**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20006**

 

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**FORM 10-K/A**

** **

**ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the fiscal year endedDecember 31, 2004**

 

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**COMMUNITY VALLEY BANCORP**

(Exact name of registrant as specified in itscharter)

 

Commission File Number:  **333-85950**

 
| **California**                            | ** ** | **68-0479553**                         |
|-------------------------------------------|------------|----------------------------------------|
| State of incorporation                    |       | I.R.S. Employer  Identification Number |
|                                      |       |                                   |
| **2041 Forest Avenue  Chico, California** | ** ** | **95928**                              |
| Address of principal  executive offices   |       | Zip Code                               |

 

**(530) 899-2344**

Registrant’s telephone number, including areacode

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

Securitiesregistered pursuant to Section 12(g) of the Act:  **CommonStock, No Par Value**

 

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Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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

 

Check if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this form 10-K.  ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act). Yes   o   No   ý

 

As of June 30, 2004, the aggregate market valueof the voting stock held by non-affiliates of the Registrant was approximately$66.9 million, based on the sales price reported to the Registrant on that dateof $26.30 per share.

 

Shares of Common Stock held by each officer anddirector and each person owning more than five percent of the outstandingCommon Stock have been excluded in that such persons may be deemed to beaffiliates.  This determination of theaffiliate status is not necessarily a conclusive determination for otherpurposes.

 

The number of shares of Common Stock of theregistrant outstanding as of March 1, 2005 was 3,646,511.

 

Documents Incorporated by Reference:  Portions of the definitive proxy statementfor the 2005 Annual Meeting of Shareholders to be filed with the FederalDeposit Insurance Corporation pursuant to SEC Regulation 14A are incorporatedby reference in Part III, Items 10-14.

 

 

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EXPLANATORY NOTE

 

This Form 10-K/A of CommunityValley Bancorp amends the annual Report on Form 10-K of the registrant for theregistrant’s fiscal year ended December 31, 2004.  Specifically, this Form 10-K/A contains thesignature block for the accounting firm which was inadvertently omitted fromthe original filing.

 

1

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**PART IV**

 

**Item 15.                 Exhibits,Financial Statement Schedules, and Reports on Form 8-K**.

 

(a)           **List ofdocuments filed as part of this report**

 

(1)           **FinancialStatements**

 

The following financial statements and independent auditor’s reportsare included in this Annual Report on Form 10-K immediately following.

 
| I.   |   | Independent Auditor’s Report                                                                                   |
|------|--------|---------------------------------------------------------------------------------------------------------------------|
| II.  |   | Consolidated  Balance Sheet - December 31, 2004 and 2003                                                            |
| III. |   | Consolidated Statement of Income - Years Ended December 31,  2004, 2003 and 2002                               |
| IV.  |   | Consolidated Statement of Changes in Shareholders’ Equity - Years  Ended December 31, 2004, 2003 and 2002 |
| V.   |   | Consolidated Statement of Cash Flows - Years Ended December 31, 2004,  2003 and 2002                                |
| VI.  |   | Notes to the Consolidated Financial Statements                                                                      |

 

(2)           **FinancialStatement Schedules**

 

Schedules to the financial statements are omitted because the requiredinformation is not applicable or because the required information is presentedin the Company’s Consolidated Financial Statements or related notes.

 

(3)           **Exhibits**

 
| **Exhibit  Number** | ** ** | **Document  Description**                                          |
|---------------------|------------|--------------------------------------------------------------------|
|                |       |                                                               |
| (23.1)              |       | Consent of Independent Registered Public  Accounting Firm          |
| (31.1)              |       | Rule 13a-14(a)/15d-14(a) certification of  Chief Executive Officer |
| (31.2)              |       | Rule 13a-14(a)/15d-14(a) certification of  Chief Financial Officer |
| (32.1)              |       | Section 1350 certification of Chief  Executive Officer             |
| (32.2)              |       | Section 1350 certification of Chief  Financial Officer             |

 

2

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**COMMUNITYVALLEY BANCORP AND SUBSIDIARIES**

** **

**CONSOLIDATED FINANCIAL STATEMENTS**

 

**AS OF DECEMBER 31, 2004 AND 2003 AND**

 

**FOR THE YEARS ENDED**

 

**DECEMBER 31, 2004, 2003 AND 2002**

 

**AND**

 

**REPORT OF INDEPENDENT REGISTERED**

 

**PUBLIC ACCOUNTING FIRM**

 

3

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# ***REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM***

 

The Board of Directorsand Shareholders

Community Valley Bancorp

 

We haveaudited the accompanying consolidated balance sheet of Community Valley Bancorpand subsidiaries as of December 31, 2004 and 2003, and the related consolidatedstatements of income, changes in shareholders’ equity and cash flows for eachof the years in the three-year period ended December 31, 2004.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financial statementsbased on our audits.

