UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





(Mark
One)


ý
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,
  2010








o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE TRANSITION PERIOD
      FROM                                TO





COMMISSION FILE
NUMBER:000-51949





VALLEY
COMMERCE BANCORP


(Name of
small business issuer as specified in its charter)





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





701
W. Main Street


Visalia,
California  93291


(Address
of principal executive offices)








(559)
622-9000


(Issuer’s
telephone number)





Indicated
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  ý   No  





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
the 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
      Companyý





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


Yes  o   No  ý





The
number of shares outstanding of the issuer’s Common Stock was 2,608,317 as of
May 17,
2010.










INDEX





PART
      I - FINANCIAL INFORMATION
            
            3ITEM 1 - FINANCIAL STATEMENTS
            
            4ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATONS
            
            20ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK
            
            32ITEM 4 – CONTROLS AND PROCEDURES
            
            32PART
      II - OTHER INFORMATION
            
            33ITEM 1 LEGAL PROCEEDINGS
            
            33ITEM 1A  RISK FACTORS
            
            33ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
            
            33ITEM 3 DEFAULTS UPON SENIOR SECURITIES
            
            33ITEM 4 (RESERVED)
            
            34ITEM 5 OTHER INFORMATION
            
            34ITEM 6 EXHIBITS
            
            34SIGNATURES
            
            35EXHIBIT INDEX
            
            36


2
 Index


PART
I





Forward-Looking
Information




Certain
matters discussed in this Quarterly Report on Form 10-Q including, but not
limited to, those described in Item 2 - 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 (17) 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q.  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.


3
 Index


PART
1 – FINANCIAL INFORMATION


ITEM 1 – FINANCIAL STATEMENTS





VALLEY
COMMERCE BANCORP


CONDENSED
CONSOLIDATED BALANCE SHEET


(UNAUDITED)








March
      31,
              2010
            
            
            December
      31,
              2009AssetsCash
      and due from banks
            
            $
            44,089,927
            
            
            $
            39,077,786Available-for-sale
      investment securities, at fair value (Note 3)
            
            
            41,142,000
            
            
            
            42,566,000Loans,
      less allowance for loan losses of $6,822,349 at March 31, 2010 and
      $6,231,065 at December 31, 2009 (Note 4)
            
            
            235,117,869
            
            
            
            234,822,963Bank
      premises and equipment, net (Note 5)
            
            
            8,652,731
            
            
            
            8,041,905Cash
      surrender value of bank-owned life insurance
            
            
            6,417,248
            
            
            
            6,354,871Accrued
      interest receivable and other assets
            
            
            9,213,305
            
            
            
            9,307,998Total
      assets
            
            $
            344,633,080
            
            
            $
            340,171,523Liabilities and Shareholders’
      EquityDeposits:Noninterest-bearing
            
            $
            73,472,487
            
            
            $
            76,574,651Interest-bearing
            
            
            224,863,022
            
            
            
            217,707,492Total
      deposits
            
            
            298,335,509
            
            
            
            294,282,143Accrued
      interest payable and other liabilities
            
            
            2,472,737
            
            
            
            2,265,842Long-term
      debt
            
            
            3,604,683
            
            
            
            3,661,999Junior
      subordinated deferrable interest debentures
            
            
            3,093,000
            
            
            
            3,093,000Total
      liabilities
            
            
            307,505,929
            
            
            
            303,302,984Commitments
      and contingencies (Note 6)Shareholders’
      equity:Serial
      preferred stock - no par value; 10,000,000 shares authorized, issued and
      outstanding – 7,700 shares class B and 385 shares class C at March 31,
      2010 and     December 31, 2009 (Note
      12)
            
            
            7,764,050
            
            
            
            7,744,800Common
      stock - no par value; 30,000,000 shares authorized; issued and outstanding
      – 2,608,317 shares at March 31, 2010 and December 31, 2009
            
            
            25,967,346
            
            
            
            25,953,290Retained
      earnings
            
            
            3,294,248
            
            
            
            3,166,732Accumulated
      other comprehensive income, net of taxes (Notes 3
    and 9)
            
            
            101,507
            
            
            
            3,717Total
      shareholders’ equity
            
            
            37,127,151
            
            
            
            36,868,539Total
      liabilities and shareholders’ equity
            
            $
            344,633,080
            
            
            $
            340,171,523








See notes
to unaudited condensed consolidated financial statements.


4
 Index


VALLEY
COMMERCE BANCORP


CONDENSED
CONSOLIDATED STATEMENT OF INCOME


(UNAUDITED)





For
      the Three MonthsEnded
      March 31,2010
            
            
            2009Interest
      Income:Interest
      and fees on loans
            
            $
            3,617,825
            
            
            $
            3,711,367Interest
      on investment securities:Taxable
            
            
            182,836
            
            
            
            306,448Exempt
      from Federal income taxes
            
            
            156,446
            
            
            
            196,541Interest
      on Federal funds sold
            
            
            -
            
            
            
            8,562Interest
      on deposits in banks
            
            
            14,340
            
            
            
            -Total
      interest income
            
            
            3,971,447
            
            
            
            4,222,918Interest
      Expense:Interest
      on deposits
            
            
            661,632
            
            
            
            1,029,783Interest
      on short-term debt
            
            
            -
            
            
            
            25,255Interest
      on long-term debt
            
            
            46,279
            
            
            
            66,093Interest
      on junior subordinated deferrable interest debentures
            
            
            27,480
            
            
            
            36,219Total
      interest expense
            
            
            735,391
            
            
            
            1,157,350Net
      interest income before provision for loan losses
            
            
            3,236,056
            
            
            
            3,065,568Provision
      for loan losses
            
            
            600,000
            
            
            
            400,000Net
      interest income after provision for loan losses
            
            
            2,636,056
            
            
            
            2,665,568Non-Interest
      Income:Service
      charges
            
            
            184,901
            
            
            
            178,492Gain
      on sale of available-for-sale investment securities
            
            
            -
            
            
            
            4,602Mortgage
      loan brokerage fees
            
            
            5,997
            
            
            
            12,500Earnings
      on cash surrender value of life insurance policies
            
            
            67,507
            
            
            
            74,436Other
            
            
            38,036
            
            
            
            46,629Total
      non-interest income
            
            
            296,441
            
            
            
            316,659Non-Interest
      Expense:Salaries
      and employee benefits
            
            
            1,403,901
            
            
            
            1,286,735Occupancy
      and equipment
            
            
            339,610
            
            
            
            380,599Other
            
            
            882,471
            
            
            
            852,043Total
      non-interest expense
            
            
            2,625,982
            
            
            
            2,519,377Income
      before provision for income taxes
            
            
            306,515
            
            
            
            462,850Provision
      for income taxes
            
            
            56,000
            
            
            
            116,000Net
      income
            
            $
            250,515
            
            
            $
            346,850Dividends
      accrued and discount accreted on preferred shares (Note
12)
            
            
            (95,181
            )
            
            
            (91,972
            )Net
      income available to common shareholders
            
            $
            155,334
            
            
            $
            254,878Basic
      earnings per share (Notes 8)
            
            $
            0.06
            
            
            $
            0.10Diluted
      earnings per share (Notes 8)
            
            $
            0.06
            
            
            $
            0.10








See notes
to unaudited condensed consolidated financial statements.


5
 Index


VALLEY
COMMERCE BANCORP


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)





For
      the Three MonthsEnded
      March 31,2010
            
            
            2009Cash
      Flows from Operating Activities:Net
      income
            
            $
            250,515
            
            
            $
            346,850Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
            
            
            600,000
            
            
            
            400,000(Decrease)
      increase in deferred loan origination fees, net
            
            
            (20,300
            )
            
            
            23,013Depreciation
            
            
            118,396
            
            
            
            171,865Gain
      on sale of available-for-sale investment securities, net
            
            
            -
            
            
            
            (4,062
            )Loss
      on disposition of premises and equipment
            
            
            5,544
            
            
            
            -Amortization
      of premiums (accretion of discounts) on investment securities,
      net
            
            
            71,865
            
            
            
            (10,395
            )Increase
      in cash surrender value of bank-owned life insurance
            
            
            (62,377
            )
            
            
            (69,918
            )Stock-based
      compensation expense
            
            
            14,056
            
            
            
            14,695Decrease
      in accrued interest receivable and other assets
            
            
            94,693
            
            
            
            8,065Increase
      in accrued interest payable and other liabilities
            
            
            138,518
            
            
            
            483,820Net
      cash provided by operating activities
            
            
            1,210,910
            
            
            
            1,363,933Cash
      Flows from Investing Activities:Proceeds
      from sales of available-for-sale investment securities
            
            
            -
            
            
            
            1,579,550Purchases
      of available-for-sale investment securities
            
            
            -
            
            
            
            (6,689,291
            )Proceeds
      from principal repayments from available-for-sale mortgage-backed
      securities
            
            
            1,518,302
            
            
            
            1,014,066Net
      increase in loans
            
            
            (874,606
            )
            
            
            (4,126,376
            )Purchase
      of premises and equipment
            
            
            (734,766
            )
            
            
            (3,823,565
            )Net
      cash used in investing activities
            
            
            (91,070
            )
            
            
            (12,045,616
            )





Continued
on next page.


