UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-Q




(Mark
      One)ý
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009o
            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


(Exact
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  o





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





Large
      Accelerated Filer
             ̈
            Accelerated
      Filer
             ̈Non-Accelerated
      Filer
             ̈
            Smaller
      Reporting Company
            ý


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 2,473,739 as of
May 15, 2009.









1




INDEX




PART I - FINANCIAL INFORMATION
            3ITEM 1 - FINANCIAL STATEMENTS
            4ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS  OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS
            12ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
            20ITEM 4 – CONTROLS AND PROCEDURES
            21PART II - OTHER INFORMATION
            22ITEM 1 LEGAL PROCEEDINGS
            22ITEM 1A RISK FACTORS
            22ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
            22ITEM 3 DEFAULTS UPON SENIOR SECURITIES
            22ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
            22ITEM 5 OTHER INFORMATION
            22ITEM 6 EXHIBITS
            22SIGNATURES
            23EXHIBIT INDEX
            24





2
 Index


PART I




Forward-Looking
Information




Certain
matters discussed in this Quarterly Report on Form 10-Q including, but not
limited to, those described in Item 2 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations, are forward-looking statements
that are subject to risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements. 
Such risks and uncertainties include, among others: (1) significant increases in
competitive pressure in the banking and financial services industries; (2)
changes in the interest rate environment, which could reduce anticipated or
actual margins; (3) changes in the regulatory environment; (4) general economic
conditions, either nationally or regionally and especially in the Company’s
primary service area, becoming less favorable than expected and resulting in,
among other things, a deterioration in credit quality; (5) operational risks,
including data processing systems failures or fraud; (6) changes in business
conditions and inflation; (7) changes in technology; (8) changes in monetary and
tax policies; and (9)changes in the securities markets; (10) civil disturbances
or terrorist threats or acts, or apprehension about the possible future
occurrences or acts of this type; (11) outbreak or escalation of hostilities in
which the United States is involved, any declaration of war by the U.S. Congress
or any other national or international calamity, crisis or emergency; (12)
changes in laws and regulations; (13) recently issued accounting pronouncements;
(14) government policies, regulations, and their enforcement
including  Bank Secrecy Act-related matters, taxing statutes and
regulations; (15) restrictions on dividends that our subsidiaries are allowed to
pay to us; (16) the ability to satisfy requirements related to the
Sarbanes-Oxley Act and other regulation on internal control; and (17)
management’s ability to manage these and other risks.  Therefore, the
information set forth in such forward-looking statements should be carefully
considered when evaluating the business prospects of the Company.




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


3
 Index


PART
1 – FINANCIAL INFORMATION


ITEM
1 – FINANCIALSTATEMENTS





VALLEY
COMMERCE BANCORP


CONDENSED
CONSOLIDATED BALANCE SHEET


(UNAUDITED)




March
      31,
                        2009
                      
                      
                      December
      31,
                        2008AssetsCash
      and due from banks
                      
                      $
                      6,837,736
                      
                      
                      $
                      8,755,867Federal
      funds sold
                      
                      
                      7,840,000
                      
                      
                      
                      13,390,000Total
      cash and cash equivalents
                      
                      
                      14,677,736
                      
                      
                      
                      22,145,867Available-for-sale
      investment securities, at fair value
                      
                      
                      46,232,000
                      
                      
                      
                      42,018,000Loans,
      less allowance for loan losses of $3,644,604 at March 31, 2009 and
      $3,244,454 at December 31, 2008 (Note 3)
                      
                      
                      230,400,201
                      
                      
                      
                      226,696,838Bank
      premises and equipment, net
                      
                      
                      7,626,545
                      
                      
                      
                      3,974,845Cash
      surrender value of bank-owned life insurance
                      
                      
                      6,491,781
                      
                      
                      
                      6,421,863Accrued
      interest receivable and other assets
                      
                      
                      4,833,500
                      
                      
                      
                      4,841,565Total
      assets
                      
                      $
                      310,261,763
                      
                      
                      $
                      306,098,978Liabilities and
      Shareholders’ EquityDeposits:Non-interest
      bearing
                      
                      $
                      66,852,346
                      
                      
                      $
                      77,405,517Interest
      bearing
                      
                      
                      194,060,000
                      
                      
                      
                      179,917,916Total
      deposits
                      
                      
                      260,912,346
                      
                      
                      
                      257,323,433Accrued
      interest payable and other liabilities
                      
                      
                      2,984,727
                      
                      
                      
                      2,357,915Short-term
      debt
                      
                      
                      -
                      
                      
                      
                      8,000,000Long-term
      debt
                      
                      
                      5,129,778
                      
                      
                      
                      5,184,346Junior
      subordinated deferrable interest debentures
                      
                      
                      3,093,000
                      
                      
                      
                      3,093,000Total
      liabilities
                      
                      
                      272,119,851
                      
                      
                      
                      275,958,694Commitments
      and contingencies (Note 5)Shareholders’
      equity (Note 6, 11 and 13):Serial
      preferred stock - no par value; 10,000,000 shares authorized, issued and
      outstanding – 7,700 shares class B and 385 shares class C at March 31,
      2009 and none issued at December 31, 2008
                      
                      
                      7,692,040
                      
                      
                      
                      -Common
      stock - no par value; 30,000,000 shares authorized; issued and outstanding
      – 2,473,739 shares at March 31, 2009 and December 31, 2008
                      
                      
                      24,535,483
                      
                      
                      
                      24,684,529Retained
      earnings
                      
                      
                      5,757,043
                      
                      
                      
                      5,359,535Accumulated
      other comprehensive income , net of taxes (Note 8)
                      
                      
                      157,346
                      
                      
                      
                      96,220Total
      shareholders’ equity
                      
                      
                      38,141,912
                      
                      
                      
                      30,140,284Total
      liabilities and shareholders’ equity
                      
                      $
                      310,261,763
                      
                      
                      $
                      306,098,978





See
      notes to unaudited condensed consolidated financial
      statements.


4
 Index


VALLEY COMMERCE
BANCORP


CONDENSED
CONSOLIDATED STATEMENT OF INCOME


(UNAUDITED)







For
      the Three MonthsEnded
      March 31,2009
                                                      
                                                      
                                                      2008Interest
      Income:Interest
      and fees on loans
                                                      
                                                      $
                                                      3,711,367
                                                      
                                                      
                                                      $
                                                      3,847,216Interest
      on investment securities:Taxable
                                                      
                                                      
                                                      306,448
                                                      
                                                      
                                                      
                                                      405,665Exempt
      from Federal income taxes
                                                      
                                                      
                                                      196,541
                                                      
                                                      
                                                      
                                                      195,552Interest
      on Federal funds sold
                                                      
                                                      
                                                      8,562
                                                      
                                                      
                                                      
                                                      593Total
      interest income
                                                      
                                                      
                                                      4,222,918
                                                      
                                                      
                                                      
                                                      4,449,026Interest
      Expense:Interest on deposits
                                                      
                                                      
                                                      1,029,783
                                                      
                                                      
                                                      
                                                      1,206,376Interest on short-term borrowings
                                                      
                                                      
                                                      25,255
                                                      
                                                      
                                                      
                                                      137,127Interest
      on long-term borrowings
                                                      
                                                      
                                                      66,093
                                                      
                                                      
                                                      
                                                      86,790Interest
      on junior subordinated deferrable interest debentures
                                                      
                                                      
                                                      36,219
                                                      
                                                      
                                                      
                                                      59,681Total
      interest expense
                                                      
                                                      
                                                      1,157,350
                                                      
                                                      
                                                      
                                                      1,489,974Net
      interest income before provision for loan losses
                                                      
                                                      
                                                      3,065,568
                                                      
                                                      
                                                      
                                                      2,959,052Provision
      for Loan Losses
                                                      
                                                      
                                                      400,000
                                                      
                                                      
                                                      
                                                      400,000Net
      interest income after provision for loan losses
                                                      
                                                      
                                                      2,665,568
                                                      
                                                      
                                                      
                                                      2,559,052Non-Interest
      Income:Service
      charges
                                                      
                                                      
                                                      178,492
                                                      
                                                      
                                                      
                                                      170,450Mortgage
      loan brokerage fees
                                                      
                                                      
                                                      12,500
                                                      
                                                      
                                                      
                                                      8,080Earnings
      on cash surrender value of life insurance policies
                                                      
                                                      
                                                      74,436
                                                      
                                                      
                                                      