 

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

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Community Valley Bancorp and subsidiaries as of December 31, 2004 and 2003and the consolidated results of their operations and their cash flows for eachof the years in the three-year period ended December 31, 2004, in conformitywith accounting principles generally accepted in the United States of America.

 

 
| /s/  Perry-Smith LLP    |   |
|-------------------------|--------|
|                    |
| Sacramento,  California |
| February 25, 2005       |

 

4

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**COMMUNITY VALLEY BANCORP AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEET**

 

**December 31, 2004 and 2003**

 
| ** **                                                                                                                                   | ** ** | **2004**    | ** **  | **2003**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
|                                                                                                                                         |       |        |        |        |       |
| **ASSETS**                                                                                                                                   |       |        |        |        |       |
|                                                                                                                                         |       |        |        |        |       |
| Cash and due  from banks                                                                                                                     |       | $           | 21,778,000  |        | $          | 26,204,700 |   |
| Federal  funds sold                                                                                                                          |       | 46,440,000  |        | 50,605,000  |       |
|                                                                                                                                         |       |        |        |        |       |
| Total cash and cash equivalents                                                                                                              |       | 68,218,000  |        | 76,809,700  |       |
|                                                                                                                                         |       |        |        |        |       |
| Interest-bearing  deposits in banks                                                                                                          |       | 8,715,000   |        | 7,925,000   |       |
| Loans held  for sale, at lower of cost or market                                                                                             |       | 1,489,800   |        | 2,279,100   |       |
| Investment  securities (Note 2):                                                                                                             |       |        |        |        |       |
| Available-for-sale, at fair value                                                                                                            |       | 4,379,000   |        | 502,000     |       |
| Held-to-maturity, at cost                                                                                                                    |       | 2,581,900   |        | 3,822,500   |       |
| Loans, less allowance for loan losses of  $4,381,200 in 2004 and $3,587,200 in 2003 (Notes 3, 10 and 14)                                     |       | 339,173,900 |        | 270,231,300 |       |
| Premises and  equipment, net (Note 5)                                                                                                        |       | 9,027,200   |        | 8,553,900   |       |
| Accrued  interest receivable and other assets (Notes 4, 13 and 15)                                                                           |       | 16,090,700  |        | 16,599,200  |       |
|                                                                                                                                         |       |        |        |        |       |
| Total assets                                                                                                                                 |       | $           | 449,675,500 |        | $          | 386,722,700 |   |
|                                                                                                                                         |       |        |        |        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                |       |        |        |        |       |
|                                                                                                                                         |       |        |        |        |       |
| Deposits:                                                                                                                                    |       |        |        |        |       |
| Non-interest bearing                                                                                                                         |       | $           | 80,793,200  |        | $          | 68,463,100 |   |
| Interest bearing (Note 6)                                                                                                                    |       | 318,265,900 |        | 274,048,300 |       |
|                                                                                                                                         |       |        |        |        |       |
| Total deposits                                                                                                                               |       | 399,059,100 |        | 342,511,400 |       |
| Employee  stock ownership plan (ESOP) note payable (Notes 8 and 15)                                                                          |       | 833,200     |        | 831,900     |       |
| Junior  subordinated debentures (Note 9)                                                                                                     |       | 8,248,000   |        | 8,248,000   |       |
| Accrued  interest payable and other liabilities (Note 15)                                                                                    |       | 7,004,100   |        | 5,182,900   |       |
|                                                                                                                                         |       |        |        |        |       |
| Total liabilities                                                                                                                            |       | 415,144,400 |        | 356,774,200 |       |
|                                                                                                                                         |       |        |        |        |       |
| Commitments  and contingencies (Note 10)                                                                                                     |       |        |        |        |       |
|                                                                                                                                         |       |        |        |        |       |
| Shareholders’  equity (Note 11):                                                                                                        |       |        |        |        |       |
| Common stock - no par value; authorized –  20,000,000 shares, outstanding – 3,636,791 shares in 2004 and 3,621,824  shares in 2003 |       | 7,861,800   |        | 7,271,400   |       |
| Unallocated ESOP shares (89,628 shares in  2004 and 90,909 shares in 2003, at cost) (Note 15)                                                |       | (1,144,300  | )           | (1,070,700  | )          |
| Retained earnings                                                                                                                            |       | 27,802,000  |        | 23,745,700  |       |
| Accumulated other comprehensive income, net  of taxes (Note 2)                                                                               |       | 11,600      |        | 2,100       |       |
|                                                                                                                                         |       |        |        |        |       |
| Total shareholders’ equity                                                                                                              |       | 34,531,100  |        | 29,948,500  |       |
|                                                                                                                                         |       |        |        |        |       |
| Total liabilities and shareholders’ equity                                                                                              |       | $           | 449,675,500 |        | $          | 386,722,700 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

