UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-Q




(Mark
One)




x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30,
  2008





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.)200
      South Court 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                        ̈
            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 2,460,667 as of
August 12, 2008.







1





INDEX




PART I - FINANCIAL INFORMATION
            4ITEM 1 - FINANCIAL STATEMENTS
            4ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATONS
            13ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK
            28ITEM 4 – CONTROLS AND PROCEDURES
            28PART II - OTHER INFORMATION
            29ITEM 1 LEGAL PROCEEDINGS
            29ITEM 1A  RISK FACTORS
            29ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
            29ITEM 3 DEFAULTS UPON SENIOR SECURITIES
            29ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
            30ITEM 5 OTHER INFORMATION
            30ITEM 6 EXHIBITS
            30SIGNATURES
            31EXHIBIT INDEX
            32





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





PART1 – FINANCIAL INFORMATION


ITEM
1 – FINANCIAL STATEMENTS





VALLEY
COMMERCE BANCORP


CONDENSED
CONSOLIDATED BALANCE SHEET


(UNAUDITED)





June
      30,
              2008
            
            
            December
      31,
              2007AssetsCash
      and due from banks
            
            $
            11,634,305
            
            
            $
            9,297,346Federal
      funds sold
            
            
            23,605,000
            
            
            
            -Total
      cash and cash equivalents
            
            
            35,239,305
            
            
            
            9,297,346Available-for-sale
      investment securities, at fair value
            
            
            42,805,000
            
            
            
            56,615,000Loans,
      less allowance for loan losses of $2,565,288 at June 30, 2008 and
      $1,757,591 at December 31, 2007 (Note 3)
            
            
            215,985,317
            
            
            
            199,514,271Bank
      premises and equipment, net
            
            
            4,115,944
            
            
            
            3,037,063Cash
      surrender value of bank-owned life insurance
            
            
            6,310,270
            
            
            
            6,184,531Accrued
      interest receivable and other assets
            
            
            4,990,369
            
            
            
            4,432,665Total
      assets
            
            $
            309,446,205
            
            
            $
            279,080,876Liabilities and
      Shareholders’ EquityDeposits:Noninterest-bearing
            
            $
            69,209,893
            
            
            $
            66,992,568Interest-bearing
            
            
            192,791,446
            
            
            
            148,393,500Total
      deposits
            
            
            262,001,339
            
            
            
            215,386,068Accrued
      interest payable and other liabilities
            
            
            2,046,692
            
            
            
            1,778,548Short-term
      debt
            
            
            8,000,000
            
            
            
            21,804,000Long-term
      debt
            
            
            5,541,494
            
            
            
            8,146,049Junior
      subordinated deferrable interest debentures
            
            
            3,093,000
            
            
            
            3,093,000Total
      liabilities
            
            
            280,682,525
            
            
            
            250,207,665Commitments
      and contingencies (Note 4)Shareholders’
      equity (Note 5 and 9):Serial
      preferred stock - no par value; 10,000,000 shares authorized, none
      issuedCommon
      stock - no par value; 30,000,000 shares authorized; issued and outstanding
      – 2,460,667 shares at June 30, 2008 and 2,516,257 shares at December 31,
      2007
            
            
            24,434,218
            
            
            
            23,511,066Retained
      earnings
            
            
            4,582,666
            
            
            
            5,423,324Accumulated
      other comprehensive loss, net of taxes (Note 7)
            
            
            (253,204
            )
            
            
            (61,179
            )Total
      shareholders’ equity
            
            
            28,763,680
            
            
            
            28,873,211Total
      liabilities and shareholders’ equity
            
            $
            309,446,205
            
            
            $
            279,080,876




See notes
to unaudited condensed consolidated financial statements.


4
 Index





VALLEY COMMERCE
BANCORP


CONDENSED
CONSOLIDATED STATEMENT OF INCOME


(UNAUDITED)





For
      the Three Months
            
            
            For
      the Six MonthsEnded
      June 30,
            
            
            Ended
      June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Interest
      Income:Interest
      and fees on loans
            
            $
            3,897,251
            
            
            $
            4,066,212
            
            
            $
            7,744,467
            
            
            $
            7,906,936Interest
      on investment securities:Taxable
            
            
            311,273
            
            
            
            357,855
            
            
            
            716,938
            
            
            
            782,698Exempt
      from Federal income taxes
            
            
            197,981
            
            
            
            190,705
            
            
            
            393,533
            
            
            
            381,240Interest
      on Federal funds sold
            
            
            47,507
            
            
            
            1,667
            
            
            
            48,100
            
            
            
            2,001Total
      interest income
            
            
            4,454,012
            
            
            
            4,616,439
            
            
            
            8,903,038
            
            
            
            9,072,875Interest
      Expense:Interest
      on deposits
            
            
            1,176,589
            
            
            
            1,521,781
            
            
            
            2,382,965
            
            
            
            2,949,686Interest
      on short-term debt
            
            
            56,599
            
            
            
            176,073
            
            
            
            193,726
            
            
            
            353,450Interest
      on long-term debt
            
            
            77,097
            
            
            
            90,359
            
            
            
            163,887
            
            
            
            181,780Interest
      on junior subordinated deferrable interest debentures
            
            
            47,941
            
            
            
            67,675
            
            
            
            107,622
            
            
            
            134,647Total
      interest expense
            
            
            1,358,226
            
            
            
            1,855,888
            
            
            
            2,848,200
            
            
            
            3,619,563Net
      interest income before provision for loan losses
            
            
            3,095,786
            
            
            
            2,760,551
            
            
            
            6,054,838
            
            
            
            5,453,312Provision
      for loan losses
            
            
            400,000
            
            
            
            -
            
            
            
            800,000
            
            
            
            -Net
      interest income after provision for loan losses
            
            
            2,695,786
            
            
            
            2,760,551
            
            
            
            5,254,838
            
            
            
            5,453,312Non-Interest
      Income:Service
      charges
            
            
            165,244
            
            
            
            137,039
            
            
            
            335,694
            
            
            
            275,566Gain
      (loss) on sale of available-for-sale investment securities,
      net
            
            
            46,412
            
            
            
            (1,145
            )
            
            
            46,412
            
            
            
            (1,145
            )Mortgage
      loan brokerage fees
            
            
            25,721
            
            
            
            23,560
            
            
            
            33,801
            
            
            
            47,330Earnings
      on cash surrender value of life insurance policies
            
            
            66,865
            
            
            
            64,349
            
            
            
            132,619
            
            
            
            128,127Other
            
            
            85,393
            
            
            
            58,319
            
            
            
            132,187
            
            
            
            123,292Total
      non-interest income
            
            
            389,635
            
            
            
            282,122
            
            
            
            680,713
            
            
            
            573,170Non-Interest
      Expense:Salaries
      and employee benefits
            
            
            1,273,029
            
            
            
            1,165,354
            
            
            
            2,556,298
            
            
            
            2,415,536Occupancy
      and equipment
            
            
            313,292
            
            
            
            249,309
            
            
            
            599,284
            
            
            
            495,276Other
            
            
            728,390
            
            
            
            698,760
            
            
            
            1,434,576
            
            
            
            1,314,408Total
      non-interest expense
            
            
            2,314,711
            
            
            
            2,113,423
            
            
            
            4,590,158
            
            
            
            4,225,220Income
      before provision for income taxes
            
            
            770,710
            
            
            
            929,250
            
            
            
            1,345,393
            
            
            
            1,801,262Provision
      for income taxes
            
            
            235,000
            
            
            
            258,000
            
            
            
            392,000
            
            
            
            537,000Net
      income
            
            $
            535,710
            
            
            $
            671,250
            
            
            $
            953,393
            
            
            $
            1,264,262Basic
      earnings per share (Notes 2 and 6)
            
            $
            0.22
            
            
            $
            0.27
            
            
            $
            0.39
            
            
            $
            0.52Diluted
      earnings per share (Notes 2 and 6)
            
            $
            0.22
            
            
            $
            0.26
            
            
            $
            0.38
            
            
            $
            0.50





See notes
to unaudited condensed consolidated financial statements.