                                                      65,754Other
                                                      
                                                      
                                                      51,231
                                                      
                                                      
                                                      
                                                      46,794Total
      non-interest income
                                                      
                                                      
                                                      316,659
                                                      
                                                      
                                                      
                                                      291,078Non-Interest
      Expense:Salaries
      and employee benefits
                                                      
                                                      
                                                      1,286,735
                                                      
                                                      
                                                      
                                                      1,283,269Occupancy
      and equipment
                                                      
                                                      
                                                      380,599
                                                      
                                                      
                                                      
                                                      285,992Other
                                                      
                                                      
                                                      852,043
                                                      
                                                      
                                                      
                                                      706,186Total
      non-interest expense
                                                      
                                                      
                                                      2,519,377
                                                      
                                                      
                                                      
                                                      2,275,447Income
      before provision for income taxes
                                                      
                                                      
                                                      462,850
                                                      
                                                      
                                                      
                                                      574,683Provision
      for Income Taxes
                                                      
                                                      
                                                      116,000
                                                      
                                                      
                                                      
                                                      157,000Net income
                                                      
                                                      
                                                      346,850
                                                      
                                                      
                                                      
                                                      417,683Dividends
      accrued and discount accreted onpreferred
      shares
                                                      
                                                      
                                                      91,972
                                                      
                                                      
                                                      
                                                      -Net
      income available to common shareholders
                                                      
                                                      $
                                                      254,878
                                                      
                                                      
                                                      $
                                                      417,683Basic
      earnings per share (Notes 7)
                                                      
                                                      $
                                                      0.10
                                                      
                                                      
                                                      $
                                                      0.16Diluted
      earnings per share (Notes 7)
                                                      
                                                      $
                                                      0.10
                                                      
                                                      
                                                      $
                                                      0.15





See
      notes to unaudited condensed consolidated financial
      statements.


5
 Index


VALLEY
COMMERCE BANCORP


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)





For
      the Three MonthsEnded
      March 31,2009
                    
                    
                    2008Cash
      Flows from Operating Activities:Net
      income
                    
                    $
                    346,850
                    
                    
                    $
                    417,683Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
                    
                    
                    400,000
                    
                    
                    
                    400,000Increase
      (decrease) in deferred loan origination fees, net
                    
                    
                    23,013
                    
                    
                    
                    (2,196
                    )Depreciation
                    
                    
                    171,865
                    
                    
                    
                    103,803Amortization
      of intangibles
                    
                    
                    -
                    
                    
                    
                    7,718Dividends
      on Federal Home Loan Bank stock
                    
                    
                    -
                    
                    
                    
                    (22,200
                    )Gain
      on sale of investment securities
                    
                    
                    (4,062
                    )
                    
                    
                    -Accretion
      of discounts of  premiums on investment securities,
      net
                    
                    
                    (10,395
                    )
                    
                    
                    (20,338
                    )Increase
      in cash surrender value of bank owned life insurance
                    
                    
                    (69,918
                    )
                    
                    
                    (62,333
                    )Stock-based
      compensation expense
                    
                    
                    14,695
                    
                    
                    
                    18,633Increase
      (decrease) in accrued interest receivable and other assets
                    
                    
                    8,065
                    
                    
                    
                    (30,597
                    )Increase
      in accrued interest payable and other liabilities
                    
                    
                    483,820
                    
                    
                    
                    270,145Net
      cash provided by operating activities
                    
                    
                    1,363,933
                    
                    
                    
                    1,080,318Cash
      Flows from Investing Activities:Proceeds
      from matured and called available-for-sale investment
      securities
                    
                    
                    -
                    
                    
                    
                    6,500,000Proceeds
      from sales of available-for-sale investment securities
                    
                    
                    1,579,550
                    
                    
                    
                    -Purchases
      of available-for-sale investment securities
                    
                    
                    (6,689,291
                    )
                    
                    
                    -Proceeds
      from principal repayments from available-for-sale mortgage-backed
      securities
                    
                    
                    1,014,066
                    
                    
                    
                    854,090Net
      increase in loans
                    
                    
                    (4,126,376
                    )
                    
                    
                    (11,556,392
                    )Purchase
      of premises and equipment
                    
                    
                    (3,823,565
                    )
                    
                    
                    (243,050
                    )Net
      cash used in investing activities
                    
                    $
                    (12,045,616
                    )
                    
                    $
                    (4,445,352
                    )Continued
      on next page.











6
 Index


VALLEY
COMMERCE BANCORP


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(UNAUDITED)


(Continued)





For
      the Three MonthsEnded
      March 31,2009
                                            
                                            
                                            2008Cash
      Flows from Financing Activities:Net
      increase in noninterest-bearing and interest-bearing
    deposits
                                            
                                            $
                                            8,906,508
                                            
                                            
                                            $
                                            5,455,831Net
      (decrease) increase in time deposits
                                            
                                            
                                            (5,317,595
                                            )
                                            
                                            
                                            8,324,503Proceeds
      from exercised stock options
                                            
                                            
                                            -
                                            
                                            
                                            
                                            4,175Proceeds
      from issuance of preferred stock
                                            
                                            
                                            7,679,207
                                            
                                            
                                            
                                            -Cash
      paid to repurchase common stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (804,118
                                            )Net
      decrease in short-term borrowings
                                            
                                            
                                            (8,000,000
                                            )
                                            
                                            
                                            (2,641,000
                                            )Payments
      on long-term advances
                                            
                                            
                                            (54,568
                                            )
                                            
                                            
                                            (951,958
                                            )Net
      cash provided by financing activities
                                            
                                            
                                            3,213,552
                                            
                                            
                                            
                                            9,387,433(Decrease)
      increase in cash and cash equivalents
                                            
                                            
                                            (7,468,131
                                            )
                                            
                                            
                                            6,022,399Cash
      and Cash Equivalents at Beginning of Period
                                            
                                            
                                            22,145,867
                                            
                                            
                                            
                                            9,297,346Cash
      and Cash Equivalents at End of Period
                                            
                                            $
                                            14,677,736
                                            
                                            
                                            $
                                            15,319,745Supplemental
      Disclosure of Cash Flow Information:Cash
      paid during the period for:Interest
      expense
                                            
                                            $
                                            1,288,382
                                            
                                            
                                            $
                                            1,444,561Income
      taxes
                                            
                                            $
                                            460,000
                                            
                                            
                                            $
                                            -Non-Cash
      Investing Activities:Net
      change in unrealized gain on available-for-sale securities
                                            
                                            $
                                            103,868
                                            
                                            
                                            $
                                            490,498Non-Cash
      Financing Activities:Accrued
      dividends on preferred stock
                                            
                                            $
                                            100,250
                                            
                                            
                                            
                                            N/ACumulative
      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"), formerly Bank of Visalia, in a one bank holding company
reorganization.  The new corporate structure provides the Company and
the Bank greater flexibility to expand and diversify.  The
reorganization was completed on November 21, 2002, subsequent to which the Bank
continued its operations as previously conducted, but as a wholly owned
subsidiary of the Company.





The Bank
commenced operations in 1996 under the name Bank of Visalia and changed its name
during 2005 to Valley Business Bank.  The Bank operates branches in
Visalia, Fresno, Woodlake, Tipton, and 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 March 31, 2009 and December 31, 2008, the
results of its operations for the three-month periods ended March 31, 2009 and
2008, and its cash flows for the three-month periods ended March 31, 2009 and
2008 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 consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company’s 2008 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 periods reported. 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.