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**COMMUNITY VALLEY BANCORP AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF INCOME**

 

### **For the Years EndedDecember 31, 2004, 2003 and 2002**

 
| ** **                                                   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                         |       |       |       |       |       |       |       |
| Interest  income:                                            |       |       |       |       |       |       |       |
| Interest and fees on loans                                   |       | $          | 24,043,100 |       | $          | 20,528,000 |       | $ | 18,157,400 |   |
| Interest on Federal funds sold                               |       | 488,200    |       | 633,900    |       | 572,700    |       |
| Interest on deposits in banks                                |       | 244,400    |       | 201,400    |       | 81,200     |       |
| Interest on investment securities:                           |       |       |       |       |       |       |       |
| Taxable                                                      |       | 150,900    |       | 104,700    |       | 76,200     |       |
| Exempt from Federal income taxes                             |       | 53,600     |       | 48,600     |       | 89,400     |       |
|                                                         |       |       |       |       |       |       |       |
| Total interest income                                        |       | 24,980,200 |       | 21,516,600 |       | 18,976,900 |       |
|                                                         |       |       |       |       |       |       |       |
| Interest  expense:                                           |       |       |       |       |       |       |       |
| Interest expense on deposits (Note 6)                        |       | 3,584,600  |       | 3,924,300  |       | 4,735,000  |       |
| Interest expense on junior subordinated  debentures (Note 9) |       | 437,700    |       | 438,800    |       |       |       |
| Interest expense on ESOP note payable  (Notes 8 and 15)      |       | 33,400     |       | 33,100     |       | 39,500     |       |
|                                                         |       |       |       |       |       |       |       |
| Total interest expense                                       |       | 4,055,700  |       | 4,396,200  |       | 4,774,500  |       |
|                                                         |       |       |       |       |       |       |       |
| Net interest income before provision for  loan losses        |       | 20,924,500 |       | 17,120,400 |       | 14,202,400 |       |
|                                                         |       |       |       |       |       |       |       |
| Provision  for loan losses (Note 3)                          |       | 790,000    |       | 655,000    |       | 603,000    |       |
|                                                         |       |       |       |       |       |       |       |
| Net interest income after provision for  loan losses         |       | 20,134,500 |       | 16,465,400 |       | 13,599,400 |       |
|                                                         |       |       |       |       |       |       |       |
| Non-interest  income:                                        |       |       |       |       |       |       |       |
| Service charges and fees                                     |       | 2,086,200  |       | 1,397,300  |       | 1,028,300  |       |
| Gain on sale of loans                                        |       | 1,825,400  |       | 2,783,400  |       | 2,326,500  |       |
| Loan servicing income                                        |       | 382,700    |       | 379,500    |       | 356,200    |       |
| Other (Note 12)                                              |       | 1,724,000  |       | 1,390,200  |       | 2,453,000  |       |
|                                                         |       |       |       |       |       |       |       |
| Total non-interest income                                    |       | 6,018,300  |       | 5,950,400  |       | 6,164,000  |       |
|                                                         |       |       |       |       |       |       |       |
| Non-interest  expenses:                                      |       |       |       |       |       |       |       |
| Salaries and employee benefits (Notes 3 and  15)             |       | 9,979,900  |       | 8,150,800  |       | 6,558,700  |       |
| Occupancy and equipment (Notes 5 and10)                      |       | 2,525,200  |       | 2,037,200  |       | 1,557,400  |       |
| Other (Note 12)                                              |       | 4,235,100  |       | 3,629,600  |       | 4,422,700  |       |
|                                                         |       |       |       |       |       |       |       |
| Total non-interest expenses                                  |       | 16,740,200 |       | 13,817,600 |       | 12,538,800 |       |
|                                                         |       |       |       |       |       |       |       |
| Income before provision for income taxes                     |       | 9,412,600  |       | 8,598,200  |       | 7,224,600  |       |
|                                                         |       |       |       |       |       |       |       |
| Provision  for income taxes (Note 13)                        |       | 3,803,000  |       | 3,329,000  |       | 2,375,000  |       |
|                                                         |       |       |       |       |       |       |       |
| Net income                                                   |       | $          | 5,609,600  |       | $          | 5,269,200  |       | $ | 4,849,600 |   |
|                                                         |       |       |       |       |       |       |       |
| Basic  earnings per share (Note 11)                          |       | $          | 1.58       |       | $          | 1.50       |       | $ | 1.40 |   |
|                                                         |       |       |       |       |       |       |       |
| Diluted earnings  per share (Note 11)                        |       | $          | 1.48       |       | $          | 1.42       |       | $ | 1.33 |   |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