5
 Index





VALLEY
COMMERCE BANCORP


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)





For
      the Six MonthsEnded
      June 30,2008
            
            
            2007Cash
      Flows from Operating Activities:Net
      income
            
            $
            953,393
            
            
            $
            1,264,262Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
            
            
            800,000
            
            
            
            -Increase
      in deferred loan origination fees, net
            
            
            81,621
            
            
            
            42,945Depreciation
            
            
            213,470
            
            
            
            142,999Amortization
      of intangibles
            
            
            7,718
            
            
            
            31,269(Gain)
      loss on sale of available-for-sale investment securities,
    net
            
            
            (46,412
            )
            
            
            1,145Dividends
      on Federal Home Loan Bank stock
            
            
            (45,800
            )
            
            
            (45,700
            )(Acretion
      of discounts) amortization of premiums on investment securities,
      net
            
            
            (66,380
            )
            
            
            55,722Increase
      in cash surrender value of bank-owned life insurance
            
            
            (227,855
            )
            
            
            (123,147
            )Stock-based
      compensation expense
            
            
            34,850
            
            
            
            15,342Loss
      on disposition of premises and equipment
            
            
            558
            
            
            
            1,255Decrease
      in accrued interest receivable and other assets
            
            
            (582,218
            )
            
            
            (278,060
            )Increase
      in accrued interest payable and other liabilities
            
            
            268,144
            
            
            
            301,388Net
      cash provided by operating activities
            
            
            1,391,089
            
            
            
            1,409,420Cash
      Flows from Investing Activities:Proceeds
      from matured and called available-for-sale investment
      securities
            
            
            8,500,000
            
            
            
            2,000,000Proceeds
      from sales of available-for-sale investment securities
            
            
            4,500,000
            
            
            
            2,623,855Purchases
      of available-for-sale investment securities
            
            
            (1,455,840
            )
            
            
            (2,226,905
            )Proceeds
      from principal repayments from available-for-sale
              mortgage-backed
      securities
            
            
            1,993,103
            
            
            
            1,114,134Redemption
      of Federal Home Loan Bank Stock, net
            
            
            256,100
            
            
            
            633,200Net
      increase in loans
            
            
            (17,352,667
            )
            
            
            (12,697,695
            )Purchase
      of premises and equipment
            
            
            (1,292,909
            )
            
            
            (344,903
            )Proceeds
      from sale of equipment
            
            
            
            
            
            
            9,313Net
      cash used in investing activities
            
            
            (4,852,213
            )
            
            
            (8,889,001
            )





Continued
on next page.





6
 Index





VALLEY
COMMERCE BANCORP


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)


(Continued)





For
      the Six MonthsEnded
      June 30,2008
            
            
            2007Cash
      Flows from Financing Activities:Net
      increase in noninterest-bearing and interest-bearing
    deposits
            
            $
            5,781,333
            
            
            $
            2,898,956Net
      increase in time deposits
            
            
            40,833,937
            
            
            
            3,349,731Proceeds
      from exercised stock options
            
            
            3,975
            
            
            
            13,000Cash
      paid to repurchase common stock
            
            
            (804,118
            )
            
            
            -Decrease
      in short-term borrowings
            
            
            (13,804,000
            )
            
            
            (3,547,000
            )Payments
      on long-term advance
            
            
            (2,604,555
            )
            
            
            (299,563
            )Cash
      paid to repurchase fractional shares
            
            
            (3,489
            )
            
            
            (5,390
            )Net
      cash provided by financing activities
            
            
            29,403,083
            
            
            
            2,409,734Increase
      (decrease) in cash and cash equivalents
            
            
            25,941,959
            
            
            
            (5,069,847
            )Cash
      and Cash Equivalents at Beginning of Year
            
            
            9,297,346
            
            
            
            13,265,547Cash
      and Cash Equivalents at End of Period
            
            $
            35,239,305
            
            
            $
            8,195,700Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the period for:Interest
      expense
            
            $
            2,771,740
            
            
            $
            3,461,916Income
      taxes
            
            $
            1,027,000
            
            
            $
            615,000Non-Cash
      Investing Activities:Net
      change in unrealized loss on available-for-sale securities
            
            $
            (339,118
            )
            
            $
            (577,049
            )Non-cash
      Financing Activities:Cumulative
      effect of adopting EITF 06-04
            
            $
            102,115


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 bank holding company reorganization.  The new corporate
structure provides the Company and the Bank greater flexibility to expand and
diversify.  The reorganization was completed on November 21, 2002,
subsequent to which the Bank continued its operations as previously conducted,
but as a wholly owned subsidiary of the Company.





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





2.
            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 (the “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 Valley Commerce Bancorp’s (the “Company”)
consolidated financial position at June 30, 2008 and December 31, 2007, the
results of its operations for the three- and six-month periods ended June 30,
2008 and 2007, and its cash flows for the six-month periods ended June 30, 2008
and 2007 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 2007 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 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.





On May
20, 2008 the Company declared a 5% stock dividend payable on June 25, 2008 for
all shareholders of record on June 11, 2008.  All earnings per share
and per share amounts have been retroactively adjusted to reflect the stock
dividend.





8
 Index


3.
              LOANS


Outstanding
loans are summarized below, in thousands:




June
      30,
              2008
            
            
            December
      31,
              2007Commercial
            
            $
            52,997,717
            
            
            $
            41,823,876Real
      estate – mortgage
            
            
            120,209,570
            
            
            
            106,872,707Real
      estate – construction
            
            
            38,636,186
            
            
            
            44,896,223Agricultural
            
            
            4,868,658
            
            
            
            4,987,839Consumer
            
            
            2,223,875
            
            
            
            2,994,997218,936,006
            
            
            
            201,575,642Deferred
      loan fees,  net
            
            
            (385,401
            )
            
            
            (303,780
            )Allowance
      for loan losses
            
            
            (2,565,288
            )
            
            
            (1,757,591
            )$
            215,985,317
            
            
            $
            199,514,271








4.
            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 $55.2 million and $53.5 million and letters of credit of
$0.3 million and $0.2 million at June 30, 2008 and December 31, 2007,
respectively.





At June
30, 2008, consumer loan commitments, which are generally unsecured, represent
approximately 4% of total commitments.  Agricultural loan commitments
represent approximately 2% of total commitments and are generally secured by
crops and/or real estate.  Commercial loan commitments represent
approximately 67% of total commitments and are generally secured by various
assets of the borrower.  Real estate loan commitments represent the
remaining 27% of total commitments.  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 June 30, 2008 or December 31,
2007.








5.
            STOCK
      BASED COMPENSATION





On May
15, 2007, the Company’s shareholders approved the Valley Commerce Bancorp 2007
Equity Incentive Plan (“Incentive Plan”).  The Incentive Plan provides
for awards of stock options, restricted stock awards, qualified
performance-based awards and stock grants.  Under the plan, 91,451
shares of common stock are reserved for issuance to employees and directors
under incentive and nonstatutory agreements.  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 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.  Additional information on the Incentive Plan may be
obtained from the Company’s 2008 Annual Proxy Statement.





9
 Index





The prior
plan, the Valley Commerce Bancorp Amended and Restated 1997 Stock Option Plan
("Prior Plan") was established in 1997 and expired on February 17,
2007.  There were 36,750 options outstanding at June 30, 2008 granted
under the Incentive Plan.





During
the six-month periods ended June 30, 2008 and 2007, no options were granted by
the Company to its officers or directors.  Compensation cost related
to stock options recognized in operating results under SFAS No. 123R were
$14,640 and $7,671 in the three month periods ended June 30, 2008 and 2007,
respectively.  Compensation cost related to stock options recognized
in operating results under SFAS No. 123R were $31,159 and $15,342 in the
six-month periods ended June 30, 2008 and 2007,
respectively.  Compensation expense is recognized over the vesting
period on a straight line accounting basis.





SFAS
123(R) requires the cash flows resulting from the tax benefits resulting from
tax deductions in excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as a cash flow from financing in the
statement of cash flows.   The excess tax benefits for the three
months ended June 30, 2008 and 2007 were $1,577 and $2,153,
respectively.  The excess tax benefits for the six months ended June
30, 2008 and 2007 were $3,691 and $4,306, respectively.





The
following table summarizes information about stock option activity for the six
months ended June 30, 2008:





For
      the Six Months Ended June 30, 2008Shares
            
            
            Weighted
      Average Exercise Price
            
            Weighted
      Average Remaining Contractual Term
            
            Aggregate
      Intrinsic Value
              (in thousands)Incentive:Options
      outstanding at January 1, 2008
            
            
            75,467
            
            
            $
            8.20Options
      granted
            
            
            -
            
            
            
            -Options
      exercised
            
            
            (345
            )
            
            
            10.97Options
      cancelled
            
            
            (3,786
            )
            
            
            13.71Options
      outstanding at June 30, 2008
            
            
            71,336
            
            
            
            10.88
            
            6.95
      years
            
            $
            260,847
            (1)Options
      exercisable at June 30, 2008
            
            
            32,728
            
            
            
            7.59
            
            4.79
      years
            
            
            219,361
            (1)Options
      vested or expected to vest after June 30, 2008
            
            
            60,698
            
            
            
            10.88
            
            6.95
      years
            
            
            206,907
            (1)Nonstatutory:Options
      outstanding at January 1, 2008
            
            
            109,181
            
            
            $
            8.67Options
      granted
            
            
            -Options
      exercised
            
            
            -Options
      cancelled
            
            
            -Options
      outstanding at June 30, 2008
            
            
            109,181
            
            
            
            8.67
            
            4.88
      years
            
            $
            650,958
            (1)Options
      exercisable at June 30, 2008
            
            
            104,771
            
            
            
            8.29
            
            4.88
      years
            
            
            650,958
            (1)Options
      vested or expected to vest after June 30, 2008
            
            
            98,424
            
            
            
            8.29
            
            4.88
      years
            
            
            628,553
            (1)





(1)
11,025 non-statutory options with a weighted average price of $17.69 and 36,750
incentive options with a weighted average price of $13.81 are excluded from
intrinsic value from table above because the exercise price is greater than the
stock price at June 30, 2008.