8
 Index





3.           LOANS





Outstanding
loans are summarized below, in thousands:


March
      31,
                  2009
                
                
                December
      31,
                  2008Commercial
                
                $
                61,290,756
                
                
                $
                58,324,986Real
      estate – mortgage
                
                
                131,540,399
                
                
                
                129,267,195Real
      estate – construction
                
                
                33,896,087
                
                
                
                35,113,099Agricultural
                
                
                4,554,428
                
                
                
                4,010,551Consumer
                
                
                3,126,897
                
                
                
                3,566,210234,408,567
                
                
                
                230,282,041Deferred
      loan fees,  net
                
                
                (363,762
                )
                
                
                (340,749
                )Allowance
      for loan losses
                
                
                (3,644,604
                )
                
                
                (3,244,454
                )$
                230,400,201
                
                
                $
                226,696,838





4.           BANK
PREMISES AND EQUIPMENT





Premises
and equipment consisted of the following:


March
      31,
                    2009
                  
                  
                  December
      31,
                    2008Furniture
      and equipment
                  
                  $
                  2,821,909
                  
                  
                  $
                  2,805,728Premises
                  
                  
                  2,094,517
                  
                  
                  
                  2,094,517Leasehold
      improvements
                  
                  
                  550,548
                  
                  
                  
                  550,548Construction
      in progress
                  
                  
                  3,813,341
                  
                  
                  
                  5,957Land
                  
                  
                  601,530
                  
                  
                  
                  601,5309,881,845
                  
                  
                  
                  6,058,280Less
      accumulated depreciation and amortization
                  
                  
                  (2,255,300
                  )
                  
                  
                  (2,083,435
                  )$
                  7,626,545
                  
                  
                  $
                  3,974,845





During
February of 2009, the Company purchased an office building in Visalia,
California.  The Company plans to relocate its administrative office
and Visalia branch to the new facility in the latter part of 2009.





5.           COMMITMENTS
AND CONTINGENCIES





The
Company is 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 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 $45.4 million and $47.4 million  and letters of
credit of $302,000 and $337,000 at March 31, 2009 and December 31, 2008,
respectively.





At March
31, 2009, consumer loan commitments, which are generally unsecured, represent
approximately 5% of total commitments.  Agricultural loan commitments
represent approximately 3% of total commitments and are generally secured by
crops and/or real estate.  Commercial loan commitments represent
approximately 66% of total commitments and are generally secured by various
assets of the borrower.  Real estate loan commitments represent the
remaining 26% of total commitments and are generally secured by property with a
loan-to-value ratio not to exceed 80%.  In addition, the majority of
the Bank’s commitments have variable interest rates.  Total
commitments do not necessarily represent future cash
requirements.  Each loan commitment and the amount and type of
collateral obtained, if any, are evaluated on an individual
basis.  Collateral held varies, but may include real property, bank
deposits, debt or equity securities or business assets.


9
 Index


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.





6.           STOCK-BASED
COMPENSATION





The
Company has two active share based compensation plans; the Valley Commerce
Bancorp 2007 Equity Incentive Plan (“Incentive Plan”) for which 95,925 shares of
common stock are reserved for issuance to employees and directors under
incentive and non-statutory agreements and the Valley Commerce Bancorp Amended
and Restated 1997 Stock Option Plan (‘Prior Plan”) for which 151,438 shares of
common stock are reserved for issuance, however, no further grants may be made
under this plan as it expired in February 2007.  The Incentive Plan
provides for awards of stock options, restricted stock awards, qualified
performance-based awards and stock grants.  The purpose of the
Incentive Plan is to promote the long-term success of the Company and the
creation of shareholder value.  The Board of Directors believes that
the availability of stock options and other forms of stock awards will be a key
factor in the ability of the Company to attract and retain qualified
individuals.





During
the three-month periods ended March 31, 2009 and March 31, 2008, no options were
granted by the Company. Compensation costs related to stock options recognized
in operating results under SFAS No. 123R was $14,695 and $18,633 in the three
months ended March 31, 2009 and 2008, 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
following table summarizes information about stock option activity for the three
months ended March 31, 2009:




For
      the Three Months Ended March 31, 2009Shares
                                                    
                                                    
                                                    Weighted
      Average
                                                      Exercise
      Price
                                                    
                                                    Weighted
      Average
                                                      Remaining
                                                      Contractual
      Term
                                                    
                                                    Aggregate
      Intrinsic
                                                      Value
      (1)Incentive:Options
      outstanding at January 1, 2009
                                                    
                                                    
                                                    74,878
                                                    
                                                    
                                                    $
                                                    10.36Options
      granted
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Options
      exercised
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Options
      cancelled
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Options
      outstanding at March 31, 2009
                                                    
                                                    
                                                    74,878
                                                    
                                                    
                                                    $
                                                    10.36
                                                    
                                                    6.11
      years
                                                    
                                                    $
                                                    -Options
      vested or expected to vest atMarch
      31, 2009
                                                    
                                                    
                                                    54,599
                                                    
                                                    
                                                    $
                                                    11.64
                                                    
                                                    6.29
      years
                                                    
                                                    $
                                                    -Options
      exercisable at March 31, 2009
                                                    
                                                    
                                                    44,020
                                                    
                                                    
                                                    $
                                                    8.41
                                                    
                                                    4.27
      years
                                                    
                                                    $
                                                    -Nonstatutory:Options
      outstanding at January 1, 2009
                                                    
                                                    
                                                    99,121
                                                    
                                                    
                                                    $
                                                    -Options
      granted
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Options
      exercised
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Options
      cancelled
                                                    
                                                    
                                                    -Options
      outstanding at March 31, 2009
                                                    
                                                    
                                                    99,121
                                                    
                                                    
                                                    $
                                                    8.68
                                                    
                                                    3.46
      years
                                                    
                                                    $
                                                    -Options
      vested or expected to vest atMarch
      31, 2009
                                                    
                                                    
                                                    93,379
                                                    
                                                    
                                                    $
                                                    8.28
                                                    
                                                    4.51
      years
                                                    
                                                    $
                                                    -Options
      exercisable at March 31, 2009
                                                    
                                                    
                                                    94,490
                                                    
                                                    
                                                    $
                                                    8.28
                                                    
                                                    3.28
      years
                                                    
                                                    $
                                                    -


(1)  All  incentive
and non-statutory options are excluded from the intrinsic value calculation in
the table above because the exercise price is greater than the stock price at
March 31, 2009.


10
 Index


The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the quoted price of the Company’s common
stock for options that were in-the-money at March 31, 2009.  There
were no stock options exercised during the three months ended March 31,
2009.  The total fair value of shares vested during the quarter ended
March 31, 2009 was $36,099.





Management
estimates expected forfeitures and recognizes compensation costs only for those
equity awards expected to vest.  As of March 31, 2009, there was
$177,000 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 3.74 years and
will be adjusted for subsequent changes in estimated forfeitures.





7.           EARNINGS
PER SHARE




Basic
earnings per share are computed by dividing income available to common
shareholders by the weighted average common shares outstanding for the
period.  Diluted earnings per share reflect the potential dilution
that could occur if outstanding stock options were exercised.  Diluted
earnings per share are computed by dividing income available to common
shareholders by the weighted average common shares outstanding for the period
plus the dilutive effect of options.  Earnings per share computations
have been adjusted to reflect the stock dividend declared on April 21, 2009, as
well as retroactively adjusted to reflect the stock dividend paid to
shareholders of record on June 11, 2008.





For
      the Three MonthsEnded
      March 31,2009
                                        
                                        
                                        2008Net
      Income:Net
      income
                                        
                                        $
                                        346,850
                                        
                                        
                                        $
                                        417,683Dividends
      accrued and discount accreted on preferred shares
                                        
                                        
                                        91,972
                                        
                                        
                                        
                                        -Net
      income (loss) allocated to common shareholders
                                        
                                        $
                                        254,878
                                        
                                        
                                        $
                                        417,683Earnings
      Per Share:Basic
      earnings per share
                                        
                                        $
                                        0.10
                                        
                                        
                                        $
                                        0.16Diluted
      earnings per share
                                        
                                        $
                                        0.10
                                        
                                        
                                        $
                                        0.15Weighted
      Average Number of Shares Outstanding:Basic
      shares
                                        
                                        
                                        2,597,425
                                        
                                        
                                        
                                        2,618,467Diluted
      shares
                                        
                                        
                                        2,597,425
                                        
                                        
                                        
                                        2,662,842





There
were 173,999 and 11,576 options excluded from the computation of diluted
earnings per share for the 2009 and 2008 periods as they were identified as
antidilutive.





8.           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 EndedMarch
      31,
                
                
                March
      31,2009
                
                
                2008Net
      income
                
                $
                346,850
                
                
                $
                417,683Other
      comprehensive income:Unrealized
      holding gains on available-for-saleinvestment
      securities, net of tax
                
                
                61,126
                
                
                
                490,498Total
      comprehensive income
                
                $
                407,976
                
                
                $
                908,181





11
 Index


9.            INCOME
TAXES





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





Deferred
tax assets and liabilities are recognized for the tax consequences of temporary
differences between the reported 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
quarter ended March 31, 2009.





