted
            
            
            38,500
            
            
            
            14.50Options
      exercised
            
            
            (1,914
            )
            
            
            6.79Options
      cancelled
            
            
            (608
            )
            
            
            11.52Options
      outstanding at December 31, 2007
            
            
            71,874
            
            
            
            11.58
            
            7.55
      years
            
            $
            427,984Options
      vested or expected to vest at December 31, 2007
            
            
            70,707
            
            
            
            11.60
            
            6.00
      years
            
            $
            820,084
            (1)Options
      exercisable at December 31, 2007
            
            
            29,662
            
            
            
            7.79
            
            5.33
      years
            
            $
            289,011
            (1)Nonstatutory:Options
      outstanding at January 1, 2006
            
            
            213,937
            
            
            $
            7.47





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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)





Options
      granted
            
            
            10,500
            
            
            
            18.58Options
      exercised
            
            
            (23,726
            )
            
            
            6.03Options
      cancelled
            
            
            (1,042
            )
            
            
            7.07Options
      outstanding at December 31, 2006
            
            
            199,669
            
            
            
            7.47Options
      granted
            
            
            -
            
            
            
            -Options
      exercised
            
            
            (95,684
            )
            
            
            5.68Options
      cancelled
            
            
            -
            
            
            
            -Options
      outstanding at December 31, 2007
            
            
            103,985
            
            
            
            9.10
            
            5.48
      years
            
            $
            887,080Options
      vested or expected to vest at December 31, 2007
            
            
            103,227
            
            
            
            8.04
            
            6.83
      years
            
            $
            517,143Options
      exercisable at December 31, 2007
            
            
            93,517
            
            
            
            8.36
            
            5.48
      years
            
            $
            862,022





(1)
            10,500
      options at an average price are excluded from intrinsic value because they
      are not in the money.





The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the quoted price of the Company’s common
stock for options that were in-the-money at December 31, 2007.  There
were 97,507 and 24,345 options exercised during the years ended December
31, 2007 and 2006, respectively.  There were 25,345 options exercised
during the year ended December 31, 2006.  The total intrinsic value of
options exercised during the years ended December 31, 2007, 2006, and 2005 was
$1,152,962, $331,737, and $0, respectively.  The total fair value of
shares vested during the years ended December 31, 2007, 2006, and 2005 was
$219,283, $295,328, and $265,229, respectively. Cash received from option
exercise for the years ended December 31, 2007 and 2006 was $556,335 and
$154,402, respectively.  The total tax benefit of the non-qualified
options exercised in 2007 and 2006 was $335,894 and $125,828,
respectively.





There
were 38,500 incentive stock options granted in 2007 and 10,500 non-statutory
options granted in 2006.  The Company bases the fair value of the
options granted on the date of grant using a Black-Scholes option pricing model
that uses assumptions based on expected option life and the level of estimated
forfeitures, expected stock volatility, risk free interest rate, and dividend
yield.  The Company uses historical data to estimate expected option
life.  Stock volatility is based on the historical volatility of the
Company’s stock.  The risk-free rate is based on the U. S. Treasury
yield curve for the periods within the contractual life of the options in effect
at the time of grant.





Regulatory
Capital





The
Company and the Bank are subject to certain regulatory capital requirements
administered by the Board of Governors of the Federal Reserve System and the
Federal Deposit Insurance Corporation (FDIC).  Failure to meet these
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial
statements.  Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities
and certain off-balance-sheet items as calculated under regulatory accounting
practices.  The Company's and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.





Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets and of Tier 1 capital to average
assets.  Each of these components is defined in the
regulations.  Management believes that the Company and the Bank met
all their capital adequacy requirements as of December 31, 2007 and
2006.





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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








10.
            SHAREHOLDERS' EQUITY(Continued)





Regulatory Capital
(Continued)





In
addition, the most recent notification from the FDIC categorized the Bank as
well capitalized under the regulatory framework for prompt corrective
action.  To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth below.  There are no conditions or events since that
notification that management believes have changed the Bank's
category.