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 June 30, 2008.  There were
364 and 1,914 options exercised during the six months ended June 30, 2008 and
2007, respectively.  The total intrinsic value, which is the amount by
which the stock price exceeded the exercise price of the options on the date of
exercise, of options exercised during the six months ended June 30, 2008 and
2007 was $1,100 and $24,000, respectively.  During the six months
ended June 30, 2008 and 2007, the amount of cash received from the exercise of
stock options was $3,975 and





10
 Index





$13,000,
respectively.  The total fair value of shares vested during the three
months ended June 30, 2008 and 2007 was $84,000 and $119,000,
respectively.  The total fair value of shares vested during the six
months ended June 30, 2008 and 2007 was $122,000 and $161,000,
respectively.




Management
estimates expected forfeitures and recognizes compensation costs only for those
equity awards expected to vest.  As of June 30, 2008, there was
$201,000 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 4.5 years and
will be adjusted for subsequent changes in estimated forfeitures.





6.
            EARNINGS
      PER SHARE COMPUTATION




Basic
earnings per share are computed by dividing net income 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
net income by the weighted average common shares outstanding for the period plus
the dilutive effect of options.  Earnings per share computations have
been retroactively adjusted for stock splits and stock dividends for all periods
presented.  On May 20, 2008 the Company declared a 5% stock dividend
payable on June 25, 2008 for all shareholders of record on June 11,
2008.  All earnings per share and per share amounts have been
retroactively adjusted to reflect the stock dividend.





For
      the Three Months
            
            
            For
      the Six MonthsEnded June 30,
            
            
            Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Earnings
      Per Share:Basic
      earnings per share
            
            $
            0.22
            
            
            $
            0.27
            
            
            $
            0.39
            
            
            $
            0.52Diluted
      earnings per share
            
            $
            0.22
            
            
            $
            0.26
            
            
            $
            0.38
            
            
            $
            0.50Weighted
      Average Number of Shares Outstanding:Basic
      shares
            
            
            2,473,839
            
            
            
            2,444,601
            
            
            
            2,473,839
            
            
            
            2,443,923Diluted
      shares
            
            
            2,485,022
            
            
            
            2,546,051
            
            
            
            2,491,638
            
            
            
            2,546,501





There
were 47,775 options excluded form the computation of diluted earnings per share
for the 2008 period as they were identified as anti-dilutive.  There
were no options excluded for the 2007 period.





7.
            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 Months
            
            
            For
      the Six MonthsEnded
            
            
            Ended(In
      thousands)
            
            June
      30,
              2008
            
            
            June
      30,
              2007
            
            
            June
      30,
              2008
            
            
            June
      30,
              2007Net
      income
            
            $
            536
            
            
            $
            671
            
            
            $
            953
            
            
            $
            1,264Other
      comprehensive (loss):Unrealized
      holding loss on available-for-sale investment securities, net of
      tax
            
            
            (683
            )
            
            
            (459
            )
            
            
            (192
            )
            
            
            (404
            )Total
      other comprehensive (loss) income
            
            $
            (147
            )
            
            $
            212
            
            
            $
            761
            
            
            $
            860





11
 Index





8.
            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
six months ended June 30, 2008.





9.
            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 program
commenced in November of 2007 and will continue for a period of twelve months
thereafter, subject to earlier termination at the Company’s
discretion.  The number, price and timing of the repurchase shall be
at the Company’s sole discretion and the plan may be re-evaluated depending on
market conditions, liquidity needs or other factors.  The Board, based
on such re-evaluations, may suspend, terminate, modify or cancel the plan at any
time without notice.  During the six months ended June 30, 2008, the
Company repurchased 53,032 shares for a total cost of $804,118 or an average
price of $15.16 per share.  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.





10.
            FAIR
      VALUE MEASUREMENT





On
January 1, 2008, the Company adopted Financial Accounting Standards Board (FASB)
Statement No. 157 (SFAS 157), Fair Value
Measurements.  SFAS 157 defines fair value, establishes a
framework for measuring fair value under GAAP and expands disclosures about fair
value measurements.  There was no cumulative effect adjustment to
beginning retained earnings recorded upon adoption and no impact on the
financial statements in the first half of 2008.





The
following table presents information about the Company’s assets and liabilities
measured at fair value on a recurring basis as of June 30, 2008, and 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





12
 Index





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 are summarized
below:





Fair
      Value Measurementsat
      June 30, 2008, UsingQuoted
      Prices in
            
            Other
            
            SignificantActive
      Markets for
            
            Observable
            
            Unobservable(in
      thousands)
            
            Fair
      Value
            
            Identical
      Assets
            
            Inputs
            
            InputsJune
      30, 2008
            
            (Level
      1)
            
            (Level
      2)
            
            (Level
      3)Assets:Available-for-sale
      investment securities
            
            $
            42,805
            
            
            
            —
            
            
            $
            42,805
            
            
            
            —





The fair
value of securities available for sale equals quoted market price, if
available.  If quoted market prices are not available, fair value is
determined using quoted market prices for similar securities.  Changes
in fair market value are recorded in other comprehensive income.





Financial
assets and liabilities measured at fair value on a non-recurring basis are
summarized below:





Fair
      Value Measurementsat
      June 30, 2008, UsingQuoted
      Prices in
            
            
            Other
            
            
            SignificantActive
      Markets for
            
            
            Observable
            
            
            Unobservable(in
    thousands)
            
            Fair
      Value
            
            
            Identical
      Assets
            
            
            Inputs
            
            
            InputsJune 30, 2008
            
            
            (Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)Assets:Impaired
      loans
            
            $
            1,373,000
            
            
            
            —
            
            
            $
            1,373,000
            
            
            $
            —





Impaired
loans allocated to the allowance for loan losses are measured at fair value on a
nonrecurring basis. 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, which are measured for
impairment using the fair value of the collateral for collateral dependent
loans, had outstanding principal balances of $1,373,000 at June 30, 2008 , with
a valuation allowance of $102,000 at June 30, 2008.  Declines in the
fair value of collateral on impaired loans and therefore the increase in
specific allocations of the allowance for loan losses, were $102,000 during the
six months ended June 30, 2008.




ITEM2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS




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, 2007.





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





13
 Index





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 and
operations.  The Company does not currently conduct any operations
other than through the Bank.




The
Company earned net income of $536,000, or $.22 per diluted share for the three
months ended June 30, 2008, compared to $671,000 or $0.26 per diluted share for
the three months ended June 30, 2007.  The Company earned net income
of $953,000 or $.38 per diluted share, for the six-month period ended June 30,
2008, compared to $1.3 million, or $0.50 per diluted share, for the six-month
period ended June 30, 2007.  The annualized return on average assets
was 0.67% for the six months ended June 30, 2008 and 0.98% for the same 2007
period.  The annualized return on average shareholders’ equity for the
six months ended June 30, 2008 and 2007 was 6.56% and 9.77%,
respectively.  The decrease in earnings was primarily due to the
$800,000 provision for loan losses made during the six-month period ended June
30, 2008 compared to no provision being made during the same period in
2007.




At June
30, 2008, the Company’s total assets were $309 million, representing an increase
of $30 million or 11% compared to December 31, 2007, and an increase of $42
million or 16% compared to June 30, 2007.  Federal funds sold totaled
$24 million at June 30, 2008.  At both December 31, 2007 and June 30,
2007 had no Federal funds sold.  The balance of Federal funds at June
30, 2008 resulted from management’s decision to retain a significant level of
liquidity on the balance sheet due to a high level of uncertainty in the
financial markets.  The remaining increase in total assets resulted
primarily from loan growth.  The underlying funding for asset growth
during the first half of 2008 was provided through brokered time deposits and
successful local deposit promotions.