10.           STOCK
REPURCHASE




On
November 13, 2007, the Company announced that its Board of Directors authorized
a common stock repurchase plan.  The plan provides for the repurchase
of up to an aggregate of $3,000,000 of the Company’s common
stock.  The number, price and timing of the repurchase shall be at the
Company’s sole discretion and the plan may be re-evaluated depending on market
conditions, liquidity needs or other factors.  The Board, based on
such re-evaluations, may suspend, terminate, modify or cancel the plan at any
time without notice.  There were no shares repurchased during the
quarter ended March 31, 2009.  During the quarter ended March 31,
2008, the Company repurchased 58,467 shares for a total cost of $804,118 or an
average price of $13.75 per share.  Since the plan was adopted the
Company has repurchased 90,505 shares for a total cost of $1,202,846 at an
average price of $13.29 per share.




Beginning
January 30, 2009, the Company was restricted from repurchasing its common stock
due to its issuance of preferred stock to the United States Department of the
Treasury in conjunction with the Company’s participation in the Capital Purchase
Program.  See Note 11.




11.           PREFERREDSTOCK




On
January 30, 2009, the Company entered into a Letter Agreement (the “Purchase
Agreement”) with the United States Department of the Treasury (“Treasury”),
pursuant to which the Company issued and sold (i) 7,700 shares of the
Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the
“Series B Preferred Stock”) and (ii) a warrant to purchase
385  shares of the Company’s Fixed Rate Cumulative Perpetual Preferred
Stock, Series C  stock, (the “Warrant Preferred” or “Series C
Preferred Stock”) for a combined purchase price of $7,700,000 and were recorded
net of $20,793 in offering costs.  The Treasury exercised the Warrant
immediately upon issuance.





The
Series B Preferred Stock will qualify as Tier 1 capital and will pay
cumulative dividends quarterly at a rate of 5% per annum for the first five
years, and 9% per annum thereafter. The Warrant Preferred will pay cumulative
dividends at a rate of 9% per annum until redemption.  The terms
governing the Series B Preferred Stock and the Series C Preferred Stock provide
that either series may be redeemed by the Company after three years; however,
the Warrant Preferred may not be redeemed until after all the Series B Preferred
Stock has been redeemed, and prior to the end of three years, the Series B
Preferred Stock and the Warrant Preferred may be redeemed by the Company only
with proceeds from the sale of qualifying equity securities of the Company (a
“Qualified Equity Offering”).  The American Recovery and Reinvestment
Act of 2009, which was enacted on February 17, 2009,


12
 Index


permits
the Company to redeem the Series B Preferred Stock and the Warrant
Preferred without a Qualified Equity Offering, subject to the Company’s
consultation with the Board of Governors of the Federal Reserve
System.





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




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





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





12.           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 quarter of 2009.





The
following table presents information about the Company’s assets and liabilities
measured at fair value on a recurring basis as of March 31, 2009, 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
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.








13
 Index











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





Fair
      Value Measurementsat
      March 31, 2009, UsingQuoted
      Prices in
                        
                        Other
                        
                        SignificantActive
      Markets for
                        
                        Observable
                        
                        UnobservableFair
      Value
                        
                        Identical
      Assets
                        
                        Inputs
                        
                        InputsMarch 31, 2009
                        
                        (Level
      1)
                        
                        (Level
      2)
                        
                        (Level
      3)Assets:Available-for-sale
      investment securities
                        
                        $
                        46,232,000
                        
                        
                        
                        —
                        
                        
                        $
                        46,232,000
                        
                        
                        
                        —





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
      March 31, 2009, UsingQuoted
      Prices in
                                              
                                              Other
                                              
                                              
                                              SignificantActive
      Markets for
                                              
                                              Observable
                                              
                                              
                                              UnobservableFair
      Value
                                              
                                              Identical
      Assets
                                              
                                              Inputs
                                              
                                              
                                              InputsMarch 31, 2008
                                              
                                              (Level
      1)
                                              
                                              (Level
      2)
                                              
                                              
                                              (Level
      3)Assets:Impaired
      loans
                                              $
                                              
                                              2,700,000
                                              
                                              
                                              
                                              —
                                              
                                              
                                              $
                                              2,700,000
                                              
                                              
                                              $
                                              —





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
credit losses expense on the Consolidated Statements 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 $2.7 million with a valuation allowance of $581,000 at
March 31, 2009 compared to impaired loans with a principal balance of $2.8
million with a related valuation allowance of $425,000 at December 31,
2008.  Declines in the fair value of collateral on impaired loans and
were the primary cause of the increase in specific allocations of the allowance
for loan losses of $156,000 during the three months ended March 31,
2009.





13.           SUBSEQUENT
EVENT - STOCK DIVIDEND





At a regularly scheduled meeting held
April 21, 2009, the Board of Directors of Valley Commerce Bancorp approved a 5%
stock dividend to be issued to shareholders in mid-June.  The stock
dividend will be provided to shareholders of record as of June 10,
2009.  All share and per share data included in these first quarter
2009 financial statements have been adjusted as if the dividendwas
issued at the beginning of the quarter.





14.           RECENT
ACCOUTING DEVELOPMENTS





In April
2009, the Financial Accounting Standards Board (FASB) issued the following three
FASB Staff Positions (FSPs) intended to provide additional guidance and enhance
disclosures regarding fair value measurements and impairment of
securities:





FSP FAS
157-4, Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly, provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the
asset or liability have decreased significantly.  FSP FAS 157-4 also
provides guidance on identifying circumstances that indicate a transaction is
not orderly.  The provisions of FSP FAS 157-4 are effective for the
Company’s interim period ending on June 30, 2009.  Management is
currently evaluating the effect that the provisions of FSP FAS 157-4 may have on
the Company’s condensed consolidated financial statements.


14
 Index





FSP FAS
107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments,requires disclosures
about fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in
annual financial statements.  The provisions of FSP FAS 107-1 and APB 28-1
are effective for the Company’s interim period ending on June 30,
2009.  As FSP FAS 107-1 and APB 28-1 amends only the disclosure
requirements about fair value of financial instruments in interim periods, the
adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect the Company’s
condensed consolidated financial statements.





FSP FAS
115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, amends current other-than-temporary
impairment guidance in GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements.  This FSP does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. 
The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Company’s
interim period ending on June 30, 2009.  Management is currently
evaluating the effect that the provisions of FSP FAS 115-2 and FAS 124-2 may
have on the Company’s condensed consolidated financial statements.












15
 Index


ITEM
2 – 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,
2008.





Overview




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




The
Company earned net income of $347,000 or $0.10 per diluted share, for the
quarter ended March 31, 2009, compared to $418,000, or $0.15 per diluted share,
for the quarter ended March 31, 2008.  The decrease in earnings
resulted from increases in non-interest expense partially offset by increases in
net interest income.  The accrual of an industry-wide special and
other general assessments announced by the FDIC in February 2009 was the primary
reason for the increase in non-interest expense.  While net interest
income increased, the decrease in diluted earnings per share resulted primarily
from preferred stock dividends issued to the United States Treasury in the first
quarter of 2009.  The preferred dividends reduced the amount of net
income available to common shareholders in the earnings per share
calculation.




The
annualized quarterly return on average assets for the 2009 and 2008 periods was
0.45% and 0.60%, respectively.  The annualized quarterly return on
average shareholders’ equity for the 2009 and 2008 periods was 3.92% and 5.76%,
respectively.




At March
31, 2009, the Company’s total assets were $310.3 million, representing an
increase of $20.4 million or 7% compared to March 31, 2008.  Total
loans, net of the allowance for loan losses, were $230.4 million at March 31,
2009, representing an increase of $19.7 million or 9% compared to March 31,
2008.  Total deposits were $260.9 million at March 31, 2009,
representing an increase of $31.7 million or 14% compared to March 31,
2008.  Comparing March 31, 2009 and December 31, 2008 balances, total
assets increased by $4.2 million or 1%, total net loans increased by $3.7
million or 2%, and total deposits increased by $3.6 million or 1%.




At March
31, 2009, the Company’s leverage ratio was 13.2% while its tier 1 risk-based
capital ratio and total risk-based capital ratio were 15.5% and 16.7%,
respectively.  At December 31, 2008, the Company’s leverage ratio was
10.9% while its tier 1 risk-based capital ratio and total risk-based capital
ratio were 12.7% and 14.0%, respectively.  The leverage, tier 1
risk-based capital and total risk-based capital ratios at March 31, 2008 were
11.2%, 13.1% and 14.0%, respectively.  The Company’s capital ratios
increased between March 31, 2009 and the prior periods primarily as a result of
the issuance of preferred stock to the United States Department of Treasury on
January 30, 2009.  The Company issued  and sold 7,700 shares
of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B and a
warrant to purchase 385 shares of the Company’s Fixed Rate Cumulative Perpetual
Preferred stock, Series C stock for a combined price of $7.7
million.  The Treasury exercised the warrant immediately upon
issuance.