December 31,2007
            
            
            2006Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioLeverage
      RatioValley
      Commerce Bancorp and Subsidiary
            
            $
            31,927,000
            
            
            
            11.5
            %
            
            $
            28,654,000
            
            
            
            11.1
            %Minimum
      regulatory requirement
            
            $
            11,101,000
            
            
            
            4.0
            %
            
            $
            10,346,000
            
            
            
            4.0
            %Valley
      Business Bank
            
            $
            31,538,000
            
            
            
            11.4
            %
            
            $
            28,336,000
            
            
            
            11.0
            %Minimum
      requirement for "Well-Capitalized" institution
            
            $
            13,871,000
            
            
            
            5.0
            %
            
            $
            12,926,000
            
            
            
            5.0
            %Minimum
      regulatory requirement
            
            $
            11,097,000
            
            
            
            4.0
            %
            
            $
            10,341,000
            
            
            
            4.0
            %Tier 1 Risk-Based
      Capital RatioValley
      Commerce Bancorp and Subsidiary
            
            $
            31,927,000
            
            
            
            13.8
            %
            
            $
            28,654,000
            
            
            
            13.5
            %Minimum
      regulatory requirement
            
            $
            9,233,000
            
            
            
            4.0
            %
            
            $
            8,500,000
            
            
            
            4.0
            %Valley
      Business Bank
            
            $
            31,538,000
            
            
            
            13.7
            %
            
            $
            28,336,000
            
            
            
            13.4
            %Minimum
      requirement for "Well-Capitalized" institution
            
            $
            13,844,000
            
            
            
            6.0
            %
            
            $
            12,738,000
            
            
            
            6.0
            %Minimum
      regulatory requirement
            
            $
            9,230,000
            
            
            
            4.0
            %
            
            $
            8,492,000
            
            
            
            4.0
            %Total Risk-Based
      Capital RatioValley
      Commerce Bancorp and Subsidiary
            
            $
            33,684,000
            
            
            
            14.6
            %
            
            $
            30,399,000
            
            
            
            14.3
            %Minimum
      regulatory requirement
            
            $
            18,465,000
            
            
            
            8.0
            %
            
            $
            17,000,000
            
            
            
            8.0
            %Valley
      Business Bank
            
            $
            33,296,000
            
            
            
            14.4
            %
            
            $
            30,081,000
            
            
            
            14.2
            %Minimum
      requirement for "Well-Capitalized" institution
            
            $
            23,074,000
            
            
            
            10.0
            %
            
            $
            21,230,000
            
            
            
            10.0
            %Minimum
      regulatory requirement
            
            $
            18,459,000
            
            
            
            8.0
            %
            
            $
            16,984,000
            
            
            
            8.0
            %





66
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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








10.
            SHAREHOLDERS'
      EQUITY(Continued)





Stock
Repurchase





On
November 13, 2007 the Company announced that its Board of Directors authorized a
common stock repurchase plan.  The plan calls for the repurchase up to
an aggregate of $3,000,000 of the Company’s common stock.  The
repurchases will be made from time to time by the Company in the open market or
privately negotiated transactions as conditions allow and all shares repurchased
under this plan will be returned to authorized but unissued
shares.  The number, price and timing of the repurchases shall be at
the Company’s sole discretion and the plan may be re-evaluated depending on
market conditions, liquidity needs or other factors.  The Board, based
on such re-evaluations, may suspend, terminate, modify or cancel the plan at any
time without notice.  During 2007 the Company repurchased 27,440
shares at an average price of $13.91 for a total cost of $381,808.





11.
            OTHER
      EXPENSES





Other
expenses consisted of the following:





Year Ended
December 31,2007
            
            
            2006
            
            
            2005Data
      processing
            
            $
            494,863
            
            
            $
            459,981
            
            
            $
            422,158Operations
            
            
            479,803
            
            
            
            454,229
            
            
            
            414,485Professional
      and legal
            
            
            507,920
            
            
            
            330,101
            
            
            
            310,928Promotional
            
            
            304,774
            
            
            
            268,374
            
            
            
            258,360Telephone
      and postal
            
            
            213,401
            
            
            
            205,804
            
            
            
            171,117Assessment
      and insurance
            
            
            197,225
            
            
            
            114,270
            
            
            
            124,506Supplies
            
            
            187,834
            
            
            
            180,384
            
            
            
            236,859Amortization
      expense
            
            
            62,538
            
            
            
            62,538
            
            
            
            62,538Other
      expenses
            
            
            406,835
            
            
            
            426,249
            
            
            
            274,908$
            2,855,193
            
            
            $
            2,501,930
            
            
            $
            2,275,859





67
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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