6
 Index


VALLEY
COMMERCE BANCORP


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)


(Continued)





For
      the Three MonthsEnded
      March 31,2010
            
            
            2009Cash
      Flows from Financing Activities:Net
      increase in noninterest-bearing and interest-bearing
    deposits
            
            $
            851,139
            
            
            $
            8,906,508Net
      increase (decrease) in time deposits
            
            
            3,202,227
            
            
            
            (5,317,595
            )Proceeds
      from issuance of preferred stock
            
            
            -
            
            
            
            7,679,207Cash
      dividends paid on preferred stock
            
            
            (103,749
            )
            
            
            -Decrease
      in short-term borrowings, net
            
            
            -
            
            
            
            (8,000,000
            )Principal
      payments on long-term debt
            
            
            (57,316
            )
            
            
            (54,568
            )Net
      cash provided by financing activities
            
            
            3,892,301
            
            
            
            3,213,552Increase
      (decrease) in cash and cash equivalents
            
            
            5,012,141
            
            
            
            (7,468,131
            )Cash
      and Cash Equivalents at Beginning of Year
            
            
            39,077,786
            
            
            
            22,145,867Cash
      and Cash Equivalents at End of Period
            
            $
            44,089,927
            
            
            $
            14,677,736Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the period for:Interest
      expense
            
            $
            745,232
            
            
            $
            1,288,382Income
      taxes
            
            $
            -
            
            
            $
            460,000Non-Cash
      Investing Activities:Net
      change in unrealized gain/loss on available-for-sale
      securities
            
            $
            (166,167
            )
            
            $
            103,868Non-cash
      Financing Activities:Accrued
      dividends on preferred stock
            
            $
            103,749
            
            
            $
            100,250





See notes
to unaudited condensed consolidated financial statements.


7
 Index


VALLEY
COMMERCE BANCORP


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





1.
            GENERAL





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"), in a one bank holding company reorganization intended to provide 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 Tulare.  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.  The Bank's deposits are insured by the Federal
Deposit Insurance Corporation (FDIC) up to applicable legal
limits.  The Bank is participating in the FDIC Transaction Account
Guarantee Program which was extended through December 31, 2010.  Under
the program, all noninterest-bearing transaction accounts are fully guaranteed
by the FDIC for the entire amount in the account.  Coverage under the
Transaction Account Guarantee Program is in addition to and separate from the
coverage under the FDIC’s general deposit insurance rules.





2.
            BASIS
      OF PRESENTATION





The
interim unaudited condensed consolidated financial statements of Valley Commerce
Bancorp and subsidiary have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”). These interim condensed
consolidated financial statements include the accounts of Valley Commerce
Bancorp and its wholly owned subsidiary Valley Business Bank (collectively, the
“Company”). 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.  All significant intercompany accounts and
transactions have been eliminated in consolidation.  All adjustments
(consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation of the Company’s consolidated
financial position at March 31, 2010 and December 31, 2009, the results of its
operations and cash flows for the three-month periods ended March 31, 2010 and
2009, have been included therein.  Certain information and footnote
disclosures normally included in the annual consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted, however, the Company believes that
the disclosures made are adequate to make the information not
misleading.  These interim condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company’s 2009 Annual Report on Form
10-K.  The results of operations and cash flows for the interim
periods presented are not necessarily indicative of the results for a full
year.





The
preparation of these condensed consolidated 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 significantly from
those estimates.





Management
has determined that because all of the commercial 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 single customer accounts for more than
10% of the revenues of the Company or the Bank.


8
 Index


2.
            BASIS
      OF PRESENTATION (Continued)





On April
21, 2009 the Company declared a 5% stock dividend payable on June 25, 2009 for
all shareholders of record on June 10, 2009.  All earnings per share
and per share amounts have been retroactively adjusted to reflect the stock
dividend.





3.
            AVAILABLE-FOR-SALE
      INVESTMENT SECURITIES





The
amortized cost and estimated fair value of available-for-sale investment
securities at the dates indicated consisted of the following:





March 31, 2010Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair
              ValueDebt
      securities:U.S.
      Government agencies
            
            $
            2,910,466
            
            
            $
            87,534
            
            
            $
            -
            
            
            $
            2,998,000Mortgage-backed
      securities:Agency
      MBS
            
            
            8,200,819
            
            
            
            355,181
            
            
            
            -
            
            
            
            8,556,000Agency
      SBA
            
            
            14,516,671
            
            
            
            21,527
            
            
            
            (40,198
            )
            
            
            14,498,000Municipal
      securities
            
            
            15,341,560
            
            
            
            63,406
            
            
            
            (314,966
            )
            
            
            15,090,000$
            40,969,516
            
            
            $
            527,648
            
            
            $
            (355,164
            )
            
            $
            41,142,000





Net
unrealized gains on available-for-sale investment securities totaling $172,484
were recorded, net of $70,977 in income taxes, as accumulated other
comprehensive income within shareholders' equity at March 31,
2010.  There were no securities sold during the three-month period
ended March 31, 2010.





December 31, 2009Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Fair
              ValueDebt
      securities:U.S.
      Government agencies
            
            $
            2,909,941
            
            
            $
            105,059
            
            
            $
            -
            
            
            
            3,015,000Mortgage-backed
      securities:Agency
      MBS
            
            
            8,985,716
            
            
            
            295,386
            
            
            
            (102
            )
            
            
            9,281,000Agency
      SBA
            
            
            15,326,055
            
            
            
            27,173
            
            
            
            (46,228
            )
            
            
            15,307,000Municipal
      securities
            
            
            15,337,971
            
            
            
            48,855
            
            
            
            (423,826
            )
            
            
            14,963,000$
            42,559,683
            
            
            $
            476,473
            
            
            $
            (470,156
            )
            
            $
            42,566,000





Net
unrealized gains on available-for-sale investment securities totaling $6,317
were recorded, net of $2,600 in income taxes, as accumulated other comprehensive
income within shareholders' equity at December 31, 2009.  Proceeds and
realized gains from the sale of available-for-sale investment securities for the
year ended December 31, 2009 totaled $13,559,130 and $416,248, respectively, of
which $1,579,550 and $4,062, respectively, were attributable to the three month
period ended March 31, 2009.


9
 Index




3.
              AVAILABLE-FOR-SALE
      INVESTMENT SECURITIES (Continued)
 
 Investment
securities with unrealized losses at March 31, 2010 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:Mortgage-backed
      securities:Agency
      SBA
              
              $
              9,203,000
              
              
              $
              (40,198
              )
              
              $
              -
              
              
              $
              -
              
              
              $
              9,203,000
              
              
              $
              (40,198
              )Municipal
      securities
              
              
              4,636,000
              
              
              
              (54,185
              )
              
              
              3,429,000
              
              
              
              (260,781
              )
              
              
              8,065,000
              
              
              
              (314,966
              )$
              13,839,000
              
              
              $
              (94,383
              )
              
              $
              3,429,000
              
              
              $
              (260,781
              )
              
              $
              17,268,000
              
              
              $
              (355,164
              )
 
 Investment
securities with unrealized losses at December 31, 2009 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:Mortgage-backed
      securities:Agency
      MBS
              
              $
              132,000
              
              
              $
              (102
              )
              
              $
              -
              
              
              $
              -
              
              
              $
              132,000
              
              
              $
              (102
              )Agency
      SBA
              
              
              9,567,000
              
              
              
              (46,228
              )
              
              
              -
              
              
              
              -
              
              
              
              9,567,000
              
              
              
              (46,228
              )Municipal
      securities
              
              
              6,449,000
              
              
              
              (179,802
              )
              
              
              2,789,000
              
              
              
              ( 244,024
              )
              
              
              9,238,000
              
              
              
              (423,826
              )$
              16,148,000
              
              
              $
              (226,132
              )
              
              $
              2,789,000
              
              
              $
              (244,024
              )
              
              $
              18,937,000
              
              
              $
              (470,156
              )
 
 Mortgage-backed
Obligations
 
 At March
31, 2010, the Company held 52 mortgage-backed obligations of which nine were in
a loss position for less than twelve months and none were in a loss position for
twelve months or more.  Management believes the unrealized losses on
the Company's investments in mortgage obligations were caused primarily by
limited market liquidity and perceived credit risk on the part of
investors.  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 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 March 31, 2010.
 
 Municipal
Securities
 
 At March
31, 2010, the Company held 48 obligations of states and political subdivision
securities of which 14 were in a loss position for less than twelve months and
11 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
due to the continued dislocation of the securities market.  All of
these securities have continued to pay as scheduled despite their impairment due
to current market conditions.  Specifically, there has been no
observable deterioration in the credit rating or financial performance of the
underlying municipality.  In addition, the Company has the ability and
intent to hold those investments until a recovery of fair value, which may be
maturity.  Therefore, the Company does not consider those investments
to be other-than-temporarily impaired at March 31, 2010.




10
 Index


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





The
amortized cost and estimated fair value of investment securities at March 31,
2010 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.





Amortized
              Cost
            
            
            Estimated
              Fair
              ValueAfter
      one year through five years
            
            $
            1,019,851
            
            
            $
            1,043,000After
      five years through ten years
            
            
            2,780,418
            
            
            
            2,803,000After
      ten years
            
            
            14,451,757
            
            
            
            14,242,00018,252,026
            
            
            
            18,088,000Investment
      securities not due at a single maturity date:Mortgage-backed
      securities
            
            
            22,717,490
            
            
            
            23,054,000$
            40,969,516
            
            
            $
            41,142,000





At March
31, 2010 and December 31, 2009, all investment securities were pledged to secure
either public deposits or borrowing arrangements.





4.
            LOANS





Outstanding
loans are summarized below, in thousands:





March
      31,
              2010
            
            
            December
      31,
              2009Commercial
            
            $
            50,093,427
            
            
            $
            49,442,490Real
      estate – mortgage
            
            
            163,647,856
            
            
            
            162,772,435Real
      estate – construction
            
            
            22,176,266
            
            
            
            22,581,964Agricultural
            
            
            4,497,876
            
            
            
            4,727,349Consumer
            
            
            1,911,291
            
            
            
            1,936,588242,326,716
            
            
            
            241,460,826Deferred
      loan fees,  net
            
            
            (386,498
            )
            
            
            (406,798
            )Allowance
      for loan losses
            
            
            (6,822,349
            )
            
            
            (6,231,065
            )$
            235,117,869
            
            
            $
            234,822,963





The
recorded investment in loans that were considered to be impaired totaled
$12,748,857 and $12,485,248 of which $10,736,640 and $10,435,958 had a related
allowance for loan losses of $2,741,300 and $2,652,000 at March 31, 2010 and
December 31, 2009.  The average recorded investment in impaired loans
for the periods ended March 31, 2010 and December 31, 2009 was $12,269,000 and
$10,103,000, respectively.  The Company recognized $36,961 in interest
income on a cash basis for impaired loans during the period ended December 31,
2009.  There was no interest income recognized for the period ended
March 31, 2010.