Critical
Accounting Policies




There
have been no changes to the Company’s critical accounting policies from those
discussed in the Company’s 2008 Annual Report to Shareholders’ on Form
10-K.


16
 Index


Results
of Operations for the Three Months Ended March 31, 2009 and 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 and
      costs
                                                                        Three
      months ended March 31,2009
                                                                      
                                                                      
                                                                      2008Interest
                                                                      
                                                                      
                                                                      Average
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      Interest
                                                                      
                                                                      
                                                                      AverageAverage
                                                                      
                                                                      
                                                                      income/
                                                                      
                                                                      
                                                                      Yield/
                                                                      
                                                                      
                                                                      Average
                                                                      
                                                                      
                                                                      income/
                                                                      
                                                                      
                                                                      Yield/(dollars
      in thousands)
                                                                      
                                                                      Balance
                                                                      
                                                                      
                                                                      Expense
                                                                      
                                                                      
                                                                      Cost
                                                                      
                                                                      
                                                                      Balance
                                                                      
                                                                      
                                                                      Expense
                                                                      
                                                                      
                                                                      costASSETSFederal
      funds sold
                                                                      
                                                                      $
                                                                      12,990
                                                                      
                                                                      
                                                                      $
                                                                      9
                                                                      
                                                                      
                                                                      
                                                                      0.28
                                                                      %
                                                                      
                                                                      $
                                                                      94
                                                                      
                                                                      
                                                                      $
                                                                      1
                                                                      
                                                                      
                                                                      
                                                                      2.54
                                                                      %Available-for-sale
      investment securities:Taxable
                                                                      
                                                                      
                                                                      23,983
                                                                      
                                                                      
                                                                      
                                                                      306
                                                                      
                                                                      
                                                                      
                                                                      5.17
                                                                      %
                                                                      
                                                                      
                                                                      34,029
                                                                      
                                                                      
                                                                      
                                                                      405
                                                                      
                                                                      
                                                                      
                                                                      4.79
                                                                      %Exempt
      from Federal income taxes (1)
                                                                      
                                                                      
                                                                      19,512
                                                                      
                                                                      
                                                                      
                                                                      197
                                                                      
                                                                      
                                                                      
                                                                      6.20
                                                                      %
                                                                      
                                                                      
                                                                      19,306
                                                                      
                                                                      
                                                                      
                                                                      196
                                                                      
                                                                      
                                                                      
                                                                      6.19
                                                                      %Total
      securities (1)
                                                                      
                                                                      
                                                                      43,495
                                                                      
                                                                      
                                                                      
                                                                      503
                                                                      
                                                                      
                                                                      
                                                                      5.64
                                                                      %
                                                                      
                                                                      
                                                                      53,335
                                                                      
                                                                      
                                                                      
                                                                      601
                                                                      
                                                                      
                                                                      
                                                                      5.29
                                                                      %Loans
      (2) (3)
                                                                      
                                                                      
                                                                      232,393
                                                                      
                                                                      
                                                                      
                                                                      3,711
                                                                      
                                                                      
                                                                      
                                                                      6.48
                                                                      %
                                                                      
                                                                      
                                                                      207,276
                                                                      
                                                                      
                                                                      
                                                                      3,847
                                                                      
                                                                      
                                                                      
                                                                      7.46
                                                                      %Total
      interest-earning assets (1)
                                                                      
                                                                      
                                                                      288,878
                                                                      
                                                                      
                                                                      
                                                                      4,223
                                                                      
                                                                      
                                                                      
                                                                      6.07
                                                                      %
                                                                      
                                                                      
                                                                      260,705
                                                                      
                                                                      
                                                                      
                                                                      4,449
                                                                      
                                                                      
                                                                      
                                                                      7.08
                                                                      %Noninterest-earning
      assets, net of allowance for loan losses
                                                                      
                                                                      
                                                                      20,999
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      19,661Total
      assets
                                                                      
                                                                      $
                                                                      309,877
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      $
                                                                      280,366LIABILITIES
      AND SHAREHOLDERS’ EQUITYDeposits:Other
      interest-bearing
                                                                      
                                                                      $
                                                                      99,067
                                                                      
                                                                      
                                                                      $
                                                                      355
                                                                      
                                                                      
                                                                      
                                                                      1.45
                                                                      %
                                                                      
                                                                      $
                                                                      94,035
                                                                      
                                                                      
                                                                      $
                                                                      521
                                                                      
                                                                      
                                                                      
                                                                      2.23
                                                                      %Time
      deposits less than $100,000
                                                                      
                                                                      
                                                                      25,375
                                                                      
                                                                      
                                                                      
                                                                      177
                                                                      
                                                                      
                                                                      
                                                                      2.83
                                                                      %
                                                                      
                                                                      
                                                                      18,027
                                                                      
                                                                      
                                                                      
                                                                      179
                                                                      
                                                                      
                                                                      
                                                                      3.99
                                                                      %Time
      deposits $100,000 or more
                                                                      
                                                                      
                                                                      66,117
                                                                      
                                                                      
                                                                      
                                                                      498
                                                                      
                                                                      
                                                                      
                                                                      3.05
                                                                      %
                                                                      
                                                                      
                                                                      44,788
                                                                      
                                                                      
                                                                      
                                                                      506
                                                                      
                                                                      
                                                                      
                                                                      4.54
                                                                      %Total
      interest-bearing deposits
                                                                      
                                                                      
                                                                      190,559
                                                                      
                                                                      
                                                                      
                                                                      1,030
                                                                      
                                                                      
                                                                      
                                                                      2.19
                                                                      %
                                                                      
                                                                      
                                                                      156,850
                                                                      
                                                                      
                                                                      
                                                                      1,206
                                                                      
                                                                      
                                                                      
                                                                      3.09
                                                                      %Short-term
      debt
                                                                      
                                                                      
                                                                      4,244
                                                                      
                                                                      
                                                                      
                                                                      25
                                                                      
                                                                      
                                                                      
                                                                      2.39
                                                                      %
                                                                      
                                                                      
                                                                      18,282
                                                                      
                                                                      
                                                                      
                                                                      137
                                                                      
                                                                      
                                                                      
                                                                      3.01
                                                                      %Long-term
      debt
                                                                      
                                                                      
                                                                      5,152
                                                                      
                                                                      
                                                                      
                                                                      66
                                                                      
                                                                      
                                                                      
                                                                      5.20
                                                                      %
                                                                      
                                                                      
                                                                      7,859
                                                                      
                                                                      
                                                                      
                                                                      87
                                                                      
                                                                      
                                                                      
                                                                      4.45
                                                                      %Junior
      subordinated deferrable interest debentures
                                                                      
                                                                      
                                                                      3,093
                                                                      
                                                                      
                                                                      
                                                                      36
                                                                      
                                                                      
                                                                      
                                                                      4.72
                                                                      %
                                                                      
                                                                      
                                                                      3,093
                                                                      
                                                                      
                                                                      
                                                                      60
                                                                      
                                                                      
                                                                      
                                                                      7.80
                                                                      %Total
      interest-bearing liabilities
                                                                      
                                                                      
                                                                      203,048
                                                                      
                                                                      
                                                                      
                                                                      1,157
                                                                      
                                                                      
                                                                      
                                                                      2.31
                                                                      %
                                                                      
                                                                      
                                                                      186,084
                                                                      
                                                                      
                                                                      
                                                                      1,490
                                                                      
                                                                      
                                                                      
                                                                      3.22
                                                                      %Noninterest-bearing
      deposits
                                                                      
                                                                      
                                                                      68,873
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      63,057Other
      liabilities
                                                                      
                                                                      
                                                                      2,038
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      2,050Total
      liabilities
                                                                      
                                                                      
                                                                      273,959
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      251,191Shareholders’
      equity
                                                                      
                                                                      
                                                                      35,918
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      29,175Total
      liabilities and shareholders’ equity
                                                                      
                                                                      $
                                                                      309,877
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      $
                                                                      280,366Net
      interest income and margin (1)
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      $
                                                                      3,066
                                                                      
                                                                      
                                                                      
                                                                      4.41
                                                                      %
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      $
                                                                      2,959
                                                                      
                                                                      
                                                                      
                                                                      4.72
                                                                      %





(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 $28 and $60 for 2009 and 2008, respectively.