12.
            INCOME
      TAXES





The
provision for income taxes for the years ended December 31, 2007 and 2006
consisted of the following:





Federal
            
            
            State
            
            
            Total2007Current
            
            $
            809,000
            
            
            $
            402,000
            
            
            $
            1,211,000Deferred
            
            
            (40,000
            )
            
            
            (37,000
            )
            
            
            (77,000
            )Provision
      for income taxes
            
            $
            769,000
            
            
            $
            365,000
            
            
            $
            1,134,0002006Current
            
            $
            1,107,000
            
            
            $
            467,000
            
            
            $
            1,574,000Deferred
            
            
            (6,000
            )
            
            
            8,000
            
            
            
            2,000Provision
      for income taxes
            
            $
            1,101,000
            
            
            $
            475,000
            
            
            $
            1,576,0002005Current
            
            $
            1,188,000
            
            
            $
            403,000
            
            
            $
            1,591,000Deferred
            
            
            (195,000
            )
            
            
            (56,000
            )
            
            
            (251,000
            )Provision
      for income taxes
            
            $
            993,000
            
            
            $
            347,000
            
            
            $
            1,340,000





68
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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








12.
            INCOME TAXES
      (Continued)





Deferred
tax assets (liabilities) consisted of the following:





December 31,2007
            
            
            2006Deferred
      tax assets:Allowance
      for loan losses
            
            $
            740,000
            
            
            $
            740,000Unrealized
      loss on available-for-sale investment securities
            
            
            30,000
            
            
            
            156,000Deferred
      compensation
            
            
            499,000
            
            
            
            356,000Intangible
      assets
            
            
            92,000
            
            
            
            82,000Future
      benefit of state income tax deduction
            
            
            20,000
            
            
            
            73,000Total
      deferred tax assets
            
            
            1,381,000
            
            
            
            1,407,000Deferred
      tax liabilities:Bank
      premises and equipment
            
            
            (34,000
            )
            
            
            (74,000
            )Loan
      costs
            
            
            (261,000
            )
            
            
            (197,000
            )Other
            
            
            (35,000
            )
            
            
            (36,000
            )Total
      deferred tax liabilities
            
            
            (330,000
            )
            
            
            (307,000
            )Net
      deferred tax assets
            
            $
            1,051,000
            
            
            $
            1,100,000





Management
believes that it is more likely than not that it will realize the above deferred
tax assets in future periods; therefore, no valuation allowance has been
provided against its deferred tax assets.





The
provision for income taxes differs from amounts computed by applying the
statutory Federal income tax rate to operating income before income
taxes.  The items comprising these differences consisted of the
following:





Year Ended
December 31,2007
            
            
            2006
            
            
            2005Rate
            
            
            Rate
            
            
            RateFederal
      income tax expense, at statutory rate
            
            
            34.0
            %
            
            
            34.0
            %
            
            
            34.0
            %State
      franchise tax, net of Federal tax effect
            
            
            7.2
            %
            
            
            7.2
            %
            
            
            7.2
            %Interest
      on obligations of states and political subdivisions
            
            
            (6.0
            )%
            
            
            (4.8
            )%
            
            
            (2.7
            )%Net
      increase in cash surrender value of bank-owned life
    insurance
            
            
            (2.2
            )%
            
            
            (1.2
            )%
            
            
            (1.0
            )%Other
            
            
            (3.1
            )%
            
            
            (0.4
            )%
            
            
            1.2
            %Total
      income tax expense
            
            
            29.9
            %
            
            
            34.8
            %
            
            
            38.7
            %





69
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COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








12.
            INCOME TAXES
      (Continued)





The
Company and its subsidiary file income tax returns in the U.S. federal and
California jurisdictions.  There are currently no pending U.S.
federal, state, and local income tax or non-U.S. income tax examinations by tax
authorities.





With few
exceptions, the Company is no longer subject to tax examinations by U.S. Federal
taxing authorities for years ended before December 31, 2004, and by state and
local taxing authorities for years ended before December 31, 2003.





The
unrecognized tax benefits and the interest and penalties accrued by the Company
as of December 31, 2007 were not significant.