There was
$7,149,631 and $7,364,347 in nonaccrual loans at March 31, 2010 and December 31,
2009, respectively.  There was $159,146 and $436,714 interest foregone
on nonaccrual loans for the periods ended March 31, 2010 and December 31, 2009,
respectively.





The Bank
did not have any loans considered to be troubled debt restructurings at March
31, 2010 or December 31, 2009.





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.


11
 Index


5.
            BANK
      PREMISES AND EQUIPMENT





Premises
and equipment consisted of the following:




March
      31,
              2010
            
            
            December
      31,
              2009Furniture
      and equipment
            
            $
            2,977,976
            
            
            $
            2,955,097Construction
      in progress
            
            
            -
            
            
            
            4,567,346Leasehold
      improvements
            
            
            207,342
            
            
            
            550,548Premises
            
            
            6,086,188
            
            
            
            2,095,490Land
            
            
            1,461,379
            
            
            
            605,06010,732,885
            
            
            
            10,773,541Less
      accumulated depreciation and amortization
            
            
            (2,080,154
            )
            
            
            (2,731,636
            )$
            8,652,731
            
            
            $
            8,041,905





In
February 2009, the Company purchased an office building in Visalia, California
and commenced refurbishing it to serve as the Company’s
headquarters.  The Company relocated its administrative office and
Visalia branch to the new facility in November 2009 and January 2010,
respectively.





6.
            COMMITMENTS
      AND CONTINGENCIES





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





In the
normal course of business, the Company has various outstanding commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of $35.4 million and $41.2 million and letters of credit of
$116,500 and $72,000 at March 31, 2010 and December 31, 2009,
respectively.





At March
31, 2010, consumer loan commitments, which are generally unsecured, represent
approximately 7% of total commitments.  Agricultural loan commitments
represent approximately 5% of total commitments and are generally secured by
crops and/or real estate.  Commercial loan commitments represent
approximately 78% of total commitments and are generally secured by various
assets of the borrower.  Real estate loan commitments represent the
remaining 10% of total commitments and are generally secured by property with a
loan-to-value not to exceed 80%.  In addition, the majority of the
Bank’s commitments have variable interest rates.  Total commitments do
not necessarily represent future cash requirements.  Each loan
commitment and the amount and type of collateral obtained, if any, are evaluated
on an individual basis.  Collateral held varies, but may include real
property, bank deposits, debt or equity securities or business
assets.





Stand-by
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 deferred liability related to the Company’s stand-by
letters of credit was not significant at March 31, 2010 or December 31,
2009.


12
 Index


7.
            STOCK
      BASED COMPENSATION





The
Company has two active share based compensation plans; the Valley Commerce
Bancorp 2007 Equity Incentive Plan (“Incentive Plan”) for which 96,476 shares of
common stock are reserved for issuance to employees and directors under
incentive and non-statutory agreements and the Valley Commerce Bancorp Amended
and Restated 1997 Stock Option Plan (“Prior Plan”) for which 151,438 shares of
common stock are reserved for issuance, however, no further grants may be made
under this plan as it expired in February 2007.  The Incentive Plan
provides for awards of stock options, restricted stock awards, qualified
performance-based awards and stock grants.  The purpose of the
Incentive Plan is to promote the long-term success of the Company and the
creation of shareholder value.  The Board of Directors believes that
the availability 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.





During
the three-month periods ended March 31, 2010 and 2009, no options were granted
by the Company to its officers or directors.  Compensation expense is
recognized over the vesting period on a straight line accounting
basis.  Compensation cost related to stock options recognized in
operating results was $12,482 and $13,121 for the three month periods ended
March 31, 2010 and 2009, respectively.  The tax benefits resulting
from tax deductions in excess of the compensation cost recognized for those
options (excess tax benefits) are classified as cash flow from financing
activities in the statement of cash flows.   The excess tax
benefits for the three months ended March 31, 2010 and 2009 was $1,574 for both
periods.





The
following table summarizes information about stock option activity for the three
months ended March 31, 2010:




For
      the Three Months Ended March 31, 2010Shares
                
                
                Weighted
      Average Exercise Price
                
                
                Weighted
      Average Remaining Contractual Term
                
                
                Aggregate
      Intrinsic Value (in thousands)Incentive:Options
      outstanding at December 31, 2009
                
                
                74,357
                
                
                $
                10.34Options
      outstanding at March 31, 2010
                
                
                74,357
                
                
                
                10.34
                
                
                5.09
      years
                
                
                $
                -
                (1
                )Options
      vested or expected to vest after March 31, 2010
                
                
                72,993
                
                
                
                12.60
                
                
                3.34
      years
                
                
                $
                -
                (1
                )Options
      exercisable at March 31, 2010
                
                
                51,538
                
                
                
                9.10
                
                
                3.26
      years
                
                
                $
                -
                (1
                )Nonstatutory:Options
      outstanding at December 31, 2009
                
                
                87,964
                
                
                $
                9.10Options
      cancelled
                
                
                (12,103
                )
                
                
                5.37Options
      outstanding at March 31, 2010
                
                
                75,861
                
                
                
                9.69
                
                
                3.26
      years
                
                
                $
                6,852
                (1
                )Options
      vested or expected to vest after March 31, 2010
                
                
                75,861
                
                
                
                9.46
                
                
                3.26
      years
                
                
                $
                6,852
                (1
                )Options
      exercisable at March 31, 2010
                
                
                73,544
                
                
                
                9.46
                
                
                3.06
      years
                
                
                $
                6,852
                (1
                )





(1)
53,698 non-statutory options with a weighted average price of $11.36 and 74,357
incentive options with a weighted average price of $10.34 are excluded from
intrinsic value from table above because the exercise price is greater than the
stock price at March 31, 2010.





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 March 31, 2010.  There
were no options exercised during the three months ended March 31, 2010 and
2009.  No options vested during the three month period ended March 31,
2010.  The total fair value of shares vested during the three months
ended March 31, 2009 was $36,099.





Management
estimates expected forfeitures and recognizes compensation costs only for those
equity awards expected to vest.  As of March 31, 2010, there was
$115,365 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the Plan.  The
cost is expected to be realized over a weighted average period of 1.32 years and
will be adjusted for subsequent changes in estimated
forfeitures.


13
 Index


8.
            EARNINGS
      PER SHARE COMPUTATION





Basic
earnings per share are computed by dividing income available to common
shareholder by the weighted average common shares outstanding for the
period.  Diluted earnings per share reflect the potential dilution
that could occur if outstanding stock options were exercised.  Diluted
earnings per share are computed by dividing income available to common
shareholders by the weighted average common shares outstanding for the period
plus the dilutive effect of options.  Earnings per share computations
have been adjusted to reflect the stock dividend paid in 2009 to shareholders of
record as of June 10, 2009.




For
      the Three MonthsEnded
      March 31,2010
            
            
            2009Net
      Income:Net
      income
            
            $
            250,515
            
            
            $
            346,850Dividends
      accrued and discounts accreted on preferred shares
            
            
            (95,181
            )
            
            
            (91,972
            )Net
      income allocated to common shareholders
            
            $
            155,334
            
            
            $
            254,878Earnings
      Per Share:Basic
      earnings per share
            
            $
            0.06
            
            
            $
            0.10Diluted
      earnings per share
            
            $
            0.06
            
            
            $
            0.10Weighted
      Average Number of Shares Outstanding:Basic
      shares
            
            
            2,608,317
            
            
            
            2,597,425Diluted
      shares
            
            
            2,610,362
            
            
            
            2,597,425





There
were 128,055 options excluded from the computation of diluted earnings per share
for the three-month period ended March 31, 2010 and 173,999 excluded from the
computation of diluted earnings per share for the three-month period ended March
31, 2009, respectively, as they were identified as anti-dilutive.





9.
            COMPREHENSIVE
      INCOME





Comprehensive
income includes net income and other comprehensive income.  The
Company's only source of other comprehensive income is derived from unrealized
gains and losses on investment securities available for sale.  The
Company's comprehensive income was as follows:





For
      the Three MonthsEndedMarch
      31,
                2010
              
              
              March
      31,
                2009Net
      income
              
              $
              250,515
              
              
              $
              346,850Other
      comprehensive income:Unrealized
      gain on available-for-sale investment securities, net of
    tax
              
              
              97,790
              
              
              
              61,126Total
      other comprehensive income
              
              $
              348,305
              
              
              $
              407,976


14
 Index


10.
                INCOME
      TAXES


The
Company files its income taxes on a consolidated basis with its
subsidiaries.  The allocation of income tax expense 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 amounts 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 condensed consolidated balance sheet, net deferred tax assets are included
in accrued interest receivable and other assets.





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 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 condensed consolidated balance sheet along with any associated
interest and penalties that would be payable to the taxing authorities upon
examination. The Company recognizes accrued interest and penalties, if any,
related to unrecognized tax benefits as a component of tax expense in the
condensed consolidated statements of income. There have been no significant
changes to unrecognized tax benefits or accrued interest and penalties for the
three months ended March 31, 2010.





11.
            STOCK
      REPURCHASE





In 2007,
the Board of Directors approved a plan to incrementally repurchase up to an
aggregate of $3,000,000 of the Company’s common stock.  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 program commenced in November of 2007 and, based
on the October 2008 and October 2009 plan extensions approved by the Board of
Directors, will continue until its expiration on November 30, 2010, subject to
earlier termination at the Company’s discretion.  Beginning January
30, 2009, the Company was restricted from repurchasing its common stock due to
its issuance of preferred stock to the United States Department of the Treasury
in conjunction with the Company’s participation in the Capital Purchase Program
(See Note 12).  There were no shares repurchased during the three
month period ended March 31, 2010.  Since the plan adoption the
Company has repurchased 80,472 shares for a total cost of $1,185,927 at an
average price of $14.74 per share.