Total
loans, net of the allowance for loan losses, were $216 million at June 30, 2008,
representing an increase of $16 million or 8% compared to December 31, 2007, and
an increase of $21 million or 11% compared to June 30, 2007.  Loan
volume growth in the 2008 period centered in new commercial real estate loans
and draws made on existing commercial lines of credit.




Total
deposits were $262 million at June 30, 2008, representing an increase of $47
million or 22% compared to December 31, 2007, and an increase of $48 million or
23% compared to June 30, 2007.  In the first half of 2008, time
deposits, including brokered time deposits, increased by $41 million or
40%.  The amount of brokered time deposits at June 30, 2008, December
31, 2007, and June 30, 2007 were $22 million, $3 million, and $10 million,
respectively.  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.




At June
30, 2008, the Company’s leverage ratio was 11.2% while its tier 1 risk-based
capital ratio and total risk-based capital ratio were 13.1% and 14.0%,
respectively.  At December 31, 2007, the Company’s leverage ratio was
11.5% while its tier 1 risk-based capital ratio and total risk-based capital
ratio were 13.8% and 14.6 %, respectively.  The leverage, tier 1
risk-based capital and total risk-based capital ratios at June 30, 2007 were
11.5 %, 13.4 % and 14.2%, respectively.  The Company’s capital ratios
declined between June 30, 2008 and June 30, 2007 as a result of stock
repurchases made under a stock repurchase plan implemented in November 2007 and
asset growth during that period.  These factors were offset by capital
additions from earnings and the exercise of stock options.




Critical
Accounting Policies




There
have been no changes to the Company’s critical accounting policies from those
discussed in the Company’s 2007 Annual Report to Shareholders’ on Form
10-K.





14
 Index





Results
of Operations for the Six Months Ended June 30, 2008 and 2007




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 six-month
periods indicated:





Average
      balances and weighted average yields and costsSix
      Months ended June 30,2008
            
            
            2007Interest
            
            
            Average
            
            
            
            
            
            Interest
            
            
            AverageAverage
            
            
            income/
            
            
            yield/
            
            
            Average
            
            
            income/
            
            
            yield/(dollars
      in thousands)
            
            Balance
            
            
            Expense
            
            
            Cost
            
            
            Balance
            
            
            Expense
            
            
            CostASSETSFederal
      funds sold
            
            $
            4,780
            
            
            $
            48
            
            
            
            2.03
            %
            
            $
            77
            
            
            $
            2
            
            
            
            5.24
            %Available-for-sale
      investment securities:Taxable
            
            
            29,530
            
            
            
            717
            
            
            
            4.90
            %
            
            
            34,987
            
            
            
            783
            
            
            
            4.51
            %Exempt
      from Federal income taxes (1)
            
            
            19,468
            
            
            
            394
            
            
            
            6.18
            %
            
            
            18,852
            
            
            
            381
            
            
            
            6.18
            %Total
      securities (1)
            
            
            48,998
            
            
            
            1,111
            
            
            
            5.41
            %
            
            
            53,839
            
            
            
            1,164
            
            
            
            5.09
            %Loans
      (2) (3)
            
            
            212,359
            
            
            
            7,744
            
            
            
            7.35
            %
            
            
            189,242
            
            
            
            7,907
            
            
            
            8.43
            %Total
      interest-earning assets (1)
            
            
            266,137
            
            
            
            8,903
            
            
            
            6.88
            %
            
            
            243,158
            
            
            
            9,073
            
            
            
            7.69
            %Noninterest-earning
      assets, net of allowance for loan losses
            
            
            20,389
            
            
            
            
            
            
            
            
            
            
            
            18,022Total
      assets
            
            $
            286,526
            
            
            
            
            
            
            
            
            
            
            $
            261,180LIABILITIES
      AND SHAREHOLDERS’ EQUITYDeposits:Other
      interest bearing
            
            $
            91,558
            
            
            $
            891
            
            
            
            1.96
            %
            
            $
            76,888
            
            
            $
            1,161
            
            
            
            3.05
            %Time
      deposits less than $100,000
            
            
            19,414
            
            
            
            364
            
            
            
            3.78
            %
            
            
            21,715
            
            
            
            518
            
            
            
            4.81
            %Time
      deposits $100,000 or more
            
            
            54,099
            
            
            
            1,128
            
            
            
            4.20
            %
            
            
            50,761
            
            
            
            1,271
            
            
            
            5.05
            %Total
      interest-bearing deposits
            
            
            165,071
            
            
            
            2,383
            
            
            
            2.91
            %
            
            
            149,364
            
            
            
            2,950
            
            
            
            3.98
            %Short-term
      debt
            
            
            13,855
            
            
            
            193
            
            
            
            2.81
            %
            
            
            13,304
            
            
            
            353
            
            
            
            5.35
            %Long-term
      debt
            
            
            7,203
            
            
            
            164
            
            
            
            4.59
            %
            
            
            8,387
            
            
            
            182
            
            
            
            4.38
            %Junior
      subordinated deferrable interest debentures
            
            
            3,093
            
            
            
            108
            
            
            
            7.04
            %
            
            
            3,093
            
            
            
            135
            
            
            
            8.80
            %Total
      interest-bearing liabilities
            
            
            189,222
            
            
            
            2,848
            
            
            
            3.04
            %
            
            
            174,148
            
            
            
            3,620
            
            
            
            4.19
            %Noninterest-bearing
      deposits
            
            
            65,908
            
            
            
            
            
            
            
            
            
            
            
            59,350Other
      liabilities
            
            
            2,163
            
            
            
            
            
            
            
            
            
            
            
            1,597Total
      liabilities
            
            
            257,293
            
            
            
            
            
            
            
            
            
            
            
            235,095Shareholders’
      equity
            
            
            29,233
            
            
            
            
            
            
            
            
            
            
            
            26,085Total
      liabilities and shareholders’ equity
            
            $
            286,526
            
            
            
            
            
            
            
            
            
            
            $
            261,180Net
      interest income and margin (1)
            
            
            
            
            
            $
            6,055
            
            
            $
            4.74
            %
            
            
            
            
            
            $
            5,453
            
            
            $
            4.69
            %





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


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


(3)
            Interest
      income on loans includes amortized loan fees, net of costs, of $304 and
      $139 for 2008 and 2007,
respectively.





15
 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, 2008 and 2007.





Changes in net
      interest income due to changes in volumes and rates2008
      period vs 2007 perioddue
      to change in:Average
            
            
            AverageVolume
            
            
            Rate
      (1)
            
            
            Total(In
      thousands)Increase
      (decrease) in interest income:Federal
      funds sold
            
            $
            61
            
            
            $
            (15
            )
            
            $
            46Investment
      securitiesTaxable
            
            
            (61
            )
            
            
            (5
            )
            
            
            (66
            )Exempt
      from Federal income taxes
            
            
            9
            
            
            
            4
            
            
            
            13Total
      securities
            
            
            (52
            )
            
            
            (1
            )
            
            
            (53
            )Loans
            
            
            484
            
            
            
            (647
            )
            
            
            (163
            )Total
      interest income
            
            $
            493
            
            
            $
            (663
            )
            
            $
            (170
            )(Decrease)
      increase in interest expense:Other
      interest bearing deposits
            
            
            111
            
            
            
            (381
            )
            
            
            (270
            )Time
      deposits less than $100,000
            
            
            (28
            )
            
            
            (126
            )
            
            
            (154
            )Time
      deposits $100,000 or more
            
            
            42
            
            
            
            (185
            )
            
            
            (143
            )Total
      interest-bearing deposits
            
            
            125
            
            
            
            (692
            )
            
            
            (567
            )Short-term
      debt
            
            
            7
            
            
            
            (167
            )
            
            
            (160
            )Long-term
      debt
            
            
            (13
            )
            
            
            (5
            )
            
            
            (18
            )Junior
      subordinated deferrable interest debentures
            
            
            -
            
            
            
            (27
            )
            
            
            (27
            )Total
      interest expense
            
            
            119
            
            
            
            (891
            )
            
            
            (772
            )(Increase)
      decrease in net interest income
            
            $
            374
            
            
            $
            228
            
            
            $
            602





Net
interest income was $6.1 million for the six-month period ended June 30, 2008
compared to $5.5 million for the same period of 2007, an increase of $602,000 or
11%.  Growth in average interest-earning assets and interest-bearing
liabilities caused the Company’s net interest income to increase by $374,000,
while decreases in interest rates on these same accounts caused interest income
to increase by an additional $228,000.