13.
            RELATED
      PARTY TRANSACTIONS





During
the normal course of business, the Company enters into transactions with related
parties, including executive officers and directors.  These
transactions include borrowings from the Company with substantially the same
terms, including rates and collateral, as loans to unrelated
parties.  The following is a summary of the aggregate activity
involving related party borrowers during 2007:





Balance,
      January 1, 2007
            
            $
            4,359,782Disbursements
            
            
            7,952,031Amounts
      repaid
            
            
            (3,855,377
            )Balance,
      December 31, 2007
            
            $
            8,456,436Undisbursed
      commitments to related parties, December 31, 2007
            
            $
            4,065,350





14.
            EMPLOYEE
      BENEFIT PLANS





Employee Retirement
Plan





The
Company adopted the Valley Business Bank 401(k) Profit Sharing Plan, effective
January 1, 1997.  All employees that work 30 or more hours per week
with more than 3 months of service are eligible to participate in the
plan.  Eligible employees may elect to make tax deferred contributions
of their salary up to the maximum amount allowed by law.  The Company
matched 70% of the employees’ contributions, applicable to contributions of up
to 6% of the employees’ annual salary beginning in April 2006.  Prior
to that the Company had matched 50% of the employees’ contributions, applicable
to contributions of up to 6% of the employees annual salary.  Company
contributions vest at a rate of 20% annually.  Bank contributions for
the years ended December 31, 2007, 2006, and 2005 totaled $112,583, $89,493, and
$47,211 respectively.





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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








14.
            EMPLOYEE BENEFIT PLANS
      (continued)





Salary Continuation and
Retirement Plans





Salary
continuation plans are in place for three executives. Under these plans, the
executives will receive monthly payments after retirement until
death.  These benefits are substantially equivalent to those available
under split-dollar life insurance policies purchased by the Bank on the lives of
the executives.  In addition, the estimated present value of these
future benefits is accrued over the period from the effective dates of the plans
until the participants' expected retirement dates.  The expense
recognized under these plans for the years ended December 31, 2007, 2006, and
2005 totaled $229,774, $184,807, and $195,232, respectively. Income earned on
these policies, net of expenses, totaled $111,813, $108,034, and $103,851 for
the years ended December 31, 2007, 2006 and 2005, respectively.





In
connection with these agreements, the Bank purchased single premium life
insurance policies with cash surrender values totaling $6,184,531 and $5,934,563
at December 31, 2007 and 2006, respectively.  Income earned on these
policies, net of expenses, totaled $249,968, $153,394 and $103,851 for the years
ended December 31, 2007, 2006 and 2005, respectively.  Income earned
on these policies is not subject to Federal and State income tax.





15.
            COMPREHENSIVE
      INCOME





Comprehensive
income is reported in addition to net income for all periods
presented.  Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of other comprehensive income
(loss) that historically has not been recognized in the calculation of net
income.  The unrealized gains and losses on the Company's
available-for-sale investment securities are included in other comprehensive
income (loss).  Total comprehensive income and the components of
accumulated other comprehensive income (loss) are presented in the consolidated
statement of changes in shareholders’ equity.





At
December 31, 2007, 2006 and 2005, the Company held securities classified as
available-for-sale which had unrealized losses as follows:





TaxBefore
            
            
            Benefit
            
            
            AfterTax
            
            
            (Expense)
            
            
            TaxFor the Year Ended
      December 31, 2007Other
      comprehensive loss:Unrealized
      holding losses
            
            $
            339,309
            
            
            $
            (125,255
            )
            
            $
            214,054Reclassification
      adjustment for losses included in net income
            
            
            (1,145
            )
            
            
            376
            
            
            
            (769
            )Total
      other comprehensive loss
            
            $
            340,454
            
            
            $
            (125,631
            )
            
            $
            214,823





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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








15.
            COMPREHENSIVE INCOME
      (continued)





TaxBefore
            
            
            Benefit
            
            
            AfterTax
            
            
            (Expense)
            
            
            TaxFor the Year Ended
      December 31, 2006Other
      comprehensive loss:Unrealized
      holding losses
            
            $
            405,337
            
            
            $
            (169,943
            )
            
            $
            235,394Reclassification
      adjustment for losses included in net income
            
            
            (52,737
            )
            
            
            19,012
            
            
            
            (33,725
            )Total
      other comprehensive loss
            
            $
            458,074
            
            
            $
            (188,955
            )
            
            $
            269,119For the Year Ended
      December 31, 2005Other
      comprehensive loss:Unrealized
      holding losses
            