15
 Index




12.
              PREFERRED
      STOCK










The
Series B Preferred Stock qualifies as Tier 1 capital and pays cumulative
dividends quarterly at a rate of 5% per annum for the first five years, and 9%
per annum thereafter.  The Warrant Preferred pays cumulative dividends
at a rate of 9% per annum until redemption.  The terms governing the
Series B Preferred Stock and the Series C Preferred Stock provide that either
series may be redeemed by the Company after three years; however, the Warrant
Preferred may not be redeemed until after all the Series B Preferred stock has
been redeemed, and prior to the end of three years, the Series B Preferred stock
and the Warrant Preferred may be redeemed by the Company only with proceeds from
the sale of Qualifying equity securities of the Company (a” Qualified Equity
Offering”).  The American Recovery and Reinvestment Act of 2009, which
was enacted on February 17, 2009 permits the Company to redeem the Series B
Preferred stock and the Warrant Preferred without a Qualified Equity Offering,
subject to the Company’s consultation with the Board of Governors of the Federal
Reserve System.





The
Series B Preferred Stock and the Warrant Preferred were issued in a private
placement exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, as amended.  The Company has agreed to register the
Series B Preferred Stock and the Warrant Preferred as soon as practicable (but
not later than 30 days) after demand by the Untied States Department of the
Treasury.  Neither the Series B Preferred Stock nor the Warrant
Preferred will be subject to any contractual restrictions on transfer, except
that Treasury and its transferees shall not effect any transfer of the Preferred
which would require the Company to become subject to the periodic reporting
requirements of Section 13 or 15(d) of the Exchange Act.





In the
Purchase Agreement, the Company agreed that, until such time as Treasury ceases
to own any debt or equity securities of the Company acquired pursuant to the
Purchase Agreement, the Company will take all necessary action to ensure that
its benefit plans with respect to its senior executive officers comply with
Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the “EESA”)
as implemented by any guidance or regulation under the EESA that has been issued
and is in effect as of the date of issuance of the Series B Preferred Stock and
the Warrant, and has agreed to not adopt any benefit plans with respect to, or
which covers, its senior executive officers that do not comply with the EESA,
and the applicable executives have consented to the
foregoing.  Furthermore, the Purchase Agreement allows Treasury to
unilaterally amend the terms of the agreement.





With
respect to dividends on the Company’s common stock, Treasury’s consent shall be
required for any increase in common dividends per share until the third
anniversary of the date of its investment unless prior to such third anniversary
the Series B Preferred Stock and the Warrant Preferred is redeemed in whole or
the Treasury has transferred all of the Senior Preferred Series B Preferred
Stock and Warrant Preferred to third parties.  After the third
anniversary and prior to the tenth anniversary, the Treasury’s consent shall be
required for any increase in aggregate common dividends per share that no
increase in common dividends may be made as a result of any dividend paid in
common shares, any stock split or similar transaction.  From and after
the tenth anniversary, the Company shall be prohibited from paying common
dividends or repurchasing any equity securities or trust preferred securities
until all equity securities held by the Treasury are redeemed in whole of the
Treasury has transferred all of such equity securities to third
parties.


16
 Index




13.
              FAIR
      VALUE MEASUREMENT


The
following table presents information about the Company’s assets and liabilities
measured at fair value on a recurring and non-recurring basis as of March 31,
2010.  The table also indicates the fair value hierarchy of the
valuation techniques utilized by the Company to determine such fair value. In
general, fair values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or liabilities that the
Company has the ability to access. Fair values determined by Level 2 inputs
utilize inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly.  Level 2
inputs include quoted prices for similar assets and liabilities in active
markets, and inputs other than quoted prices that are observable for the asset
or liability, such as interest rates and yield curves that are observable at
commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset
or liability, and includes situations where there is little, if any, market
activity for the asset or liability. In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy.
In such cases, the level in the fair value hierarchy within which the fair value
measurement in its entirety falls has been determined based on the lowest level
input that is significant to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to
the asset or liability.





Assets
and liabilities measured at fair value on a recurring basis as of March 31, 2010
and December 31, 2009 are summarized below:




Fair
      Value Measurements UsingFair
      Value
                
                Quoted
      Prices in
                  Active
      Markets for
                  Identical
      Assets
                  (Level
      1)
                
                Other
                  Observable
                  Inputs
                  (Level
      2)
                
                Significant
                  Unobservable
                  Inputs
                  (Level
      3)Assets:Available-for-sale
      investment securities at:March
      31, 2010
                
                $
                41,142,000
                
                
                $
                —
                
                
                $
                41,142,000
                
                
                $
                —December
      31, 2009
                
                $
                42,566,000
                
                
                $
                —
                
                
                $
                42,566,000
                
                
                $
                —


The fair
value of investment securities available for sale equals quoted market price, if
available.  If quoted market prices for identical securities are not
available then fair value are estimated by independent sources using pricing
models and/or quoted prices of investment securities with similar
characteristics or discounted cash flows.  The Company has categorized
all of its investment securities available-for-sale as level 2, since U.S.
Agency MBS are mainly priced in this latter manner.  Changes in fair
market value are recorded in other comprehensive income.





The
Company had no liabilities measured at fair value as of March 31, 2010 or
December 31, 2009.






17
 Index




Assets
and liabilities measured at fair value on a non-recurring basis as of March 31,
2010 and December 31, 2009  are summarized below:




Fair
      Value Measurements UsingFair
      Value
              
              
              Quoted
      Prices in
                Active
      Markets for
                Identical
      Assets
                (Level
      1)
              
              
              Other
                Observable
                Inputs
                (Level
      2)
              
              
              Significant
                Unobservable
                Inputs
                (Level
      3)
              
              Total
                lossesAssets:Impaired
      loans at:March
      31, 2010
              
              $
              7,995,000
              
              
              $
              —
              
              
              $
              599,000
              
              
              $
              7,396,000
              
              
              $
              (89,000
              )December
      31, 2009
              
              $
              7,784,000
              
              
              $
              —
              
              
              $
              —
              
              
              $
              7,784,000
              
              
              $
              (2,227,000
              )





13.
            FAIR
      VALUE MEASUREMENT (Continued)





Impaired
loans (loans which are not expected to repay all principal and interest amounts
due in accordance with the original contractual terms) are measured at an
observable market price (if available) or at the fair value of the loan’s
collateral (if collateral dependent). Fair value of the loan’s collateral is
determined by appraisals or independent valuation which is then adjusted for the
estimated costs related to liquidation of the
collateral.  Management’s ongoing review of appraisal information may
also result in additional discounts or adjustments to the valuation based upon
more recent market sales activity or more current appraisal information derived
form properties of similar type and/or locale. A significant portion of the
Bank’s impaired loans are measured using the estimated fair market value of the
collateral less the estimated costs to sell.  Therefore, the Company
has categorized its impaired loans as level 2 and level 3.  Any fair
value adjustments are recorded in the period incurred as provision for loan
losses expense on the Condensed Consolidated Statement of
Income.  Impaired loans, had outstanding principal balances of
$10,737,000 and $10,436,000 with a valuation allowance of $2,741,000 and
$2,652,000 at March 31, 2010 and December 31, 2009, respectively.





The
Company did not change the methodology used to determine fair value for any
financial instruments during 2010.  Accordingly, for any given class
of financial instruments, the Company transferred $599,000 between level 2 and
level 3 during the three month period ended March 31, 2010.  There
were no transfers between Level 1, Level 2, or Level 3 fair value measurements
during the three months ended December 31, 2009.





Fair
Value of Financial Instruments





The
estimated fair values of the Company’s financial instruments are as
follows:





March 31, 2010
            
            
            December 31, 2009Carrying
            
            
            Fair
            
            
            Carrying
            
            
            FairAmount
            
            
            Value
            
            
            Amount
            
            
            ValueFinancial
      assets:Cash
      and cash equivalents
            
            $
            44,089,927
            
            
            $
            44,089,927
            
            
            $
            33,077,786
            
            
            $
            39,077,786Available-for-sale
      investment securities
            
            
            41,142,000
            
            
            
            41,142,000
            
            
            
            42,566,000
            
            
            
            42,566,000Loans,
      net
            
            
            235,117,869
            
            
            
            233,084,165
            
            
            
            234,822,963
            
            
            
            232,495,909Cash
      surrender value of lifeinsurance
      policies
            
            
            6,417,248
            
            
            
            6,417,248
            
            
            
            6,354,871
            
            
            
            6,354,871Accrued
      interest receivable
            
            
            1,054,159
            
            
            
            1,054,159
            
            
            
            1,241,412
            
            
            
            1,241,412FHLB
      stock
            
            
            1,119,000
            
            
            
            1,119,000
            
            
            
            1,119,000
            
            
            
            1,119,000Financial
      liabilities:Deposits
            
            $
            298,335,509
            
            
            $
            297,797,877
            
            
            $
            294,282,143
            
            
            $
            294,833,469Long-term
      debt
            
            
            3,604,683
            
            
            
            3,941,740
            
            
            
            3,661,999
            
            
            
            2,974,335Junior
      subordinated deferrable interest debentures
            
            
            3,093,000
            
            
            
            959,000
            
            
            
            3,093,000
            
            
            
            959,000Accrued
      interest payable
            
            
            130,147
            
            
            
            130,147
            
            
            
            139,988
            
            
            
            139,988


18
 Index




14.
              RECENT
      ACCOUNTING DEVELOPMENTS
 
 Accounting
for Transfers of Financial Assets


In June
2009, the FASB issued ASC Topic 860 (previously SFAS No. 166), Accounting for
Transfers of Financial Assets, an amendment of SFAS No. 140.  This
standard amends the derecognition accounting and disclosure guidance included in
previously issued standards.  This standard eliminates the exemption
from consolidation for qualifying special-purpose entities (SPEs) and also
requires a transferor to evaluate all existing qualifying SPEs to determine
whether they must be consolidated in accordance with ASC Topic
810.  This standard also provides more stringent requirements for
derecognition of a portion of a financial asset and establishes new conditions
for reporting the transfer of a portion of a financial asset as a
sale.  This standard is effective as of the beginning of the first
annual reporting period that begins after November 15, 2009. Management adopted
the provisions of this standard on January 1, 2010 without a material impact on
the Company’s financial condition or results of operations.