17
 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, 2009 and 2008.





Changes in net
      interest income due to changes in volumes and rates2009
      period vs 2008 perioddue
      to change in:Average
                  
                  
                  AverageVolume
                  
                  
                  Rate
      (1)
                  
                  
                  Total(In
      thousands)Increase
      (decrease) in interest income:Federal
      funds sold
                  
                  $
                  81
                  
                  
                  $
                  (73
                  )
                  
                  $
                  8Investment
      securitiesTaxable
                  
                  
                  (119
                  )
                  
                  
                  20
                  
                  
                  
                  (99
                  )Exempt
      from Federal income taxes
                  
                  
                  3
                  
                  
                  
                  (2
                  )
                  
                  
                  1Total
      securities
                  
                  
                  (116
                  )
                  
                  
                  18
                  
                  
                  
                  (98
                  )Loans
                  
                  
                  462
                  
                  
                  
                  (598
                  )
                  
                  
                  (136
                  )Total
      interest income
                  
                  $
                  427
                  
                  
                  $
                  (653
                  )
                  
                  $
                  (226
                  )(Decrease)
      increase in interest expense:Other
      interest bearing deposits
                  
                  
                  28
                  
                  
                  
                  (194
                  )
                  
                  
                  (166
                  )Time
      deposits less than $100,000
                  
                  
                  72
                  
                  
                  
                  (74
                  )
                  
                  
                  (2
                  )Time
      deposits $100,000 or more
                  
                  
                  239
                  
                  
                  
                  (247
                  )
                  
                  
                  (8
                  )Total
      interest-bearing deposits
                  
                  
                  339
                  
                  
                  
                  (515
                  )
                  
                  
                  (176
                  )Short-term
      debt
                  
                  
                  (104
                  )
                  
                  
                  (8
                  )
                  
                  
                  (112
                  )Long-term
      debt
                  
                  
                  (30
                  )
                  
                  
                  9
                  
                  
                  
                  (21
                  )Junior
      subordinated deferrable interest debentures
                  
                  
                  -
                  
                  
                  
                  (24
                  )
                  
                  
                  (24
                  )Total
      interest expense
                  
                  
                  205
                  
                  
                  
                  (538
                  )
                  
                  
                  (333
                  )Increase
      (decrease) in net interest income
                  
                  $
                  222
                  
                  
                  $
                  (115
                  )
                  
                  $
                  107


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




Total
interest income for the three-month periods ended March 31, 2009 and 2008 was
$4.2 million and $4.5 million, respectively, a decrease $226,000 or
5%.  The weighted average taxable-equivalent yield on total
interest-earning assets was 6.07% in the 2009 period compared to 7.08% in the
2008 period, a reduction of 101 basis points.  The decrease was
primarily due to declining yields on loans.  Despite a $25.1 million
or 12% increase in average loans, the Company’s interest income from loans
decreased by $136,000 due to the average yield decreasing from 7.46% in the 2008
period to 6.48% in the 2009 period, a change of 98 basis
points.   This primarily reflected the impact of Fed rate
decreases totaling 275 basis points occurring in the period from April 2008 to
March 2009 and its impact on the variable priced portion of the Company’s loan
portfolio.  At March 31, 2009, approximately 68% of the Company’s loan
portfolio was variable rate loans.  In addition, there was a decrease
in investment securities income as average available-for-sale securities
decreased by $9.8 million or 18%, due primarily to called and matured
securities.




Total
interest expense for the three-month period ended March 31, 2009 was $1.2
million, a decrease of $333,000 or 22% from the same period in
2008.  The average rate paid on interest-bearing liabilities was 2.31%
in the 2009 period compared to 3.22% in the 2008 period, a reduction of 91 basis
points.  Average total interest-bearing liabilities in the 2009 period
increased by $17.0 million or 9% compared to the 2008 period.  This
included an increase in average interest bearing deposits of $5.0 million or 5%,
an increase of $5.8 million or 9% in average non-interest bearing deposits, and
an increase of $28.7 million or 46% in average time deposits due primarily to
local deposit growth. These increases were offset by a$16.7 million or 64%
decrease in the Company’s combined short-term and long-term
debt.


18
 Index


Due to
the factors described in the preceding paragraphs, net interest income increased
to $3.1 million for the 2009 period compared to $3.0 million for the 2008
period.   Changes in the volumes of interest earning assets and
interest bearing liabilities caused the Company’s net interest income to
increase by $222,000, while changes in interest rates on these same accounts
caused net interest income to decrease by $115,000.




The
Company’s net interest margin on a taxable equivalent basis decreased 31 bps
from 4.72% during the three months ended March 31, 2008 to 4.41% during the
three months ended March 31, 2009.  The Company maintained a fairly
steady net interest margin despite Fed funds rate decreases totaling 275 basis
points during the period April 2008 to March 2009.  This was
attributable both to loan growth and to management’s efforts to mitigate the
impact of falling interest rates.  These efforts included utilizing
rate floors on variable priced loans and aggressively lowering deposit
rates.




Provision
for Loan Losses




The
provision for loan losses, which is included in operations to support
management’s estimate of the required level of the allowance for loan losses, is
based on credit experience and management’s ongoing evaluation of loan portfolio
risk and economic conditions.  A $400,000 loan loss provision was
recorded during both the first quarter of 2009 and the first quarter of
2008.  Management determined the first quarter provision for loan loss
after consideration of current economic conditions in the Bank’s primary
markets.  See the sections below titled “Allowance for Loan
Losses.”




Non-Interest
Income




Non-interest
income for the three-month periods ended March 31, 2009 and 2008 totaled
$317,000 in the first quarter of 2009 compared to $291,000 in the first quarter
of 2008, an increase of $26,000 or 9%.  The components of non-interest
income during each period were as follows:





Non-interest
      income
                        Quarter
      ended March 31,(in
      thousands)
                      
                      2009
                      
                      
                      2008
                      
                      
                      Increase
                        (Decrease)Service
      charges on deposit accounts
                      
                      $
                      178
                      
                      
                      $
                      170
                      
                      
                      $
                      8Mortgage
      loan brokerage fees
                      
                      
                      13
                      
                      
                      
                      8
                      
                      
                      
                      5Earnings
      on cash surrender value of life insurance policies
                      
                      
                      75
                      
                      
                      
                      66
                      
                      
                      
                      9Other
                      
                      
                      51
                      
                      
                      
                      47
                      
                      
                      
                      4Total
      non-interest income
                      
                      $
                      317
                      
                      
                      $
                      291
                      
                      
                      $
                      26




Service
charges on deposit accounts increased $8,000 due to a $19,000 increase in
account analysis charges offset by a $11,000 decrease in non-sufficient funds
and overdraft charges.  Mortgage loan brokerage fees increased by
$5,000 due to higher volumes of refinance activity in the residential real
estate market.  Within the other category, the Federal Home Loan Bank
(“FHLB”) dividend income decreased $11,000 due to the cessation of FHLB
dividends in the 2009 period. This was offset by rental income of $14,000 from
an office building purchased to house the Company’s Visalia branch, and
administrative offices at a future date.




Non-Interest
Expense




Non-interest
expense was $2.5 million in the first quarter of 2009 compared to $2.3 million
in the first quarter of 2008, an increase of $244,000 or 11%. Assessment and
insurance expense increased by $145,000 or 234% as Federal Deposit Insurance
Corporation assessments increased due to higher assessment rates and an
industry-wide special assessment.  Occupancy and equipment expense
increased by $95,000 primarily due to expenses related to the planned relocation
of the Visalia offices to a larger facility in the latter part of
2009.