            $
            (810,296
            )
            
            $
            314,073
            
            
            $
            (496,223
            )Reclassification
      adjustment for gains included in net income
            
            
            (48,494
            )
            
            
            18,780
            
            
            
            (29,714
            )Total
      other comprehensive loss
            
            $
            (761,802
            )
            
            $
            295,293
            
            
            $
            (466,509
            )








16.
            DISCLOSURES
      ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS





Estimated
fair values are disclosed for financial instruments for which it is practicable
to estimate fair value.  These estimates are made at a specific point
in time based on relevant market data and information about the financial
instruments.  These estimates do not reflect any premium or discount
that could result from offering the Company's entire holdings of a particular
financial instrument for sale at one time, nor do they attempt to estimate the
value of anticipated future business related to the instruments.  In
addition, the tax ramifications related to the realization of unrealized gains
and losses can have a significant effect on fair value estimates and have not
been considered in any of these estimates.





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





The
following methods and assumptions were used by management to estimate the fair
value of its financial instruments at December 31, 2007 and 2006:





Cash and cash
equivalents:  For cash and cash equivalents, the carrying
amount is estimated to be fair value.





Investment
securities:  For investment securities, fair values are based
on quoted market prices, where available.  If quoted market prices are
not available, fair values are estimated using quoted market prices for similar
securities and indications of value provided by brokers.





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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








16.
            DISCLOSURES ABOUT FAIR VALUE OF
      FINANCIAL INSTRUMENTS
(continued)





Loans:  For
variable-rate loans that reprice frequently with no significant change in credit
risk, fair values are based on carrying values.  The fair values for
other loans are estimated using discounted cash flow analyses, using interest
rates currently being offered at each reporting date for loans with similar
terms to borrowers of comparable creditworthiness.  The carrying
amount of accrued interest receivable approximates its fair value.





Cash surrender value of
Bank-owned life insurance:  The fair values of life insurance
policies are based on current cash surrender values at each reporting date
provided by the insurers.





Federal Home Loan Bank
stock:  For Federal Home Loan Bank stock, cost approximates
fair value.





Deposits:  The
fair values for demand deposits are, by definition, equal to the amount payable
on demand at the reporting date represented by their carrying
amount.  Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow analysis using interest rates offered at
each reporting date by the Bank for certificates with similar remaining
maturities.  The carrying amount of accrued interest payable
approximates its fair value.





Long-term
debt:  The fair values of fixed-rate borrowings are estimated
by discounting their future cash flows using rates at each reporting date for
similar instruments.  The fair values of variable rate borrowings are
based on carrying value.





Junior subordinated
deferrable interest debentures:  The fair value of junior
subordinated deferrable interest debentures was determined based on the current
market value for the like kind instruments of a similar maturity and
structure.





Commitments to extend
credit:  Commitments to extend credit are primarily for
variable rate loans and standby letters of credit.  For these
commitments, there is no difference between the committed amounts and their fair
values.  Commitments to fund fixed rate loans and standby letters of
credit are at rates which approximate fair value at each reporting
date.  The fair value of the commitments at each reporting date were
not significant and not included in the accompanying table.





December 31, 2007
            
            
            December 31, 2006Carrying
            
            
            Fair
            
            
            Carrying
            
            
            FairAmount
            
            
            Value
            
            
            Amount
            
            
            ValueFinancial
      assets:Cash
      and cash equivalents
            
            $
            9,297,346
            
            
            $
            9,297,346
            
            
            $
            13,265,547
            
            
            $
            13,265,547Available-for-sale
      investment securities
            
            
            56,615,000
            
            
            
            56,615,000
            
            
            
            55,298,000
            
            
            
            55,298,000Loans,
      net
            
            
            199,514,271
            
            
            
            192,838,151
            
            
            
            182,331,506
            
            
            
            184,830,865Cash
      surrender value of life insurance policies
            
            
            6,184,531
            
            
            
            6,184,531
            
            
            
            5,934,563
            
            
            
            5,934,563Accrued
      interest receivable
            
            
            2,774,065
            
            
            
            2,774,065
            
            
            
            1,437,161
            
            
            
            1,437,161FHLB
      stock
            
            
            1,658,600
            
            
            
            1,658,600
            
            
            
            1,825,900
            
            
            
            1,825,900Financial
      liabilities:Deposits
            
            
            215,386,068
            
            
            