Transfers
and Servicing





In
December 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-16,
Transfers and Servicing (ASC Topic 860): Accounting for Transfers of Financial
Assets, which updates the derecognition guidance in ASC Topic 860 for previously
issued SFAS No. 166.  This update reflects the Board's response to
issues entities have encountered when applying ASC 860, including: (1) requires
that all arrangements made in connection with a transfer of financial assets be
considered in the derecognition analysis, (2) clarifies when a transferred asset
is considered legally isolated from the transferor, (3) modifies the
requirements related to a transferee's ability to freely pledge or exchange
transferred financial assets, and (4) provides guidance on when a portion of a
financial asset can be derecognized.  This update is effective for
financial asset transfers occurring after the beginning of an entity's first
fiscal year that begins after November 15, 2009. Management adopted the
provisions of this standard on January 1, 2010 without a material impact on the
Company’s financial condition or results of operations.





Fair
Value Measurements and Disclosures





In
January 2010, the Financial Accounting Standards Board issued Accounting
Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value
Measurements,” which added disclosure requirements about transfers in and out of
Levels 1 and 2, clarified existing fair value disclosure requirements about the
appropriate level of disaggregation, and clarified that a description of
valuation techniques and inputs used to measure fair value was required for
recurring and nonrecurring Level 2 and 3 fair value measurements. The Company
adopted these provisions of the ASU in preparing the Consolidated Financial
Statements for the period ended March 31, 2010. The adoption of these provisions
of this ASU, which was subsequently codified into Accounting Standards
Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected
the disclosure requirements for fair value measurements and as a result had no
impact on the Company’s statements of income and condition.





This ASU
also requires that Level 3 activity about purchases, sales, issuances, and
settlements be presented on a gross basis rather than as a net number as
currently permitted. This provision of the ASU is effective for the Company’s
reporting period ending March 31, 2011. As this provision amends only the
disclosure requirements for fair value measurements, the adoption will have no
impact on the Company’s statements of income and condition.


19
 Index


ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Certain
matters discussed in this report constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995.  All statements contained herein that are not historical facts,
such as statements regarding the company’s current business strategy and the
Company’s plans for future development and operations, are based upon current
expectations.  These statements are forward-looking in nature and
involve a number of risks and uncertainties.  Such risks and
uncertainties include, but are not limited to (1) significant increases in
competitive pressure in the banking industry; (2) the impact of changes in
interest rates, a decline in economic conditions at the international, national
or local level on the Company’s results of operations, the Company’s ability to
continue its internal growth at historical rates, the Company’s ability to
maintain its net interest margins, and the quality of the Company’s earning
assets; (3) changes in the regulatory environment; (4) fluctuations in the real
estate market; (5) changes in business conditions and inflation; (6) changes in
securities markets; and (7) risks associated with acquisitions, relating to
difficulty in integrating combined operations and related negative impact on
earnings, and incurrence of substantial expenses. Therefore, the information set
forth in such forward-looking statements should be carefully considered when
evaluation the business prospects of the Company.





When the
Company uses in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q.  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.  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.





The
Securities and Exchange Commission (SEC) maintains a web site which contains
reports, proxy statements, and other information pertaining to registrants that
file electronically with the SEC, including the Company.  The internet
address is: www.sec.gov.  In addition, our periodic and current
reports are available free of charge on our website at
www.valleybusinessbank.net as soon as reasonably practicable after such material
is electronically filed with, or furnished to, the SEC.


20
 Index


The
following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and related notes appearing
in  Item 1, Financial Statements, in this Quarterly Report on Form
10-Q and the consolidated financial statements and notes thereto included in
Valley Commerce Bancorp’s Annual Report filed on form 10-K for the year ended
December 31, 2009.





Introduction





Overview





Valley
Commerce Bancorp (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 financial services through its banking
subsidiary in its primary market areas of Tulare and Fresno Counties in
California. The Company derives its income primarily from interest and fees
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 interest paid on
deposits and borrowings and general operating expenses, consisting primarily of
salaries and employee benefits and, to a lesser extent, occupancy and equipment,
data processing, FDIC insurance premiums, and operations.  The Company
does not currently conduct any operations other than through the
Bank.





The
Company earned net income of $251,000, or $0.06 per diluted share for the three
months ended March 31, 2010, compared to $347,000 or $0.10 per diluted share for
the three months ended March 31, 2009.  The annualized return on
average assets was 0.30% for the three months ended March 31, 2010 and 0.45% for
the same 2009 period.  The annualized return on average common
shareholders’ equity for the three months ended March 31, 2010 and 2009 was
2.74% and 3.93%, respectively.  Net income for the three months ended
March 31, 2010 decreased from the comparable period in the prior year due to a
$200,000 increase in the provision for loan losses and a $107,000 increase in
non-interest expense.  These were offset by a $170,000 increase in net
interest income and a $60,000 decrease in the provision for income
taxes.  At March 31, 2010, the Company’s total assets were $344.6
million, representing an increase of $4.5 million or 1% compared to December 31,
2009, and an increase of $34.4 million or 11% compared to March 31,
2009.  Total loans, net of the allowance for loan losses, were $235.1
million at March 31, 2010, representing an increase of $295,000 or 0.1% compared
to December 31, 2009, and an increase of $4.7 million or 2% compared to March
31, 2009.  Loan volume growth in both periods was primarily
attributable to new commercial mortgage loans.





Total
deposits were $298.3 million at March 31, 2010, representing an increase of $4.1
million or 1% compared to December 31, 2009, and an increase of $37.4 million or
14% compared to March 31, 2009.  The amount of brokered time deposits
at March 31, 2010 and December 31, 2009 remained at $17.8
million.  The Company’s long term growth strategy is based on
acquiring core deposits in its local market rather than relying heavily on
brokered time deposits or other wholesale funding sources.  The
Company is presently utilizing brokered deposits to lessen any impact that would
be caused by a rising interest rate scenario on its net interest
margin.





At March
31, 2010, the Company’s Leverage Ratio was 11.7% while its Tier 1 Risk-Based
Capital Ratio and Total Risk-Based Capital Ratio were 15.1% and 16.4%,
respectively.  At December 31, 2009, the Company’s Leverage Ratio was
11.4% while its Tier 1 Risk-Based Capital Ratio and Total Risk-Based Capital
Ratio were 14.8% and 16.0%, respectively.  The Leverage, Tier 1
Risk-Based Capital Ratio and Total Risk-Based Capital Ratios at March 31, 2009
were 13.2%, 15.5% and 16.7%, respectively.  The Company’s capital
ratios increased between March 31, 2010 and the December 31, 2009 as a result of
net income earned during the period.  The Company’s capital ratios
decreased between March 31, 2010 and March 31, 2009 due to a combination of
asset growth and substantial loan loss provisioning recorded during the fourth
quarter of 2009.


21
 Index


Results
of Operations for the Three Months Ended March 31, 2010





Net
Interest Income





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





Average balances and
weighted average yields and costs
 
 Three
      Months ended March 31,2010
              
              
              2009Interest
              
              
              Average
              
              
              
              
              
              Interest
              
              
              AverageAverage
              
              
              income/
              
              
              yield/
              
              
              Average
              
              
              income/
              
              
              yield/(dollars
      in thousands)
              
              Balance
              
              
              Expense
              
              
              Cost
              
              
              Balance
              
              
              Expense
              
              
              CostASSETSDue
      from banks
              
              $
              23,699
              
              
              $
              14
              
              
              
              0.24
              %
              
              $
              -
              
              
              $
              -
              
              
              
              -Federal
      funds sold
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              12,990
              
              
              
              9
              
              
              
              0.28
              %Available-for-sale
      investment securities:Taxable
              
              
              26,555
              
              
              
              183
              
              
              
              2.79
              %
              
              
              23,983
              
              
              
              306
              
              
              
              5.17
              %Exempt
      from Federal income taxes (1)
              
              
              15,341
              
              
              
              156
              
              
              
              6.25
              %
              
              
              19,512
              
              
              
              197
              
              
              
              6.20
              %Total
      securities (1)
              
              
              41,896
              
              
              
              339
              
              
              
              4.06
              %
              
              
              43,495
              
              
              
              503
              
              
              
              5.64
              %Loans
      (2) (3)
              
              
              240,645
              
              
              
              3,618
              
              
              
              6.10
              %
              
              
              232,393
              
              
              
              3,711
              
              
              
              6.48
              %Total
      interest-earning assets (1)
              
              
              306,240
              
              
              
              3,971
              
              
              
              5.37
              %
              
              
              288,878
              
              
              
              4,223
              
              
              
              6.07
              %Noninterest-earning
      assets, net of allowance for loan losses
              
              
              36,487
              
              
              
              
              
              
              
              
              
              
              
              20,999Total
      assets
              
              $
              342,727
              
              
              
              
              
              
              
              
              
              
              $
              309,877LIABILITIES
      AND SHAREHOLDERS’ EQUITYDeposits:Other
      interest bearing
              
              $
              124,203
              
              
              $
              210
              
              
              
              0.69
              %
              
              $
              99,067
              
              
              $
              355
              
              
              
              1.45
              %Time
      deposits less than $100,000
              
              
              25,498
              
              
              
              103
              
              
              
              1.64
              %
              
              
              25,375
              
              
              
              177
              
              
              
              2.83
              %Time
      deposits $100,000 or more
              
              
              71,427
              
              
              
              349
              
              
              
              1.98
              %
              
              
              66,117
              
              
              
              498
              
              
              
              3.05
              %Total
      interest-bearing deposits
              
              
              221,128
              
              
              
              662
              
              
              
              1.21
              %
              
              
              190,559
              
              
              