Comparing
the six-month periods ended June 30, 2008 and 2007, the Company’s net interest
margin on a taxable equivalent basis increased 5 bps, from 4.69% in the 2007
period to 4.74% in the 2008 period.  The Company maintained its net
interest margin despite Fed funds rate decreases totaling 325 basis points
during the period September 2007 to June 2008.  The net interest
margin stability was attributable both to loan growth and to management’s
efforts to mitigate the impact of falling interest rates.  These
efforts included adding assets earning fixed interest rates to the balance
sheet, requiring interest rate floors on variable priced loans, utilizing
variable priced funding, and aggressively lowering deposit rates.




Total
interest income for the six-month periods ended June 30, 2008 and 2007 was $8.9
million and $9.1 million, respectively, a decrease of $170,000 or 2%, which
resulted from falling interest rates.  The weighted average
tax-equivalent yield on total interest-earning assets was 6.88% in the 2008
period compared to 7.69% in the 2007 period, a reduction of 81 basis
points.  Offsetting the impact of declining interest rates was a $23
million, or 9%, increase in average earning assets.




Despite a
$23 million or 12% increase in average loans, the Company’s interest income from
loans decreased by $163,000 in the 2008 period due to the average yield on loans
decreasing by 108 basis points as a result of falling interest rates impacting
the variable priced portion of the Company’s loan portfolio.  In
addition, there was a $53,000 decrease in interest income on available-for-sale
investment securities in the 2008 period due to a $4.8 million decrease in
average





16
 Index





balance
due to called and matured securities.  Interest income on Federal
funds sold increased by $46,000 in the 2008 period as the average balance
increased to $4.8 million compared to just $77,000 in the 2007
period.




Total
interest expense for the six-month periods ended June 30, 2008 and 2007 was $2.8
million and $3.6 million, respectively, a decrease of $772,000 or 21%, which
resulted from falling interest rates.  The average rate paid on
interest-bearing liabilities was 3.04% in the 2008 period compared to 4.19% in
the 2007 period, a reduction of 115 basis points.  Average total
interest-bearing liabilities in the 2008 period increased by $15 million or 9%
compared to the 2007 period.  This included an increase in average
other interest-bearing deposits of $15 million or 19%, an increase in average
time deposits of just $1.0 million or 1%, and a decrease in averaged borrowed
funds of $633,000 or 3%.




Further
enhancing the Company’s cost of funds was an increase of $6.6 million or 11% in
average non-interest bearing deposits in the 2008 period compared to the same
period in 2007.




Provision
for Loan Losses




The
provision for loan losses, which is included in operations to support the
required level of the allowance for loan losses, is based on the Company’s
actual loss experience and management’s evaluation of loan portfolio risk under
current economic conditions.  An $800,000 loan loss provision was
recorded during the six months ended June 30, 2008 compared to no provision for
loan losses for the six-month period ended June 30, 2007.  Key factors
in management’s determination of the provision for loan losses included a
significant decline in real estate values in the Bank’s primary markets and a
slowing economy.  See the sections below titled “Allowance for Loan
Losses.”




Non-Interest
Income




Non-interest
income for the six-month periods ended June 30, 2008 and 2007 totaled $681,000
and $573,000, respectively, an increase of $108,000 or 19%.  The
components of non-interest income during each period were as
follows:







Non-interest
income




Six
      Months ended June 30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            Increase
      (Decrease)Service
      charges
            
            $
            336
            
            
            $
            276
            
            
            $
            60Loss
      on sale of available-for-sale investment securities
            
            
            46
            
            
            
            (1
            )
            
            
            47Mortgage
      loan brokerage fees
            
            
            34
            
            
            
            47
            
            
            
            (13
            )Earnings
      on cash surrender value of life insurance policies
            
            
            133
            
            
            
            128
            
            
            
            5Other
            
            
            132
            
            
            
            123
            
            
            
            9Total
      non-interest income
            
            $
            681
            
            
            $
            573
            
            
            $
            108




Service
charges increased by $60,000 due to increased deposits and a higher fee
structure.  Within this category, account analysis charges increased
by $20,000 and non-sufficient funds and overdraft charges increased by
$36,000.  In addition, the Company recorded a $46,000 gain on sale of
investment securities in the 2008 period compared to a slight loss in the prior
year.  These favorable variances were offset by a $13,000 decrease in
mortgage loan brokerage fees which was attributable to a slowing
economy.




Non-Interest
Expense




Non-interest
expense was $4.6 million for the six-month period ended June 30, 2008 compared
to $4.2 million for the six-month period ended June 30, 2007, an increase of
$365,000 or 9%.  The increase was due to employee costs associated
with the Company’s growth initiatives, higher deposit insurance costs, and
increased occupancy and equipment costs.  Salaries and benefits
increased by $141,000 or 6% due to normal salary adjustments and new employees
hired to staff the Company’s new branch office in Tulare.  Occupancy
and equipment expense increased by $104,000 primarily due to the relocation of
the Fresno branch to a larger leased facility in the latter part of 2007 and the
opening of a full service branch in the City of Tulare during May
2008.  Assessment and insurance increased by $54,000 due to higher
Federal Deposit





17
 Index





Insurance
Corporation assessments rates imposed in mid-2007.  Data processing
costs increased by $39,000 due primarily to the increased usage of electronic
banking products by customers and branch operations staff.  Other
expenses increased by $38,000 primarily as a result of fees paid to fill vacant
officer positions.




Professional
and legal costs decreased by $34,000 in the 2008 period due to reduced use of
outside legal counsel on various corporate matters and reduced consultant costs
related to the implementation of Sarbanes-Oxley legislative
requirements.




The
following table describes the components of non-interest expense for the
six-month periods ended June 30, 2008 and 2007:




Non-interest
expense




Six
      Months ended June 30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            Increase
      (Decrease)Salaries
      and employee benefits
            
            $
            2,556
            
            
            $
            2,415
            
            
            $
            141Occupancy
      and equipment
            
            
            599
            
            
            
            495
            
            
            
            104Data
      processing
            
            
            260
            
            
            
            221
            
            
            
            39Operations
            
            
            255
            
            
            
            224
            
            
            
            31Professional
      and legal
            
            
            194
            
            
            
            228
            
            
            
            (34
            )Advertising
      and business development
            
            
            138
            
            
            
            143
            
            
            
            (5
            )Telephone
      and postal
            
            
            109
            
            
            
            100
            
            
            
            9Supplies
            
            
            93
            
            
            
            82
            
            
            
            11Assessment
      and insurance
            
            
            122
            
            
            
            68
            
            
            
            54Amortization
      expense
            
            
            8
            
            
            
            31
            
            
            
            (23
            )Other
      expenses
            
            
            256
            
            
            
            218
            
            
            
            38Total
      non-interest expense
            
            $
            4,590
            
            
            $
            4,225
            
            
            $
            365




Provision
for Income Taxes




The
provisions for income taxes for the six-month periods ended June 30, 2008 and
2007 was $392,000 and $537,000, respectively.  The effective tax rates
for these periods were 29.1%, and 29.8%, respectively.  The decrease
in the effective tax rate was primarily due to lower pretax income in the 2008
period which magnified the impact of permanent tax differences in the
computation of the effective tax rate.





18
 Index





Results
of Operations for the Three Months Ended June 30, 2008




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 andcostsThree
      Months ended June 30,2008
            
            
            2007Interest
            
            
            Average
            
            
            
            
            
            Interest
            
            
            AverageAverage
            
            
            income/
            
            
            yield/
            
            
            Average
            
            
            income/
            
            
            yield/(dollars
      in thousands)
            
            Balance
            
            
            Expense
            
            
            Cost
            
            
            Balance
            
            
            Expense
            
            
            CostASSETSFederal
      funds sold
            
            $
            9,466
            
            
            $
            48
            
            
            
            2.03
            %
            
            $
            128
            
            
            $
            2
            
            
            
            5.33
            %Available-for-sale
      investment securities:Taxable
            
            
            25,031
            
            
            
            311
            
            
            
            4.98
            %
            
            
            34,005
            
            
            
            358
            
            
            
            4.22
            %Exempt
      from Federal income taxes (1)
            
            
            19,629
            
            
            
            198
            
            
            
            6.13
            %
            
            
            18,774
            
            
            
            191
            
            
            
            6.18
            %Total
      securities (1)
            
            
            44,660
            
            
            
            509
            
            
            
            5.49
            %
            
            
            52,779
            
            
            
            549
            
            
            
            4.92
            %Loans
      (2) (3)
            
            
            217,747
            
            
            
            3,897
            
            
            
            7.18
            %
            
            
            194,366
            
            
            
            4,066
            
            
            
            8.39
            %Total
      interest-earning assets (1)
            
            
            271,873
            
            
            
            4,454
            
            
            
            6.74
            %
            
            
            247,273
            
            
            
            4,617
            
            
            