19
 Index





The
following table describes the components of non-interest expense for the
three-month periods ended March 31, 2009 and 2008:





Non-interest
      expense
                        Quarter
      ended March 31,(in
      thousands)
                      
                      2009
                      
                      
                      2008
                      
                      
                      Increase
                        (Decrease)Salaries
      and employee benefits
                      
                      $
                      1,287
                      
                      
                      $
                      1,283
                      
                      
                      $
                      4Occupancy
      and equipment
                      
                      
                      381
                      
                      
                      
                      286
                      
                      
                      
                      95Assessments
      and insurance
                      
                      
                      207
                      
                      
                      
                      62
                      
                      
                      
                      145Data
      processing
                      
                      
                      136
                      
                      
                      
                      129
                      
                      
                      
                      7Operations
                      
                      
                      121
                      
                      
                      
                      127
                      
                      
                      
                      (6
                      )Professional
      and legal
                      
                      
                      117
                      
                      
                      
                      128
                      
                      
                      
                      (11
                      )Advertising
      and business development
                      
                      
                      56
                      
                      
                      
                      54
                      
                      
                      
                      2Telephone
      and postal
                      
                      
                      53
                      
                      
                      
                      51
                      
                      
                      
                      2Supplies
                      
                      
                      40
                      
                      
                      
                      36
                      
                      
                      
                      4Amortization
      expense
                      
                      
                      -
                      
                      
                      
                      8
                      
                      
                      
                      (8
                      )Other
      expenses
                      
                      
                      121
                      
                      
                      
                      111
                      
                      
                      
                      10Total
      noninterest expense
                      
                      $
                      2,519
                      
                      
                      $
                      2,275
                      
                      
                      $
                      244


Provision
for Income Taxes




The
provision for income taxes for the three-month periods ended March 31, 2009 and
2008 was $116,000 and $157,000, respectively.  The effective tax rate
for these periods was 25.1%, and 27.3%, respectively.  The decrease in
effective tax rate was primarily due to lower pretax income in the 2009 period
which magnified the impact of permanent tax differences in the computation of
the effective tax rate.





Financial
Condition





Fair
Value





SFAS
No. 157,Fair Value
Measurements, which requires enhanced disclosures about financial
instruments carried at fair value. SFAS No. 157 establishes a hierarchical
disclosure framework associated with the level of observable pricing scenarios
utilized in measuring financial instruments at fair value. The degree of
judgment utilized in measuring the fair value of financial instruments generally
correlates to the level of the observable pricing scenario. Financial
instruments with readily available active quoted prices or for which fair value
can be measured from actively quoted prices generally will have a higher degree
of observable pricing and a lesser degree of judgment utilized in measuring fair
value. Conversely, financial instruments rarely traded or not quoted will
generally have little or no observable pricing and a higher degree of judgment
utilized in measuring fair value. Observable pricing scenarios are impacted by a
number of factors, including the type of financial instrument, whether the
financial instrument is new to the market and not yet established and the
characteristics specific to the transaction. See Note 12 of theNotes 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.


20
 Index


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





Market value of securities available for
      sale
                      March
      31, 2009(in
      thousands)
                    
                    Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gain
                    
                    
                    Gross
                      Unrealized
                      Loss
                    
                    
                    Fair
                      ValueU.S.
      Treasury securities
                    
                    $
                    247
                    
                    
                    $
                    29
                    
                    
                    $
                    -
                    
                    
                    $
                    276U.S.
      government  agencies
                    
                    
                    7,752
                    
                    
                    
                    218
                    
                    
                    
                    -
                    
                    
                    
                    7,970Mortgage-backed
      securities
                    
                    
                    19,282
                    
                    
                    
                    637
                    
                    
                    
                    (1
                    )
                    
                    
                    19,918Municipal
      securities
                    
                    
                    18,684
                    
                    
                    
                    41
                    
                    
                    
                    (657
                    )
                    
                    
                    18,068Total
                    
                    $
                    45,965
                    
                    
                    $
                    925
                    
                    
                    $
                    (658
                    )
                    
                    $
                    46,232
 
 
 December
      31, 2008(in
      thousands)
                    
                    Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gain
                    
                    
                    Gross
                      Unrealized
                      Loss
                    
                    
                    Fair
                      ValueU.S.
      Treasury securities
                    
                    $
                    247
                    
                    
                    $
                    33
                    
                    
                    $
                    -
                    
                    
                    $
                    280U.S.
      government  agencies
                    
                    
                    6,753
                    
                    
                    
                    225
                    
                    
                    
                    -
                    
                    
                    
                    6,978Mortgage-backed
      securities
                    
                    
                    15,102
                    
                    
                    
                    554
                    
                    
                    
                    (2
                    )
                    
                    
                    15,654Municipal
      securities
                    
                    
                    19,753
                    
                    
                    
                    98
                    
                    
                    
                    (745
                    )
                    
                    
                    19,106Total
                    
                    $
                    41,855
                    
                    
                    $
                    910
                    
                    
                    $
                    (747
                    )
                    
                    $
                    42,018


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.


21
 Index


Loans
  The
Company’s lending activities are geographically concentrated in the South San
Joaquin Valley, primarily in Tulare and Fresno counties.  The Company
offers both fixed and floating rate loans and obtains collateral in the form of
real property, business assets, and deposit accounts, but looks to business and
personal cash flows as the primary source of repayment.
  The
following table sets forth the breakdown of loans outstanding by type at the
dates indicated by amount and percentage of the portfolio:
 
 (dollars
      in  thousands)
                    
                    March
      31, 2009
                    
                    
                    December
      31, 2008Commercial
                    
                    $
                    61,291
                    
                    
                    
                    26
                    %
                    
                    $
                    58,325
                    
                    
                    
                    25
                    %Real
      estate – mortgage (1)
                    
                    
                    131,540
                    
                    
                    
                    56
                    
                    
                    
                    129,267
                    
                    
                    
                    56Real
      estate – construction
                    
                    
                    33,896
                    
                    
                    
                    15
                    
                    
                    
                    35,113
                    
                    
                    
                    15Agricultural
                    
                    
                    4,554
                    
                    
                    
                    2
                    
                    
                    
                    4,011
                    
                    
                    
                    2Consumer
      and other
                    
                    
                    3,127
                    
                    
                    
                    1
                    
                    
                    
                    3,566
                    
                    
                    
                    2Subtotal
                    
                    
                    234,408
                    
                    
                    
                    100
                    %
                    
                    
                    230,282
                    
                    
                    
                    100
                    %Deferred
      loan fees, net
                    
                    
                    (364
                    )
                    
                    
                    
                    
                    
                    
                    (341
                    )Allowance
      for loan losses
                    
                    
                    (3,644
                    )
                    
                    
                    
                    
                    
                    
                    (3,244
                    )Total
      loans, net
                    
                    $
                    230,400
                    
                    
                    
                    
                    
                    
                    $
                    226,697
 
 (1)
      Consists primarily of commercial mortgage
loans.
  During
the three months ended March 31, 2009, loan growth occurred in the categories of
commercial and real estate-mortgage.  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.
  Nonperforming
Assets.  There was $3.1 million in nonperforming assets at
March 31, 2009 which was comprised of six nonaccrual loans.  Of the
$3.1 million in nonperforming assets, management has identified $2.7 million for
which management has established specific loss reserves of
$581,000.  There were $4.9 million in nonperforming assets at December
31, 2008 of which management had identified $2.8 million with a related
valuation allowance of $425,000.
  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 $3.6 million or 1.56% of total loans at March
31, 2009.  This compared to $3.2 million or 1.41% at December 31,
2008.   Management determined the allowance for loan losses after
consideration of current economic conditions, including a significant decline in
real estate values in the Bank’s primary markets.  There were no
charge-offs or recoveries during the first quarter of 2009.  The
Company recorded $12,000 in net charge-offs during the first quarter of
2008.
  Management
determined the allowance for loan losses at March 31, 2009 based on its
assessment of probable loan losses from declining real estate values and other
recessionary conditions.  However, no prediction of the ultimate level
of loans charged off in future years can be made with any
certainty.


22
 Index





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





Changes in allowance for loan
      losses
                            Three months ended March
31,(dollars
      in thousands)
                          
                          2009
                          
                          
                          2008Balance,
      beginning of period
                          
                          $
                          3,244
                          
                          
                          $
                          1,758Provision
      for  loan losses
                          
                          
                          400
                          
                          
                          
                          400Charge-offs
                          
                          
                          
                          
                          
                          
                          (12
                          )Recoveries
                          
                          
                          -
                          
                          
                          
                          -Balance,
      end of period
                          
                          $
                          3,644
                          
                          
                          $
                          2,146Net
      charge-offs to average loans outstanding
                          
                          
                          (0.000
                          %)
                          
                          
                          (0.006
                          %)Average
      loans outstanding
                          
                          $
                          232,393
                          
                          
                          $
                          207,276Ending
      allowance to total loans outstanding
                          
                          
                          1.56
                          %
                          
                          
                          1.01
                          %





Premises
and equipment





During
February of 2009, the Company purchased an 18,700 square foot office building in
Visalia, California for $3.8 million.  The Company plans to relocate
its administrative office and Visalia branch to the new facility and does not
plan to renew its existing leases for the Visalia branch and administrative
offices which conclude their terms in the latter part of 2009.