              1,030
              
              
              
              2.19
              %Short-term
      debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,244
              
              
              
              25
              
              
              
              2.39
              %Long-term
      debt
              
              
              3,629
              
              
              
              46
              
              
              
              5.14
              %
              
              
              5,152
              
              
              
              66
              
              
              
              5.20
              %Junior
      subordinated deferrable interest debentures
              
              
              3,093
              
              
              
              27
              
              
              
              3.54
              %
              
              
              3,093
              
              
              
              36
              
              
              
              4.72
              %Total
      interest-bearing liabilities
              
              
              227,850
              
              
              
              735
              
              
              
              1.31
              %
              
              
              203,048
              
              
              
              1,157
              
              
              
              2.31
              %Noninterest
      bearing deposits
              
              
              75,319
              
              
              
              
              
              
              
              
              
              
              
              68,873Other
      liabilities
              
              
              2,415
              
              
              
              
              
              
              
              
              
              
              
              2,038Total
      liabilities
              
              
              305,584
              
              
              
              
              
              
              
              
              
              
              
              273,959Shareholders’
      equity
              
              
              37,143
              
              
              
              
              
              
              
              
              
              
              
              35,918Total
      liabilities and shareholders’ equity
              
              $
              342,727
              
              
              
              
              
              
              
              
              
              
              $
              309,877Net
      interest income and margin (1)
              
              
              
              
              
              $
              3,236
              
              
              
              4.39
              %
              
              
              
              
              
              $
              3,066
              
              
              
              4.41
              %





(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.


(3)
            Interest
      income on loans includes amortized loan fees, net of costs, of $138 and
      $28 for 2010 and 2009,
respectively.


22
 Index


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 three-month
periods ended March 31, 2010 and 2009.




Changes in net interest
income due to changes in volumes and rates





Three
      months ended March 31, 2010
                vs.
      March 31, 2009.Increase
      (decrease) due to change in:Average
              
              
              AverageVolume
              
              
              Rate
      (1)
              
              
              Total(In
      thousands)Increase
      (decrease) in interest income:Due
      from banks
              
              $
              -
              
              
              $
              14
              
              
              $
              14Federal
      funds sold
              
              
              (9
              )
              
              
              -
              
              
              
              (9
              )Investment
      securitiesTaxable
              
              
              33
              
              
              
              (156
              )
              
              
              (123
              )Exempt
      from Federal income taxes
              
              
              (64
              )
              
              
              23
              
              
              
              (41
              )Total
      securities
              
              
              (31
              )
              
              
              (133
              )
              
              
              (164
              )Loans
              
              
              132
              
              
              
              (225
              )
              
              
              (93
              )Total
      interest income
              
              
              92
              
              
              
              (344
              )
              
              
              (252
              )(Decrease)
      increase in interest expense:Other
      interest-bearing deposits
              
              
              90
              
              
              
              (235
              )
              
              
              (145
              )Time
      deposits less than $100,000
              
              
              1
              
              
              
              (75
              )
              
              
              (74
              )Time
      deposits $100,000 or more
              
              
              40
              
              
              
              (189
              )
              
              
              (149
              )Total
      interest-bearing deposits
              
              
              131
              
              
              
              (499
              )
              
              
              (368
              )Short-term
      debt
              
              
              (25
              )
              
              
              -
              
              
              
              (25
              )Long-term
      debt
              
              
              (20
              )
              
              
              -
              
              
              
              (20
              )Junior
      subordinated deferrable interest debentures
              
              
              -
              
              
              
              (9
              )
              
              
              (9
              )Total
      interest expense
              
              
              86
              
              
              
              (508
              )
              
              
              (422
              )Increase
      in net interest income
              
              $
              6
              
              
              $
              164
              
              
              $
              170





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





Net
interest income before the provision for loan losses was $3.2 million for the
three-month period ended March 31, 2010 compared to $3.1 million for the same
period of 2009, an increase of $170,000 or 6%.  Growth in average
interest-earning assets and interest-bearing liabilities caused the Company’s
net interest income to increase by $6,000, and changes in interest rates on
these same accounts caused net interest income to increase by
$164,000.





The
increase in net interest income was caused by reduced cost of funds and
increases in average loan volume offset by declining yields on
loans.  Despite a $8.3 million or 4% increase in average loans, the
Company’s interest income from loans decreased by $93,000 as the average yield
decreased from 6.48% in the 2009 period to 6.10% in the 2010 period, a decrease
of 38 basis points. The decrease in average loan yield was due to normal
repricing.  At March 31, 2010, approximately 68% of the Company’s loan
portfolio was comprised of variable rate loans of which 45% were at their floor
rate.





Total
interest income for the three-month periods ended March 31, 2010 and 2009 was
$4.0 million and $4.2 million, respectively, a decrease of $252,000 or 6% which
resulted from falling interest rates and was only partially offset by increases
in the average balance of loans.





The
average rate paid on interest-bearing liabilities was 1.31% in the 2010 period
compared to 2.31% in the 2009 period, a reduction of 100 basis
points.  The decrease in the average rate paid on deposits was due to
normal repricing and favorably priced deposit growth.  Average total
interest-bearing liabilities in the 2010 period increased by $24.8 million or
12% compared to the 2009 period.  This included increases in average
other interest bearing deposits of $25.1 million or 25%, and $5.4 million or 6%
in average time deposits and a $5.8 million or 61% decrease in the Company’s
combined short-term and long-term debt.


23
 Index


The
Company’s net interest margin on a taxable equivalent basis decreased 2 basis
points from 4.41% to 4.39% during the three month period ended March 31, 2010
compared to the same period in 2009.  The stability of the Company’s
net interest margin was partly attributable to the Federal Reserve Bank not
changing interest rates during the period April 1, 2009 to March 31,
2010.  In addition, management’s efforts to mitigate the impact of
loan and deposit repricings following a period of falling interest rates
contributed to the stability.  These efforts included utilizing rate
floors on variable priced loans and aggressively lowering deposit
rates.





Provision
for Loan Losses





The
provision for loan losses, which is included in operations to support
management’s estimate of 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.  A $600,000 loan loss provision was
recorded during the three months ended March 31, 2010 compared to a $400,000
provision for the three-month period ended March 31, 2009.  Management
determined the provision for loan losses for the period ended March 31, 2010
after careful consideration of current economic conditions in the Bank’s primary
markets and changes in the volume of impaired loans.  See the section
below titled “Allowance for Loan Losses.”





Non-Interest
Income





Non-interest
income for the three-month periods ended March 31, 2010 and 2009 totaled
$296,000 and $317,000, respectively, a decrease of $21,000 or 7%.  The
components of non-interest income during each period were as
follows:




Non-interest
income





Three
      Months ended
              March
      31,(in
      thousands)
            
            2010
            
            
            2009
            
            
            Increase
      (Decrease)Service
      charges
            
            $
            185
            
            
            $
            178
            
            
            $
            7Gain
      on sale of available-for-sale investment securities
            
            
            -
            
            
            
            4
            
            
            
            (4
            )Mortgage
      loan brokerage fees
            
            
            6
            
            
            
            13
            
            
            
            (7
            )Earnings
      on cash surrender value of life insurance policies
            
            
            67
            
            
            
            75
            
            
            
            (8
            )Other
            
            
            38
            
            
            
            47
            
            
            
            (9
            )Total
      non-interest income
            
            $
            296
            
            
            $
            317
            
            
            $
            (21
            )





Service
charges increased by $7,000 due to an increase in the volume of accounts subject
to analysis charges.  Mortgage loan brokerage fees decreased by $7,000
due to falling real estate values that hindered financing
opportunities.





Non-Interest
Expense





For the
quarter ended March 31, 2010, non-interest expense totaled $2.6 million, an
increase of $107,000 or 4.2% from the $2.5 million recorded during the first
quarter of 2009.  The increase resulted primarily from a $74,000 or
43.5% decrease in deferred loan origination costs resulting from a less active
lending environment.  Other employee-related costs increased by
$44,000 or 3.0% The FTE increased from 77.0 at March 31, 2009 to 79.6 at March
31,2010 due to the hire of senior officers.  In addition, the $30,000
increase in other non-interest expense resulted from a $46,000 or 22% increase
in FDIC deposit insurance due to higher deposit volume.  These
increases were offset by a $40,000 or 10.5% decrease in occupancy and equipment
costs and a $32,000 or 26% decrease in operations costs that were made possible
from the relocation of the Visalia branch and Administrative offices from leased
facilities to a single bank-owned facility.


24
 Index


The
following table describes the components of non-interest expense for the
three-month periods ended March 31, 2010 and 2009:





Non-interest
expense




Three
      Months ended
              March
      31,(in
      thousands)
            
            2010
            
            
            2009
            
            
            Increase
      (Decrease)Salaries
      and employee benefits
            
            $
            1,404
            
            
            $
            1,287
            
            
            $
            117Occupancy
      and equipment
            
            
            340
            
            
            
            381
            
            
            
            (41
            )Assessment
      and insurance
            
            
            253
            
            
            
            207
            
            
            
            46Data
      processing
            
            
            163
            
            
            
            136
            
            
            
            27Professional
      and legal
            
            
            129
            
            
            
            117
            
            
            
            12Operations
            
            
            89
            
            
            
            121
            
            
            
            (32
            )Advertising
      and business development
            
            
            56
            
            
            
            56
            
            
            
            -Telephone
      and postal
            
            
            52
            
            
            
            53
            
            
            
            (1
            )Supplies
            
            
            48
            
            
            
            40
            
            
            
            8Other
      expenses
            
            
            92
            
            
            
            121
            
            
            
            (29
            )Total
      non-interest expense
            
            $
            2,626
            
            
            $
            2,519
            
            
            $
            107





Provision
for Income Taxes





The
provision for income taxes for the three-month periods ended March 31, 2010 and
2009 was $56,000 and $116,000, respectively.  The effective tax rates
for these periods were 18.3%, and 25.1%, respectively. The decrease in effective
tax rate was primarily due to disproportionate changes in taxable revenues and
revenues from tax exempt sources.