            7.65
            %Noninterest-earning
      assets, net of allowance for loan losses
            
            
            20,813
            
            
            
            
            
            
            
            
            
            
            
            17,667Total
      assets
            
            $
            292,686
            
            
            
            
            
            
            
            
            
            
            $
            264,940LIABILITIES
      AND SHAREHOLDERS’ EQUITYDeposits:Interest
      bearing
            
            $
            89,080
            
            
            $
            370
            
            
            
            1.67
            %
            
            $
            79,040
            
            
            $
            609
            
            
            
            3.09
            %Time
      deposits less than $100,000
            
            
            20,805
            
            
            
            184
            
            
            
            3.55
            %
            
            
            21,874
            
            
            
            264
            
            
            
            4.84
            %Time
      deposits $100,000 or more
            
            
            63,408
            
            
            
            622
            
            
            
            3.93
            %
            
            
            51,661
            
            
            
            650
            
            
            
            5.05
            %Total
      interest-bearing deposits
            
            
            173,293
            
            
            
            1,176
            
            
            
            2.72
            %
            
            
            152,575
            
            
            
            1,523
            
            
            
            4.00
            %Short-term
      debt
            
            
            9,428
            
            
            
            57
            
            
            
            2.42
            %
            
            
            13,178
            
            
            
            176
            
            
            
            5.36
            %Long-term
      debt
            
            
            6,548
            
            
            
            77
            
            
            
            4.72
            %
            
            
            8,269
            
            
            
            90
            
            
            
            4.37
            %Junior
      subordinated deferrable interest debentures
            
            
            3,093
            
            
            
            48
            
            
            
            6.22
            %
            
            
            3,093
            
            
            
            67
            
            
            
            8.69
            %Total
      interest-bearing liabilities
            
            
            192,362
            
            
            
            1,358
            
            
            
            2.83
            %
            
            
            177,115
            
            
            
            1,856
            
            
            
            4.20
            %Noninterest
      bearing deposits
            
            
            68,759
            
            
            
            
            
            
            
            
            
            
            
            59,796Other
      liabilities
            
            
            2,274
            
            
            
            
            
            
            
            
            
            
            
            1,580Total
      liabilities
            
            
            263,395
            
            
            
            
            
            
            
            
            
            
            
            238,491Shareholders’
      equity
            
            
            29,291
            
            
            
            
            
            
            
            
            
            
            
            26,449Total
      liabilities and shareholders’ equity
            
            $
            292,686
            
            
            
            
            
            
            
            
            
            
            $
            264,940Net
      interest income and margin (1)
            
            
            
            
            
            $
            3,096
            
            
            
            4.72
            %
            
            
            
            
            
            $
            2,761
            
            
            
            4.64
            %




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


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


(3)
            Interest
      income on loans includes amortized loan fees, net of costs, of $162 and
      $141 for 2008 and 2007,
respectively.





19
 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 June 30, 2008 and 2007.




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


2008
      period vs. 2007 periodIncrease
      (decrease) due to change in:Average
            
            
            AverageVolume
            
            
            Rate
      (1)
            
            
            Total(In
      thousands)Increase
      (decrease) in interest income:Federal
      funds sold
            
            $
            124
            
            
            $
            (78
            )
            
            $
            46Investment
      securitiesTaxable
            
            
            (94
            )
            
            
            47
            
            
            
            (47
            )Exempt
      from Federal income taxes
            
            
            13
            
            
            
            (6
            )
            
            
            7Total
      securities
            
            
            (81
            )
            
            
            41
            
            
            
            (40
            )Loans
            
            
            488
            
            
            
            (657
            )
            
            
            (169
            )Total
      interest income
            
            
            531
            
            
            
            (694
            )
            
            
            (163
            )(Decrease)
      increase in interest expense:Other
      interest-bearing deposits
            
            
            77
            
            
            
            (316
            )
            
            
            (239
            )Time
      deposits less than $100,000
            
            
            (13
            )
            
            
            (67
            )
            
            
            (80
            )Time
      deposits $100,000 or more
            
            
            147
            
            
            
            (175
            )
            
            
            (28
            )Total
      interest-bearing deposits
            
            
            211
            
            
            
            (558
            )
            
            
            (347
            )Short-term
      debt
            
            
            (50
            )
            
            
            (69
            )
            
            
            (119
            )Long-term
      debt
            
            
            (19
            )
            
            
            6
            
            
            
            (13
            )Junior
      subordinated deferrable interest debentures
            
            
            -
            
            
            
            (19
            )
            
            
            (19
            )Total
      interest expense
            
            
            142
            
            
            
            (640
            )
            
            
            (498
            )Decrease
      in net interest income
            
            $
            389
            
            
            $
            (54
            )
            
            $
            335




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




Net
interest income was $3.1 million for the three-month period ended June 30, 2008
compared to $2.8 million for the same period of 2007, an increase of $335,000 or
11%.  Growth in average interest-earning assets and interest-bearing
liabilities caused the Company’s net interest income to increase by $389,000,
while changes in interest rates on these same accounts caused interest income to
decrease by $54,000.




Comparing
the three-month periods ended June 30, 2008 and 2007, the Company’s net interest
margin on a taxable equivalent basis increased 8 bps, from 4.64% in the 2007
period to 4.72% in the 2008 period.  The Company maintained its net
interest margin despite Fed funds rate decreases totaling 325 basis points
during the period September 2007 to June 2008.  The net interest
margin stability was attributable both to loan growth and to management’s
efforts to mitigate the impact of falling interest rates.  These
efforts included adding assets earning fixed interest rates to the balance
sheet, requiring interest rate floors on variable priced loans, utilizing
variable priced funding, and aggressively lowering deposit rates.




Total
interest income for the three-month periods ended June 30, 2008 and 2007 was
$4.5 million and $4.6 million, respectively, a decrease of $163,000 or
1%.  The decrease resulted primarily from falling interest rates and
was offset by growth in average interest-earning assets which increased by $25
million or 10%, including growth in average loans of $24 million or
12%.  In addition, interest income on Federal funds sold increased by
$46,000 in the 2008 period as the average balance increased to $9.5 million from
just $128,000 in the 2007 period.




The
weighted average tax-equivalent yield on average earning assets decreased from
7.65% in the 2007 period to 6.74% in the 2008 period, a reduction of 91 basis
points, which primarily reflected the weighted average yield on loans decreasing
from 8.39% in the 2007 period to 7.18% in the 2008 period, a reduction of 121
basis points.  In addition, there





20
 Index





was a
$40,000 decrease in interest income on available-for-sale investment securities
in the 2008 period due to an $8 million or 15% decrease in average balance due
to called and matured securities.




Total
interest expense for the three-month periods ended June 30, 2008 and 2007 was
$1.4 million and $1.9 million, respectively, a decrease of $498,000 or 27%,
which resulted from falling interest rates.  The average rate paid on
interest-bearing liabilities was 2.83% in the 2008 period compared to 4.20% in
the 2007 period, a reduction of 137 basis points.




Average
total interest-bearing liabilities in the 2008 period increased by $15 million
or 9% compared to the 2007 period.  This included an increase in
average other interest-bearing deposits of $10 million or 13%, an increase in
average time deposits of $11 million or 15%, and a decrease in averaged borrowed
funds of $5 million or 22%.  The increase in average time deposits
during the second quarter of 2008 reflected a successful deposit promotion and
the acquisition of additional brokered time deposits.




Further
enhancing the Company’s cost of funds was an increase of $9 million or 15% in
average non-interest bearing deposits in the 2008 period compared to the same
period in 2007.




Provision
for Loan Losses




The
provision for loan losses, which is included in operations to support the
required level of the allowance for loan losses, is based on the Company’s
actual loss experience and management’s evaluation of loan portfolio risk under
current economic conditions.  A $400,000 loan loss provision was
recorded during the three months ended June 30, 2008 compared to no provision
for loan losses for the six-month period ended June 30, 2007.  Key
factors in management’s determination of the provision for loan losses included
a significant decline in real estate values in the Bank’s primary markets and a
slowing economy.  See the sections below titled “Allowance for Loan
Losses.”