            214,836,974
            
            
            
            207,576,169
            
            
            
            207,667,710Short-term
      debt
            
            
            21,804,000
            
            
            
            21,804,000
            
            
            
            17,600,000
            
            
            
            17,600,000Long-term
      debt
            
            
            8,146,049
            
            
            
            7,977,153
            
            
            
            8,547,638
            
            
            
            8,215,627





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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








Junior
      subordinated deferrable interest debentures
            
            
            3,093,000
            
            
            
            3,093,000
            
            
            
            3,093,000
            
            
            
            3,093,000Accrued
      interest payable
            
            
            231,342
            
            
            
            209,463
            
            
            
            231,342
            
            
            
            284,942





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VALLEY
COMMERCE BANCORP AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Continued)








17.
            PARENT
      ONLY FINANCIAL STATEMENTS





CONDENSED
      BALANCE SHEETDecember
      31, 2007 and 20062007
            
            
            2006ASSETSCash
      and due from banks
            
            $
            378,772
            
            
            $
            113,078Investment
      in bank subsidiary
            
            
            31,484,801
            
            
            
            28,129,997Other
      assets
            
            
            214,957
            
            
            
            402,302$
            32,078,530
            
            
            $
            28,645,377LIABILITIES
      ANDSHAREHOLDERS'
      EQUITYOther
      liabilities
            
            $
            112,319
            
            
            $
            104,278Junior
      subordinated debentures due to subsidiary grantor trust
            
            
            3,093,000
            
            
            
            3,093,000Total
      liabilities
            
            
            3,205,319
            
            
            
            3,197,278Shareholders'
      equity:Common
      stock
            
            
            23,511,066
            
            
            
            20,683,720Retained
      earnings
            
            
            5,423,324
            
            
            
            5,040,381Accumulated
      other comprehensive loss,net of taxes
            
            
            (61,179
            )
            
            
            (276,002
            )Total
      shareholders' equity
            
            
            28,873,211
            
            
            
            25,448,099$
            32,078,530
            
            
            $
            28,645,377





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17.
            PARENT ONLY FINANCIAL
      STATEMENTS (Continued)





STATEMENT
      OF INCOMEFor
      the Years Ended December 31, 2007, 2006 and 20052007
            
            
            2006
            
            
            2005Income:Earnings
      from investment in Valley Commerce Trust I
            
            $
            8,139
            
            
            $
            7,917
            
            
            $
            6,279Expenses:Interest
      on junior subordinated deferrable interest debentures
            
            
            270,690
            
            
            
            263,310
            
            
            
            208,787Other
      expenses
            
            
            531,689
            
            
            
            390,647
            
            
            
            292,941Total
      expenses
            
            
            802,379
            
            
            
            653,957
            
            
            
            501,728Loss
      before equity in undistributed income of subsidiary
            
            
            (794,240
            )
            
            
            (646,040
            )
            
            
            (495,449
            )Equity
      in undistributed income of subsidiary
            
            
            3,128,090
            
            
            
            3,335,818
            
            
            
            2,454,256Income
      before income taxes
            
            
            2,333,850
            
            
            
            2,689,778
            
            
            
            1,958,807Income
      tax benefit
            
            
            327,000
            
            
            
            266,000
            
            
            
            204,000Net
      income
            
            $
            2,660,850
            
            
            $
            2,955,778
            
            
            $
            2,162,807





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17.
            PARENT ONLY FINANCIAL
      STATEMENTS (Continued)





STATEMENT
      OF CASH FLOWSFor
      the Years Ended December 31, 2007, 2006 and 20052007
            
            
            2006
            
            
            2005Cash
      flows from operating activities:Net
      income
            
            $
            2,660,850
            
            
            $
            2,955,778
            
            
            $
            2,162,807Adjustments
      to reconcile net income to net cash provided by operating
      activities:Undistributed
      net income of subsidiary
            
            
            (3,128,090
            )
            
            
            (3,335,818
            )
            
            
            (2,454,256
            )Stock-based
      compensation expense
            
            
            32,519
            
            
            
            18,847
            
            
            
            -Tax
      benefits on stock-based compensation
            
            
            (335,893
            )
            
            
            (125,828
            )
            
            
            -Decrease
      in other assets
            
            
            523,238
            
            
            
            77,182
            
            
            