Deposits





Total
deposits were $260.9 million as of March 31, 2009, an increase of $3.6 million
or 1% from the December 31, 2008 balance of $257.3
million.  Interest-bearing deposits increased by $19.5 million or 22%,
during the three month period ended March 31, 2009.  Non-interest
bearing and time deposits decreased by $10.6 million or 14% and $5.3 million or
6%, respectively during the three month period ended March 31,
2009.  Brokered deposits included in time deposits at March 31, 2009
and December 31, 2008 totaled $11.2 million and $15.9 million,
respectively.





Total
deposits at March 31, 2009 and December 31, 2008 are summarized in the following
table:





Deposit
      Portfolio(dollars
      in thousands)
                          
                          March
      31, 2009
                          
                          
                          December
      31, 2008Non-interest
      bearing
                          
                          $
                          66,852
                          
                          
                          
                          26
                          %
                          
                          $
                          77,406
                          
                          
                          
                          30
                          %Interest
      bearing
                          
                          
                          107,197
                          
                          
                          
                          41
                          
                          
                          
                          87,737
                          
                          
                          
                          34Time
      deposits
                          
                          
                          86,863
                          
                          
                          
                          33
                          
                          
                          
                          92,180
                          
                          
                          
                          36Total
      Deposits
                          
                          $
                          260,912
                          
                          
                          
                          100
                          %
                          
                          $
                          257,323
                          
                          
                          
                          100
                          %





Federal
Home Loan Bank Borrowings





At March
31, 2009, the Company had outstanding long-term Fixed rate borrowings from the
Federal Home Loan Bank totaling $5.1 million and no short term
debt.  At December 31, 2008, the Company had $8.0 million in
short-term debt and $5.2 million in long-term debt.  At March 31,
2009, the long-term weighted average borrowing rate was 5.20%.  The
remaining principal balance of long-term debt is scheduled to mature at various
dates ending in 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 March 31, 2009 was
unchanged from December 31, 2008.  The rate of interest paid on these
debentures was 4.72% at March 31, 2009 compared to 7.80% at December 31,
2008.


23
 Index





Capital
Resources




The
Company’s shareholders’ equity was $38.2 million at March 31, 2009 and $30.1
million at December 31, 2008.  The increase resulted from net income
of $347,000 for the three months ended March 31, 2009, and the issuance of $7.7
million of preferred stock to the U.S. Treasury.




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





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





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




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





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


24
 Index


Management
considers capital requirements 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 March
31, 2009 and December 31, 2008:





Capital and capital
      adequacy ratios
                          Quarter
      endedMarch 31, 2009
                        
                        
                        December 31, 2008(dollars
      in thousands)
                        
                        Amount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        RatioLeverage
      RatioValley
      Commerce Bancorp
                          And
      Subsidiary
                        
                        $
                        41,016
                        
                        
                        
                        13.2
                        %
                        
                        $
                        33,044
                        
                        
                        
                        10.9
                        %Minimum
      regulatory requirement
                        
                        $
                        12,395
                        
                        
                        
                        4.0
                        %
                        
                        $
                        12,150
                        
                        
                        
                        4.0
                        %Valley
      Business Bank
                        
                        $
                        40,816
                        
                        
                        
                        13.2
                        %
                        
                        $
                        32,751
                        
                        
                        
                        10.8
                        %Minimum
      requirement for “Well-
                          Capitalized”
      institution
                        
                        $
                        15,488
                        
                        
                        
                        5.0
                        %
                        
                        $
                        15,181
                        
                        
                        
                        5.0
                        %Minimum
      regulatory requirement
                        
                        $
                        12,390
                        
                        
                        
                        4.0
                        %
                        
                        $
                        12,145
                        
                        
                        
                        4.0
                        %Tier 1 Risk-Based
      Capital RatioValley
      Commerce Bancorp
                          And
      Subsidiary
                        
                        $
                        41,016
                        
                        
                        
                        15.5
                        %
                        
                        $
                        33,044
                        
                        
                        
                        12.7
                        %Minimum
      regulatory requirement
                        
                        $
                        10,622
                        
                        
                        
                        4.0
                        %
                        
                        $
                        10,367
                        
                        
                        
                        4.0
                        %Valley
      Business Bank
                        
                        $
                        40,816
                        
                        
                        
                        15.4
                        %
                        
                        $
                        32,751
                        
                        
                        
                        12.6
                        %Minimum
      requirement for “Well-
                          Capitalized”
      institution
                        
                        $
                        15,929
                        
                        
                        
                        6.0
                        %
                        
                        $
                        15,545
                        
                        
                        
                        6.0
                        %Minimum
      regulatory requirement
                        
                        $
                        10,618
                        
                        
                        
                        4.0
                        %
                        
                        $
                        10,363
                        
                        
                        
                        4.0
                        %Total Risk-Based
      Capital RatioValley
      Commerce Bancorp
                          And
      Subsidiary
                        
                        $
                        44,339
                        
                        
                        
                        16.7
                        %
                        
                        $
                        36,284
                        
                        
                        
                        14.0
                        %Minimum
      regulatory requirement
                        
                        $
                        21,243
                        
                        
                        
                        8.0
                        %
                        
                        $
                        20,734
                        
                        
                        
                        8.0
                        %Valley
      Business Bank
                        
                        $
                        44,170
                        
                        
                        
                        16.6
                        %
                        
                        $
                        35,990
                        
                        
                        
                        13.9
                        %Minimum
      requirement for “Well-
                          Capitalized”
      institution
                        
                        $
                        26,547
                        
                        
                        
                        10.0
                        %
                        
                        $
                        25,909
                        
                        
                        
                        10.0
                        %Minimum
      regulatory requirement
                        
                        $
                        21,238
                        
                        
                        
                        8.0
                        %
                        
                        $
                        20,728
                        
                        
                        
                        8.0
                        %


At March
31, 2009 and December 31, 2008, all of the Company’s capital ratios were in
excess of minimum regulatory requirements, and Valley Business Bank exceeded the
minimum requirements of a “well capitalized” institution.




Trust
preferred securities are included in Tier 1 capital, subject to regulatory
limitation.  At March 31, 2009, and December 31, 2008, $3.0 million of
trust preferred securities was included in Tier 1 capital.




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


25
 Index


The
amount of preferred stock issued to the Treasury represents approximately 3% of
the Company’s risk adjusted assets as of December 31, 2008.  The
preferred stock serves as Tier 1 capital.  Accordingly, the impact to
the Company’s risk-based capital ratios at March 31, 2009 is an increase of
approximately 300 basis points.





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 specific actions 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
the Federal Reserve Bank, the 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.




ITEM 3 – QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable.








26
 Index


ITEM
4 – CONTROLS AND PROCEDURES





(a)
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES




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





(b)
CHANGES IN INTERNAL CONTROLS




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










27
 Index


PART II – OTHER INFORMATION








ITEM
1 – LEGAL PROCEEDINGS





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








ITEM 1A – RISK FACTORS





In
addition to the other information set forth in this report, the factors
discussed in Part I “Item 1A—Risk Factors” in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008 could materially
affect its business, financial condition or future results. The risks described
in the Company’s Annual Report on Form 10-K are not the only risks facing the
Company. Additional risks and uncertainties not currently known or currently
deemed to be immaterial also may materially adversely affect the Company’s
business, financial condition and/or operating results.








ITEM
2 – CHANGES IN SECURITIES AND USE OF PROCEEDS








ITEM
3 – DEFAULTS UPON SENIOR SECURITIES





None.








ITEM
4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.








ITEM
5 – OTHER INFORMATION





None.








ITEM
6 – EXHIBITS





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


28
 Index





SIGNATURES




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





VALLEY
      COMMERCE BANCORPDate:
      May 15, 2009
                By:
                /s/
      Donald A. GillesDonald
      A. GillesPresident
      and Chief Executive OfficerDate:
      May 15, 2009
                By:
                /s/Roy
      O. EstridgeRoy
      O. Estridge, Chief Financial
Officer





29
 Index


Exhibit Index








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














30