Non-Interest
Income




Non-interest
income for the three-month periods ended June 30, 2008 and 2007 totaled $390,000
and $282,000, respectively, an increase of $108,000 or 38%.  The
components of non-interest income during each period were as
follows:





Non-interest
income




Three
      Months ended June 30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            Increase
      (Decrease)Service
      charges
            
            $
            166
            
            
            $
            138
            
            
            $
            28Loss
      on sale of available-for-sale investment
    securities, net
            
            
            46
            
            
            
            (1
            )
            
            
            47Mortgage
      loan brokerage fees
            
            
            26
            
            
            
            23
            
            
            
            3Earnings
      on cash surrender value of life insurance policies
            
            
            67
            
            
            
            64
            
            
            
            3Other
            
            
            85
            
            
            
            58
            
            
            
            27Total
      non-interest income
            
            $
            390
            
            
            $
            282
            
            
            $
            108




Service
charges increased by $28,000 due to increased deposits and a higher fee
structure.  Within this category, account analysis charges increased
by $12,000 and non-sufficient funds and overdraft charges increased by
$20,000.  In addition, the Company recorded a $46,000 gain on sale of
investment securities in the 2008 period compared to a slight loss in the prior
year.  The other category increased by $27,000 due to recovery of a
sundry loss.




Non-Interest
Expense




Non-interest
expense was $2.3 million for the three-month period ended June 30, 2008 compared
to $2.1 million for the three-month period ended June 30, 2007, an increase of
$202,000 or 10%.  The increase was due to employee costs associated
with the Company’s growth initiatives, higher deposit insurance costs, and
increased occupancy and equipment costs.  Salaries and benefits
increased by $108,000 or 9% due to normal salary adjustments and new employees
hired to





21
 Index





staff the
Company’s new branch office in Tulare.  Occupancy and equipment
expense increased by $64,000 primarily due to the relocation of the Fresno
branch to a larger leased facility in the latter part of 2007 and the opening of
a full service branch in the City of Tulare during May
2008.  Assessment and insurance increased by $25,000 due to higher
Federal Deposit Insurance Corporation assessments rates imposed in
mid-2007.  Data processing costs increased by $23,000 due primarily to
the increased usage of electronic banking products by customers and branch
operations staff.  Other expenses increased by $30,000 primarily as a
result of fees paid to fill vacant officer positions.




Professional
and legal costs decreased by $74,000 in the 2008 period due to reduced use of
outside legal counsel on various corporate matters and reduced consultant costs
related to implementation of Sarbanes-Oxley legislative
requirements.




The
following table describes the components of non-interest expense for the
three-month periods ended June 30, 2008 and 2007:




Non-interest
expense




Three
      Months ended June 30,(in
      thousands)
            
            2008
            
            
            2007
            
            
            Increase
      (Decrease)Salaries
      and employee benefits
            
            $
            1,273
            
            
            $
            1,165
            
            
            $
            108Occupancy
      and equipment
            
            
            313
            
            
            
            249
            
            
            
            64Data
      processing
            
            
            131
            
            
            
            108
            
            
            
            23Operations
            
            
            128
            
            
            
            112
            
            
            
            16Professional
      and legal
            
            
            66
            
            
            
            140
            
            
            
            (74
            )Advertising
      and business development
            
            
            84
            
            
            
            81
            
            
            
            3Telephone
      and postal
            
            
            58
            
            
            
            51
            
            
            
            7Supplies
            
            
            57
            
            
            
            41
            
            
            
            16Assessment
      and insurance
            
            
            60
            
            
            
            35
            
            
            
            25Amortization
      expense
            
            
            -
            
            
            
            16
            
            
            
            (16
            )Other
      expenses
            
            
            145
            
            
            
            115
            
            
            
            30Total
      non-interest expense
            
            $
            2,315
            
            
            $
            2,113
            
            
            $
            202





Provision
for Income Taxes





The
provision for income taxes for the three-month periods ended June 30, 2008 and
2007 was $235,000 and $258,000, respectively.  The effective tax rates
for these periods were 30.5%, and 27.8%, respectively. The increase in effective
tax rate was primarily due to lower pretax income in the 2008 period which
magnified the impact of permanent tax differences in the computation of the
effective tax rate.





Financial
Condition





Fair
Value





Effective
January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements,
which requires enhanced disclosures about financial instruments carried at fair
value.  SFAS No. 157 established 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 10 of





22
 Index





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.





23
 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


June
      30, 2008(in
      thousands)
            
            AmortizedCost
            
            
            UnrealizedGain
            
            
            Unrealized
      Loss
            
            
            Fair
      ValueU.S.
      government  agencies
            
            $
            6,550
            
            
            $
            99
            
            
            $
            (10
            )
            
            $
            6,639Mortgage-backed
      securities
            
            
            15,446
            
            
            
            90
            
            
            
            (163
            )
            
            
            15,373Municipal
      securities
            
            
            19,739
            
            
            
            6
            
            
            
            (445
            )
            
            
            19,300Corporate
      debt securities
            
            
            1,500
            
            
            
            -
            
            
            
            (7
            )
            
            
            1,493Total
            
            $
            43,235
            
            
            $
            195
            
            
            $
            (625
            )
            
            $
            42,805





December
      31, 2007(in
      thousands)
            
            AmortizedCost
            
            
            UnrealizedGain
            
            
            Unrealized
      Loss
            
            
            Fair ValueU.S.
      government  agencies
            
            $
            17,544
            
            
            $
            80
            
            
            $
            (70
            )
            
            $
            17,554Mortgage-backed
      securities
            
            
            16,853
            
            
            
            192
            
            
            
            (85
            )
            
            
            16,960Municipal
      securities
            
            
            19,304
            
            
            
            42
            
            
            
            (227
            )
            
            
            19,119Corporate
      debt securities
            
            
            3,005
            
            
            
            1
            
            
            
            (24
            )
            
            
            2,982Total
            
            $
            56,706
            
            
            $
            315
            
            
            $
            (406
            )
            
            $
            56,615




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.




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)
            
            June
      30, 2008
            
            
            December
      31, 2007Commercial
            
            $
            52,998
            
            
            
            24
            %
            
            $
            41,824
            
            
            
            21
            %Real
      estate – mortgage (1)
            
            
            120,209
            
            
            
            55
            
            
            
            106,873
            
            
            
            53Real
      estate – construction
            
            
            38,636
            
            
            
            18
            
            
            
            44,896
            
            
            
            22Agricultural
            
            
            4,868
            
            
            
            2
            
            
            
            4,988
            
            
            
            3Consumer
      and other
            
            
            2,224
            
            
            
            1
            
            
            
            2,995
            
            
            
            1Subtotal
            
            
            218,935
            
            
            
            100
            %
            
            
            201,576
            
            
            
            100
            %Deferred
      loan fees, net
            
            
            (385
            )
            
            
            
            
            
            
            (304
            )Allowance
      for loan losses
            
            
            (2,565
            )
            
            
            
            
            
            
            (1,758
            )Total
      loans, net
            
            $
            215,985
            
            
            
            
            
            
            $
            199,514





(1)
Consists primarily of commercial mortgage loans.




During
the six months ended June 30, 2008, loan growth occurred primarily 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, for business expansion
purposes.





24
 Index





Nonperforming
Assets




There was
$1.4 million in nonperforming assets at June 30, 2008 which was comprised of
three nonaccrual loans for which management has established a specific loss
reserve of $102,000.  There were no nonperforming assets as of
December 31, 2007.




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 $2.6 million or 1.17% of total loans at June
30, 2008.  This compared to $1.75 million or 0.89% of total loans at
June 30, 2007 and $1.76 million or 0.87% at December 31,
2007.  Comparing June 30, 2008 to prior periods, management increased
the allowance for loan losses in both amount and percentage based on its
determination that there was a higher amount of probable loan losses in the loan
portfolio due to declining real estate values supporting collateral for loans
and deteriorating economic conditions in the Central Valley of
Callifornia.  However, no prediction of the ultimate level of loans
charged off in the future years can be made with any certainty.




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




Changes
in allowance for loan losses


Six Months ended
            
            
            Six Months ended
            
            
            Year endedJune 30, 2008
            
            
            June 30, 2007
            
            
            December 31, 2007(dollars
      in thousands)Balance,
      beginning
            
            $
            1,758
            
            
            $
            1,746
            
            
            $
            1,746Provision
      for  loan losses
            
            
            800
            
            
            
            -
            
            
            
            -Charge-offs
            
            
            (12
            )
            
            
            -
            
            
            
            -Recoveries
            
            
            19
            
            
            
            6
            
            
            
            12Balance,
      ending
            
            $
            2,565
            
            
            $
            1,752
            
            
            $
            1,758Annualized
      net charge-offs to average loans outstanding
            
            
            .00
            %
            
            
            .00
            %
            
            
            .00
            %Average
      loans outstanding
            
            $
            212,686
            
            
            $
            189,242
            
            
            $
            194,734Ending
      allowance to total loans outstanding
            
            
            1.17
            %
            
            
            0.89
            %
            
            
            0.87
            %




Deposits




Total
deposits were $262 million at June 30, 2008, a $47 million or 22% increase from
the December 31, 2007 total of $215 million.  The increase in deposits
was mostly due to the acquisition of additional brokered deposits and time
deposit promotions during the six month period ended June 30,
2008.  The Company utilized brokered time deposits and Federal Home
Loan Bank borrowings in addition to local deposit growth to fund asset growth
and maintain targeted liquidity levels.  The amount of brokered time
deposits at June 30, 2008 and December 31, 2007 were $22 million and $3 million,
respectively.  All other deposits were acquired
locally.  The Company’s long term growth strategy is based on
acquiring core deposits in its local market.