            10,536Increase
      (decrease) in other liabilities
            
            
            8,041
            
            
            
            (4,007
            )
            
            
            (67,128
            )Net
      cash used in operating activities
            
            
            (239,335
            )
            
            
            (413,846
            )
            
            
            (348,041
            )Cash
      flows from investing activities:Investment
      I bank subsidiary
            
            
            -
            
            
            
            -
            
            
            
            (7,500,000
            )Cash
      flows from financing activities:Cash
      paid for fractional shares
            
            
            (5,392
            )
            
            
            (5,004
            )
            
            
            -Proceeds
      from the exercise of stock options
            
            
            556,336
            
            
            
            154,402
            
            
            
            -Tax
      benefits from stock-based compensation
            
            
            335,893
            
            
            
            125,828
            
            
            
            -Cash
      paid to repurchase common stock
            
            
            (381,808
            )
            
            
            -
            
            
            
            -Net
      proceeds from sale of common stock
            
            
            -
            
            
            
            -
            
            
            
            3,880,321Net
      cash provided by financing activities
            
            
            505,029
            
            
            
            275,226
            
            
            
            3,880,321Increase
      (decrease) in cash and cash equivalents
            
            
            265,694
            
            
            
            (138,620
            )
            
            
            (3,967,720
            )Cash
      and cash equivalents at beginning of year
            
            
            113,078
            
            
            
            251,698
            
            
            
            4,219,418Cash
      and cash equivalents at end of year
            
            $
            378,772
            
            
            $
            113,078
            
            
            $
            251,698





77
 Table of Contents





ITEM 9 – CHANGEIN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE





There is
no information required to be disclosed under this Item.





ITEM 9A – CONTROLSAND PROCEDURES





Based on
their evaluation as of the end of the period covered by this Annual Report on
Form 10-K (as required by paragraph (b) of Rule 13a-15 under the Securities
Exchange Act of 1934 (the Exchange Act)), the Registrant’s principal executive
officer and principal financial officer have concluded that the Registrant’s
disclosure controls and procedures (as defined in Rules 13a-15(e) under the
Exchange Act) were effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act was
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.





REPORT
OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





Management
of Valley Commerce Bancorp and its subsidiary (the Company) is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company, as such term is defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934. The Company’s management, including the chief executive
officer and chief financial officer, has assessed the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2007,
presented in conformity with accounting principles generally accepted in the
United States of America. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control -Integrated Framework. Based on this assessment,
management concluded that, as of December 31, 2007, the Company’s internal
control over financial reporting was effective based on those
criteria.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management’s report in this annual report.





Disclosure
controls and procedures





The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness, as of
December 31, 2007, of the design and operation of the Company’s disclosure
controls and procedures pursuant to Rule 15d-15 of the Exchange
Act.  Based upon that evaluation, the Company’s principal executive
and financial officers concluded that the Company’s disclosure controls and
procedures were effective, as of December 31, 2007, in timely providing them
with material information relating to the Company, as required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act,
within the time periods specified in the Securities and Exchange Commission’s
rules and forms.





Changes
in internal controls





There was
no change in the Company’s internal control over financial reporting identified
in connection with the evaluation required by Rule 15d-15 that occurred during
the year ended December 31, 2007 that has materially affected or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





ITEM 9B –OTHER INFORMATION





There is
no information required to be disclosed under this Item.





78
 Table of Contents





PART
III





ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.





For
information concerning directors and executive officers of the Company, see
“ELECTION OF DIRECTORS OF THE COMPANY” in the definitive Proxy Statement for the
Company’s 2008 Annual Meeting of Shareholders to be filed pursuant to Regulation
14A (the Proxy Statement), which section of the Proxy Statement is incorporated
herein by reference.





ITEM 11 – EXECUTIVECOMPENSATION





The
information required by Items 11 can be found in Valley Commerce Bancorp’s
Definitive Proxy Statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934, and is by this reference incorporated herein.





ITEM 12 – SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER  MATTERS





The
information required by Items 12 can be found in Valley Commerce Bancorp’s
Definitive Proxy Statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934, and is by this reference incorporated herein.





ITEM 13. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE





The
information required by Items 13 can be found in Valley Commerce Bancorp’s
Definitive Proxy Statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934, and is by this reference incorporated herein.