Financial
Condition





Fair
Value





The
Company determines the fair values of financial instruments according to the
guidance for fair value measurements and related disclosures.  The
guidance establishes a hierarchical disclosure framework associated with the
level of observable pricing scenarios utilized in measuring financial
instruments at fair value.  The degree of judgment utilized in
measuring the fair value of financial instruments generally correlates to the
level of the observable pricing scenario.  Financial instruments with
readily available active quoted prices or for which fair value can be measured
from actively quoted prices generally will have a higher degree of observable
pricing and a lesser degree of judgment utilized in measuring fair
value.  Conversely, financial instruments rarely traded or not quoted
will generally have little or no observable pricing and a higher degree of
judgment utilized in measuring fair value.  Observable pricing
scenarios are impacted by a number of factors, including the type of financial
instruments, whether the financial instrument is new to the market and not yet
established and the characteristics specific to the transaction.  See
Note 13 of the Notes to
Condensed Consolidated Financial Statements for additional information
about the financial instruments carried at fair value.





Investment
Securities





All
existing investment securities are classified as available-for-sale
securities.  In classifying its investments as available-for-sale, the
Company reports securities at fair value, with unrealized gains and losses
excluded from earnings and reported, net of taxes, as accumulated other
comprehensive income or loss within shareholders’ equity.


25
 Index


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





Market value of securities
available for sale





March
      31, 2010(in
      thousands)
            
            AmortizedCost
            
            
            UnrealizedGain
            
            
            Unrealized
      Loss
            
            
            Fair
      ValueU.S.
      government agencies
            
            $
            2,910
            
            
            $
            88
            
            
            $
            -
            
            
            $
            2,998Mortgage-backed
      securities:Agency
      MBS
            
            
            8,201
            
            
            
            355
            
            
            
            -
            
            
            
            8,556Agency
      SBA
            
            
            14,517
            
            
            
            21
            
            
            
            (40
            )
            
            
            14,498Municipal
      securities
            
            
            15,342
            
            
            
            63
            
            
            
            (315
            )
            
            
            15,090Total
            
            $
            40,970
            
            
            $
            527
            
            
            $
            (355
            )
            
            $
            41,142




December
      31, 2009(in
      thousands)
            
            AmortizedCost
            
            
            UnrealizedGain
            
            
            Unrealized
      Loss
            
            
            Fair ValueU.S.
      government agencies
            
            $
            2,910
            
            
            $
            105
            
            
            $
            -
            
            
            $
            3,015Mortgage-backed
      securities:Agency
      MBS
            
            
            8,986
            
            
            
            295
            
            
            
            -
            
            
            
            9,281Agency
      SBA
            
            
            15,326
            
            
            
            27
            
            
            
            (46
            )
            
            
            15,307Municipal
      securities
            
            
            15,338
            
            
            
            49
            
            
            
            (424
            )
            
            
            14,963Total
            
            $
            42,560
            
            
            $
            476
            
            
            $
            (470
            )
            
            $
            42,566





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 considers declines in the fair value of
individual securities to be temporary.





At March
31, 2010, the Company had a total of 48 municipal securities with a remaining
principal balance of $15,342,000 and a net unrealized loss of approximately
$252,000. Twenty-five of these securities account for $315,000 of the gross
unrealized loss at March 31, 2010.  The Company continues to perform
extensive analyses on these securities as well as all municipal
securities.  By analyzing the specific securities, the Company has
determined that there is no other-than-temporary impairment and as such, is not
taking any action to write-down these securities.    As of
March 31, 2010, management does not believe the loss in market value of these
securities is other than temporary.  We have also evaluated the credit
ratings of our other investment securities and, based on our evaluation,
management does not consider any investments to be
other-than-temporarily-impaired.  However, no assurance can be made
that the credit quality of certain securities will not deteriorate in the future
which may necessitate future write-downs.


26
 Index


Loans





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:





(dollars
      in  thousands)
            
            March
      31, 2010
            
            
            December
      31, 2009Commercial
            
            $
            50,093
            
            
            
            21
            %
            
            $
            49,443
            
            
            
            21
            %Real
      estate – mortgage (1)
            
            
            163,648
            
            
            
            67
            
            
            
            162,772
            
            
            
            67Real
      estate – construction
            
            
            22,176
            
            
            
            9
            
            
            
            22,582
            
            
            
            9Agricultural
            
            
            4,498
            
            
            
            2
            
            
            
            4,727
            
            
            
            2Consumer
      and other
            
            
            1,911
            
            
            
            1
            
            
            
            1,937
            
            
            
            1Subtotal
            
            
            242,326
            
            
            
            100
            %
            
            
            241,461
            
            
            
            100
            %Deferred
      loan fees, net
            
            
            (386
            )
            
            
            
            
            
            
            (407
            )Allowance
      for loan losses
            
            
            (6,822
            )
            
            
            
            
            
            
            (6,231
            )Total
      loans, net
            
            $
            235,118
            
            
            
            
            
            
            $
            234,823





(1)
Consists primarily of commercial mortgage loans.





During
the three months ended March 31, 2010, loan growth occurred in the category of
real estate – mortgage and commercial.  The growth consisted primarily
of loans to local business owners, most of whom have other loan and deposit
relationships with the Company.





Nonperforming
Assets





There was
$7.2 million in nonperforming assets at March 31, 2010 which represented 2.96%
of total loans.  Non-performing assets at March 31, 2010 were
comprised of ten nonaccrual loans for which management has established specific
loss reserves of $1.4 million.  This compared to $7.4 million in
non-performing assets at December 31, 2009, which represented 3.05% of total
loans and $3.1 million in non-performing assets at March 31, 2009 which
represented 1.36% of total loans.  Non-performing assets decreased
during 2010 primarily due to principal and interest payments. There was $159,000
and $41,000 in foregone interest on nonaccrual loans for the three-months ended
March 31, 2010 and 2009, respectively and $435,000 for the twelve-month period
ended December 31, 2009.





The
Company had no real estate acquired through foreclosure at March 31, 2010 or
December 31, 2009.





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.  At March 31, 2010, the
recorded investment in loans that were considered to be impaired totaled $12.7
million.  The specific allowance for loan losses for impaired loans at
March 31, 2010 totaled $2.7 million.  At December 31, 2009, the
recorded investment in loans that were considered to be impaired totaled $12.5
million.  The specific allowance for loan losses for impaired loans at
December 31, 2009 totaled $2.7 million.


27
 Index


Allowance
for Loan Losses





The
Company maintains an allowance for loan losses to provide for estimated credit
losses that, as of the balance sheet date, it is probable the Company will
incur.  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 based on historical loss rates as adjusted for
current economic conditions, trends in the level and volume of past due and
classified loans, and other qualitative factors.





The
allowance for loan losses totaled $6.8 million or 2.82% of total loans at March
31, 2010.  This compared to $3.6 million or 1.56% of total loans at
March 31, 2009 and $6.2 million or 2.58% at December 31,
2009.   The Company recorded $8,000 in net charge-offs during the
three months ended March 31, 2010 compared to no charge-offs or recoveries
during the three months ended March 31, 2009 and net charge-offs of $4.0 million
during the twelve months ended December 31, 2009.





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





Changes in allowance for
loan losses





Three Months ended
            
            
            Three Months ended
            
            
            Year endedMarch 31, 2010
            
            
            March 31, 2009
            
            
            December 31, 2009(dollars
      in thousands)Balance,
      beginning
            
            $
            6,231
            
            
            $
            3,244
            
            
            $
            3,244Provision
      for  loan losses
            
            
            600
            
            
            
            400
            
            
            
            7,000Charge-offs-commercial
            
            
            -
            
            
            
            -
            
            
            
            (4,013
            )Charge-offs-other
            
            
            (12
            )
            
            
            -
            
            
            
            -Recoveries
            
            
            4
            
            
            
            -
            
            
            
            -Balance,
      ending
            
            $
            6,823
            
            
            $
            3,644
            
            
            $
            6,231Net
      charge-offs to average loans outstanding (annualized)
            
            
            0.01
            %
            
            
            0.00
            %
            
            
            1.67
            %Average
      loans outstanding
            
            $
            240,645
            
            
            $
            232,393
            
            
            $
            239,428Ending
      allowance to total loans outstanding
            
            
            2.82
            %
            
            
            1.56
            %
            
            
            2.58
            %


28
 Index


Premises
and Equipment




Bank
      Premises and EquipmentMarch
      31,
            
            
            December
      31,(in
      thousands)
            
            2010
            
            
            2009Furniture
      and Equipment
            
            $
            2,978
            
            
            $
            2,955Construction
      in progress
            
            
            -
            
            
            
            4,567Premises
            
            
            6,086
            
            
            
            2,095Leasehold
      Improvements
            
            
            207
            
            
            
            551Land
            
            
            1,462
            
            
            
            60610,733
            
            
            
            10,774Less
      accumulated depreciation
            
            
            (2,080
            )
            
            
            (2,732
            )Total
      Bank Premises and Equipment
            
            $
            8,653
            
            
            $
            8,042





Depreciation
and amortization expense included in occupancy and equipment expense totaled
$118,000 and $665,000 for the periods ended March 31, 2010 and December 31,
2009.





In
February 2009, the Company purchased an 18,700 square foot office building to
house both the Visalia Branch and Administrative Offices.  These two
offices were housed in leased facilities with a combined square footage of
13,672 prior to being relocated to the new building commencing in late
2009.  The move was completed in January 2010 with the relocation of
the Visalia branch.  Monthly rent expense of approximately $24,000 was
replaced with monthly depreciation of approximately $10,000 on the structure as
modified and remodeled for bank use.