25
 Index




Total
deposits at June 30, 2008 and December 31, 2007 are summarized in the following
table:


Deposit
Portfolio


(dollars
      in thousands)
            
            June
      30, 2008
            
            
            December
      31, 2007Non-interest
      bearing
            
            $
            69,210
            
            
            
            27
            %
            
            $
            66,993
            
            
            
            31
            %Interest
      bearing
            
            
            89,841
            
            
            
            34
            
            
            
            86,277
            
            
            
            40Time
      deposits
            
            
            102,950
            
            
            
            39
            
            
            
            62,116
            
            
            
            29Total
      Deposits
            
            $
            262,001
            
            
            
            100
            %
            
            $
            215,386
            
            
            
            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 June 30, 2008, the Company had outstanding borrowings from the
Federal Home Loan Bank totaling $13.5 million.  This debt was
comprised of $8.0 million of short-term fixed rate debt, and $5.5 million of
long-term fixed rate debt.  At December 31, 2007, the Company had
$21.8 in short-term adjustable rate debt and long-term fixed rate debt totaling
$8.1 million.  At June 30, 2008, the weighted average rate on
long-term borrowings was 4.59% and the weighted average borrowing rate on
short-term borrowings was 2.81%.  The remaining principal balance of
long-term debt is scheduled to mature through January 2012.




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 balance of
junior subordinated deferrable interest debentures at June 30, 2008 was
unchanged from December 31, 2007.  The rate of interest paid on these
debentures was 7.04% at June 30, 2008 compared to 8.79% at December 31,
2007.





26
 Index





Capital
Resources




The
Company’s shareholders’ equity was $28.8 million at June 30, 2008 compared to
$28.9 million at December 31, 2007 as net income of $953,000 for the six-months
ended June 30, 2008 was offset by the Company’s repurchase of its common
stock.  During the six months ended June 30, 2008, the Company made
common stock repurchases totaling $804,000. In addition, there was a $192,000
increase in accumulated other comprehensive loss on available-for-sale
investment securities which is also a component of shareholders’
equity.




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.




The
following table summarizes the Company’s risk-based capital ratios as of June
30, 2008 and December 31, 2007:




Capital and capital adequacy
ratios


June 30, 2008
            
            
            December 31, 2007(dollars
      in thousands)
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioLeverage
      RatioValley
      Commerce Bancorp and Subsidiary
            
            $
            32,017
            
            
            
            11.2
            %
            
            $
            31,927
            
            
            
            11.5
            %Minimum
      regulatory requirement
            
            $
            11,707
            
            
            
            4.0
            %
            
            $
            11,101
            
            
            
            4.0
            %Valley
      Business Bank
            
            $
            31,469
            
            
            
            11.1
            %
            
            $
            31,538
            
            
            
            11.4
            %Minimum
      requirement for “Well-Capitalized” institution
            
            $
            14,628
            
            
            
            5.0
            %
            
            $
            13,871
            
            
            
            5.0
            %Minimum
      regulatory requirement
            
            $
            11,703
            
            
            
            4.0
            %
            
            $
            11,097
            
            
            
            4.0
            %Tier 1 Risk-Based
      Capital RatioValley
      Commerce Bancorp and Subsidiary
            
            $
            32,017
            
            
            
            13.1
            %
            
            $
            31,927
            
            
            
            13.8
            %Minimum
      regulatory requirement
            
            $
            10,172
            
            
            
            4.0
            %
            
            $
            9,233
            
            
            
            4.0
            %Valley
      Business Bank
            
            $
            31,469
            
            
            
            12.9
            %
            
            $
            31,538
            
            
            
            13.7
            %Minimum
      requirement for “Well-Capitalized” institution
            
            $
            15,254
            
            
            
            6.0
            %
            
            $
            13,844
            
            
            
            6.0
            %Minimum
      regulatory requirement
            
            $
            10,169
            
            
            
            4.0
            %
            
            $
            9,230
            
            
            
            4.0
            %Total Risk-Based
      Capital RatioValley
      Commerce Bancorp and Subsidiary
            
            $
            34,582
            
            
            
            14.0
            %
            
            $
            33,684
            
            
            
            14.6
            %Minimum
      regulatory requirement
            
            $
            20,345
            
            
            
            8.0
            %
            
            $
            18,465
            
            
            
            8.0
            %Valley
      Business Bank
            
            $
            34,035
            
            
            
            13.8
            %
            
            $
            33,296
            
            
            
            14.4
            %Minimum
      requirement for “Well-Capitalized” institution
            
            $
            25,423
            
            
            
            10.0
            %
            
            $
            23,074
            
            
            
            10.0
            %Minimum
      regulatory requirement
            
            $
            20,339
            
            
            
            8.0
            %
            
            $
            18,459
            
            
            
            8.0
            %




At June
30, 2008 and December 31, 2007, 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 June 30, 2008 and December 31, 2007, $3.0 million of
trust securities was included in Tier 1 Captial.





27
 Index





Liquidity





Liquidity
is the ability to provide funds to meet customers’ needs and to fund operations
in a timely and cost effective manner.  The Company has adopted
measures to ensure that the risk of loss due to inadequate liquidity remains at
a low level.  In particular, the Company adheres to a liquidity
contingency plan that requires management to take immediate action to improve
liquidity if it appears liquidity targets identified in Company policy may not
otherwise be fully achieved.




The
Company’s sources of liquidity include short-term borrowing arrangements with
FHLB and correspondent banks, available-for-sale securities, and amounts in the
Federal funds sold and cash and due from banks accounts on the balance
sheet.  Management constantly monitors its liquidity position in
relation to anticipated loan funding needs, branch expansions and other asset
acquisitions, deposit fluctuations, embedded options, off-balance sheet
arrangements and other factors that are likely to have a material effect on the
Company’s liquidity.





ITEM3 –
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.





ITEM4 – 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.





28
 Index





PARTII – OTHER INFORMATION





ITEM1 – 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.





ITEM1A – 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, 2007 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.





ITEM2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





None.





ITEM3 – DEFAULTS UPON SENIOR SECURITIES





None.





29
 Index





ITEM4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





The
Company’s 2008 Annual Meeting of Shareholders was held on May 20,
2008.  At the 2008 annual meeting, the shareholders took the following
actions:





1.
            Elected
      Directors of the Company to serve until the 2009 Annual Meeting of
      Shareholders and until their successors are elected and qualified. In the
      election for directors, no candidates were nominated for election as a
      director other than the nominees of the Board of Directors whose names
      were set forth in the Company’s proxy statement dated March 31, 2008. Set
      forth below is a tabulation of the votes cast in the election of Directors
      with respect to each nominee for
office:





Votes
      Cast
              For
      Election
            
            WithheldDavid
      B. Day
            1,786,913
            
            43,436Walter
      A. Dwelle
            1,786,913
            
            43,436Thomas
      A. Gaebe
            1,786,866
            
            43,483Donald
      A. Gilles
            1,662,947
            
            167,402Philip
      R. Hammond, Jr.
            1,786,913
            
            43,436Russell
      F. Hurley
            1,786,913
            
            43,436Fred
      P. LoBue, Jr.
            1,784,708
            
            45,641Kenneth
      H. Macklin
            1,786,913
            
            43,436Barry
      R. Smith
            1,786,913
            
            43,436





2.
            Ratified
      the appointment by the Board of Directors of Perry-Smith LLP, independent
      certified public accountants, to serve as the Company’s auditors for the
      fiscal year ending December 31, 2008. The votes tabulated
      were:





Votes
              For
            
            Votes
              Against1,776,448
            
            26,440





ITEM5 – OTHER INFORMATION





None.





ITEM6 – EXHIBITS





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





30
 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:
      August 12, 2008
            By:
            /s/
      Donald A. GillesDonald
      A. GillesPresident
      and Chief Executive OfficerDate:
      August 12, 2008
            By:
            /s/Roy
      O. EstridgeRoy
      O. Estridge, Chief Financial
Officer




31
 Index





ExhibitIndex








31.1
            Rule
      13a-14(a)/15d-14(a) Certification31.2
            Rule
      13a-14(a)/15d-14(a) Certification32.1
            Section
      1350 Certifications






32