ITEM 14. PRINCIPALACCOUNTANT FEES AND SERVICES





The
information required by Items 14 can be found in Valley Commerce Bancorp’s
Definitive Proxy Statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934, and is by this reference incorporated herein.





ITEM 15. EXHIBITS





Exhibits
required to be filed are listed on the “Exhibit Index” attached hereto, which is
incorporated herein by reference.





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 Table of Contents





SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





VALLEY
      COMMERCE BANCORPBy:
            /s/ Donald A. GillesDonald
      A. GillesPresident
      and Chief Executive OfficerBy:
            /s/ Roy O. EstridgeRoy
      O. EstridgeExecutive
      Vice President and Chief Financial OfficerDate:
            March
      19, 2008











POWER
OF ATTORNEY





KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Donald A. Gilles or Roy O. Estridge as his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.





80
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In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.








Signature
            
            Title
            
            Date/s/ Donald A. GillesDonald
      A. Gilles
            
            Director
      and Chief Executive Officer (Principal Executive Officer)
            
            March
      18, 2008/s/ Roy O. EstridgeRoy
      O. Estridge
            
            Chief
      Financial Officer (Principal Financial Officer and Principal Accounting
      Officer)
            
            March
      18, 2008/s/ David B. DayDavid
      B. Day
            
            Director
            
            March
      18, 2008/s/ Walter A. DwelleWalter
      A. Dwelle
            
            Chairman
      and Director
            
            March
      18, 2008/s/ Thomas A. GaebeThomas
      A. Gaebe
            
            Director
            
            March
      18, 2008/s/ Philip R. Hammond, Jr.Philip
      R. Hammond, Jr.
            
            Director
            
            March
      18, 2008/s/ Russell F. HurleyRussell
      F. Hurley
            
            Vice
      Chairman and Director
            
            March
      18, 2008/s/ Fred P. LoBue, Jr.Fred
      P. LoBue, Jr.
            
            Secretary
      and Director
            
            March
      18, 2008/s/ Kenneth H. MacklinKenneth
      H. Macklin
            
            Director
            
            March
      18, 2008/s/ Barry R. SmithBarry
      R. Smith
            
            Director
            
            March
      18, 2008





81
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EXHIBIT
INDEX





Exhibit
            
            Description of
      Document3.1
            
            Articles
      of Incorporation of the Company, as amended (1)3.2
            
            Bylaws
      of the Company (1)4.3
            
            Specimen
      Stock Certificate (2)10.1
            
            Valley
      Commerce Bancorp Amended and Restated 1997 Stock Option Plan
      (1,3)10.2
            
            Lease
      of premises at 200 South Court Street, Visalia (1)10.3
            
            Executive
      Supplemental Compensation Agreement with Donald A.
      Gilles  (1,3)10.4
            
            Executive
      Supplemental Compensation Agreement with Roy O. Estridge
    (1,3)10.5
            
            Executive
      Supplemental Compensation Agreement with Allan W. Stone
    (1,3)10.6
            
            Valley
      Commerce Bancorp Amended and Restated 1997 Stock Option Plan
      (1,3)10.7
            
            Valley
      Commerce Bancorp 2007 Equity Incentive Plan (4)10.8
            
            Indenture
      between Valley Commerce Bancorp and Wells Fargo Bank National Association
      as Trustee, Junior Subordinated Debt Securities Due April 7, 2033
      (1)10.9
            
            Junior
      Subordinated Debt Security Due 2003 of Valley Commerce Bancorp
      (1)10.10
            
            Guaranty
      Agreement of Valley Commerce Bancorp in favor of Wells Fargo Bank National
      Association as Trustee (1)21
            
            Subsidiaries
      of the Company (1)24
            
            Powers
      of Attorney (included on signature pages)31
            
            Rule
      13a-14(a)/15d-14(a) Certifications32
            
            Section
      1350 Certifications


_______________________________________


(1)
            Incorporated
      by reference to the same-numbered exhibit to the Company’s Registration
      Statement on Form SB-2, filed September 9,
2004.





(2)
            Incorporated
      by reference to the same-numbered exhibit to the Company’s Registration
      Statement on Form SB-2/A, filed October 27,
  2004.





(3)
            Management
      contract or compensatory plan or
arrangement.





(4)
            Incorporated
      by reference to the Company’s definitive proxy statement for its 2007
      annual meeting of shareholders, filed on April 5,
  2007






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