Deposits




Total
deposits were $298.3 million at March 31, 2010, a $4.0 million or 1% increase
from the December 31, 2009 total of $294.3 million.  Interest-bearing
and time deposits increased by $4.0 million or 3% and $3.2 million or 3%,
respectively during the three month period ended March 31,
2010.  Brokered deposits included in time deposits remained at $17.8
million for March 31, 2010 and December 31, 2009.  The Company
presently utilizes brokered deposits to lessen any short-term negative impact
that would be caused by a rising rate scenario on its net interest
margin.  Most of the brokered deposits on the balance sheet at March
31, 2010 were obtained in mid-2009, had maturities ranging from 4 to 5 years and
were callable after 6 months.  Non-interest bearing deposits decreased
by $3.1 million or 4%, during the three-month period ended March 31, 2010, which
reflects the normal seasonal pattern of depositors.




Total
deposits at March 31, 2010 and December 31, 2009 are summarized in the following
table:




Deposit Portfolio


(dollars
      in thousands)
            
            March
      31, 2010
            
            
            December
      31, 2009Non-interest
      bearing
            
            $
            73,472
            
            
            
            25
            %
            
            $
            76,575
            
            
            
            26
            %Interest
      bearing
            
            
            125,353
            
            
            
            42
            %
            
            
            121,398
            
            
            
            41
            %Time
      deposits
            
            
            81,662
            
            
            
            27
            %
            
            
            78,460
            
            
            
            27
            %Brokered
      deposits
            
            
            17,849
            
            
            
            6
            %
            
            
            17,849
            
            
            
            6
            %Total
      Deposits
            
            $
            298,336
            
            
            
            100
            %
            
            $
            294,282
            
            
            
            100
            %





Federal
Home Loan Bank Borrowings





The
Company has utilized short-term borrowings from the FHLB to fund asset growth
during periods when market conditions for growing the deposit base were
unfavorable. At March 31, 2010, the Company had outstanding long-term fixed rate
debt from the Federal Home Loan Bank totaling $3.6 million and no short-term
debt and at December 31, 2009, had long-term fixed rate debt totaling $3.7
million and no short-term debt.  At March 31, 2010, the weighted
average rate on long-term borrowings was 5.14%. The remaining principal balance
of long-term debt is scheduled to mature at various dates ending in January
2012.







29
 Index




Junior Subordinated
Deferrable Interest Debentures





Junior
subordinated deferrable interest debentures were issued in connection with the
Company’s issuance of trust preferred securities for gross proceeds of $3.0
million in the second quarter of 2003.  The $3.1 million of junior
subordinated deferrable interest debentures at March 31, 2010 was unchanged from
December 31, 2009.  The rate of interest paid on these debentures was
3.54% at March 31, 2010 compared to 4.20% at December 31, 2009.





Capital
Resources





The
Company’s shareholders’ equity was $37.1 million at March 31, 2010 and $36.9
million at December 31, 2009.  The increase resulted from net income
of $251,000 for the three months ended March 31, 2010.





On
January 30, 2009, the Company entered into a Letter Agreement (the “Purchase
Agreement”) with the United States Department of the Treasury (“Treasury”),
pursuant to which the Company issued and sold (i) 7,700 shares of the Company’s
Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Series B
Preferred Stock”) and (ii) a warrant to purchase 385 shares of the Company’s
Fixed Rate Cumulative Perpetual Preferred Stock, Series C stock, (the “Warrant
Preferred” or “Series C Preferred Stock”) for a combined purchase price of $7.7
million.  The Treasury exercised the Warrant immediately upon
issuance.  The terms and conditions pertaining to the issuance of the
Series B and C Preferred Stock are described in Note 12 to the condensed
consolidated financial statements.





Management
considers capital needs as part of its strategic planning
process.  The ability to obtain capital is dependent upon the capital
markets as well as the Company’s performance.  Management regularly
evaluates sources of capital and the timing required to meet its strategic
objectives.










30
 Index


The following table
summarizes the Company’s risk-based capital ratios as of March 31, 2010 and
December 31, 2009:
  Capital and capital adequacy
ratios
 
 March 31, 2010
              
              
              December 31, 2009(dollars
      in thousands)
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioLeverage RatioValley
      Commerce Bancorp and Subsidiary
              
              $
              40,026
              
              
              
              11.7
              %
              
              $
              39,865
              
              
              
              11.4
              %Minimum
      regulatory requirement
              
              $
              13,422
              
              
              
              4.0
              %
              
              $
              13,982
              
              
              
              4.0
              %Valley
      Business Bank
              
              $
              39,818
              
              
              
              11.6
              %
              
              $
              39,845
              
              
              
              11.4
              %Minimum
      requirement for “Well- Capitalized” institution
              
              $
              16,777
              
              
              
              5.0
              %
              
              $
              17,472
              
              
              
              5.0
              %Minimum
      regulatory requirement
              
              $
              13,417
              
              
              
              4.0
              %
              
              $
              13,977
              
              
              
              4.0
              %Tier 1 Risk-Based Capital
    RatioValley
      Commerce Bancorp and Subsidiary
              
              $
              40,026
              
              
              
              15.1
              %
              
              $
              39,865
              
              
              
              14.8
              %Minimum
      regulatory requirement
              
              $
              10,591
              
              
              
              4.0
              %
              
              $
              10,804
              
              
              
              4.0
              %Valley
      Business Bank
              
              $
              39,818
              
              
              
              15.0
              %
              
              $
              39,845
              
              
              
              14.8
              %Minimum
      requirement for “Well- Capitalized” institution
              
              $
              15,883
              
              
              
              6.0
              %
              
              $
              16,201
              
              
              
              6.0
              %Minimum
      regulatory requirement
              
              $
              10,588
              
              
              
              4.0
              %
              
              $
              10,801
              
              
              
              4.0
              %Total Risk-Based Capital
    RatioValley
      Commerce Bancorp and Subsidiary
              
              $
              43,379
              
              
              
              16.4
              %
              
              $
              43,277
              
              
              
              16.0
              %Minimum
      regulatory requirement
              
              $
              21,183
              
              
              
              8.0
              %
              
              $
              21,608
              
              
              
              8.0
              %Valley
      Business Bank
              
              $
              43,171
              
              
              
              16.3
              %
              
              $
              43,256
              
              
              
              16.0
              %Minimum
      requirement for “Well- Capitalized” institution
              
              $
              26,471
              
              
              
              10.0
              %
              
              $
              27,002
              
              
              
              10.0
              %Minimum
      regulatory requirement
              
              $
              21,177
              
              
              
              8.0
              %
              
              $
              21,601
              
              
              
              8.0
              %





At March
31, 2010 and December 31, 2009, 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.





Trust
preferred securities are included in Tier 1 Capital subject to regulatory
limitation.  At March 31, 2010 and December 31, 2009, $3.0 million of
trust preferred securities was included in Tier 1 Capital.





The
Company commenced a stock repurchase program in November 2007.  The
program is subject to restrictions contained in the Securities Purchase
Agreement between the Company and the United States Treasury under which the
Company issued $7.7 million of preferred stock to the Treasury on January 30,
2009.  The Purchase Agreement contains provisions that restrict the
Company’s ability to repurchase Valley Commerce Bancorp common
stock.  Under the Purchase Agreement, prior to January 30, 2012,
unless the Company has redeemed the Preferred shares, or the Treasury has
transferred the Preferred shares to a third party, the consent of the Treasury
will be required for the Company to redeem purchase or acquire any shares of
Common Stock or other equity or capital securities, other than in connection
with benefit plans consistent with past practice and certain other circumstances
specified in the Purchase Agreement.





The
amount of preferred stock issued to the Treasury represents approximately 3% of
the Company’s risk adjusted assets and serves as Tier 1
capital.  Accordingly, the impact to the Company’s risk-based capital
ratios at March 31, 2010 is an increase of approximately 300 basis
points.


31
 Index


Liquidity





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.





The
Company has a successful history of establishing and retaining deposit
relationships with business customers and periodically utilizes collateralized
borrowing lines and wholesale funding resources to supplement local deposit
growth.  These include borrowing lines with FHLB, FRB, and
correspondent banks, and utilization of brokered time deposits.





ITEM 3 –
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.





ITEM 4 – CONTROLS AND PROCEDURES





(a)
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES





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





(b)
CHANGES IN INTERNAL CONTROLS





There was
no change in the Company’s internal control over financial reporting identified
in connection with the evaluation described in paragraph (a) above that occurred
during the Company’s last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.


32
 Index


PART
II – OTHER INFORMATION








ITEM 1 – LEGAL PROCEEDINGS





From time
to time, the Company is a party to claims and legal proceedings arising in the
ordinary course of business.  In the opinion of the Company’s
management, the amount of ultimate liability with respect to such proceedings
will not have a material adverse effect on the financial condition or results of
operations of the Company.




ITEM 1A – RISK FACTORS





In
addition to the other information set forth in this report, the factors
discussed in Part I, “Item 1A – Risk Factors” in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009 could materially affect its
business, financial condition or future results. The risks described in the
Company’s Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not currently known or currently deemed to be
immaterial also may materially adversely affect the Company’s business,
financial condition and/or operating results.




ITEM 2 – CHANGES IN SECURITIES AND USE OF PROCEEDS





None.





ITEM 3 – DEFAULTS UPON SENIOR SECURITIES





None.


33
 Index


ITEM 4 – (RESERVED)




ITEM 5 – OTHER INFORMATION





None.





ITEM 6 – EXHIBITS





An
Exhibit Index has been attached as part of this quarterly report and is
incorporated herein by reference.


34
 Index


SIGNATURES





In
accordance with the requirements of the Securities Exchange Act of 1934, the
Company caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.








VALLEY
      COMMERCE BANCORPDate:
      May 17, 2010
              By:
              /s/
      Donald A. GillesDonald
      A. GillesPresident
      and Chief Executive OfficerDate:
      May 17, 2010
              By:
              /s/Roy
      O. EstridgeRoy
      O. Estridge, Chief Financial
Officer


35
 Index


Exhibit Index








31.1
            Rule
      13a-14(a)/15d-14(a) Certification


31.2
            Rule
      13a-14(a)/15d-14(a) Certification


32.1
            Section
      1350 Certifications






36