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**COMMUNITY VALLEY BANCORP AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENT OF CHANGES INSHAREHOLDERS’ EQUITY**

**For the Years Ended December 31, 2004, 2003and 2002**

** **
|                                                                        |   | **Common  Stock** |   | **Unallocated  ESOP** |      | **Retained** |       | **Accumulated  Other  Compre-  hensive  Income** |   | **Total  Share-  holders’** |   | **Total  Compre-  hensive** |   |
|-----------------------------------------------------------------------------|--------|-------------------|--------|-----------------------|-----------|--------------|------------|--------------------------------------------------|--------|----------------------------------|--------|-----------------------------|--------|
|                                                                        |   | **Shares**        |   | **Amount**            |      | **Shares**   |       | **Earnings**                                     |   | **(Net of  Taxes)**              |   | **Equity**                  |   | **Income** |   |
|                                                                        |   | ** **        |   | ** **            |      | ** **   |       | ** **                                       |   | ** **                       |   | ** **                  |   | ** ** |   |
| Balance, January  1, 2002                                                   |   | 3,531,185         |   | $                     | 6,131,300 |         | (902,100   | )                                                | $      | 15,591,000                       |   |                        |   | $ | 20,820,200 |   |   |   |
| Comprehensive income:                                                       |   |              |   |                  |      |         |       |                                             |   |                             |   |                        |   |   |   |
| Net income                                                                  |   |              |   |                  |      |         |       | 4,849,600                                        |   |                             |   | 4,849,600                   |   | $ | 4,849,600 |   |
| Other  comprehensive income:                                                |   |              |   |                  |      |         |       |                                             |   |                             |   |                        |   |   |   |
| Net change in  unrealized gains on available-for-sale investment securities |   |              |   |                  |      |         |       |                                             |   | $                                | 14,100 |                        | 14,100 |   | 14,100 |   |
| Total  comprehensive income                                                 |   |              |   |                  |      |         |       |                                             |   |                             |   |                        |   | $ | 4,863,700 |   |
| Exercise of stock  options and related tax benefit (Note 11)                |   | 49,283            |   | 426,200               |      |         |       |                                             |   |                             |   | 426,200                     |   |   |   |
| Amortization of  stock compensation - ESOP shares (Note 15)                 |   |              |   | 107,800               |      | 50,200       |       |                                             |   |                             |   | 158,000                     |   |   |   |
| Cash dividends - $.248 per share                                            |   |              |   |                  |      |         |       | (882,200                                         | )      |                             |   | (882,200                    | )      |   |   |
| Cash in lieu of  fractional shares in four- for-three stock split (Note 11) |   |              |   | (5,300                | )         |         |       |                                             |   |                             |   | (5,300                      | )      |   |   |
| Balance, December 31, 2002                                                  |   | 3,580,468         |   | 6,660,000             |      | (851,900     | )          | 19,558,400                                       |   | 14,100                           |   | 25,380,600                  |   |   |   |
| Comprehensive income:                                                       |   |              |   |                  |      |         |       |                                             |   |                             |   |                        |   |   |   |
| Net income                                                                  |   |              |   |                  |      |         |       | 5,269,200                                        |   |                             |   | 5,269,200                   |   | $ | 5,269,200 |   |
| Other  comprehensive income:                                                |   |              |   |                  |      |         |       |                                             |   |                             |   |                        |   |   |   |
| Net change in  unrealized gains on available-for-sale investment securities |   |              |   |                  |      |         |       |                                             |   | (12,000                          | )      | (12,000                     | )      | (12,000 | ) |
| Total  comprehensive income                                                 |   |              |   |                  |      |         |       |                                             |   |                             |   |                        |   | $ | 5,257,200 |   |
| Exercise of stock  options and related tax benefit (Note 11)                |   | 41,356            |   | 461,900               |      |         |       |                                             |   |                             |   | 461,900                     |   |   |   |
| Amortization of  stock compensation - ESOP shares (Note 15)                 |   |              |   | 149,500               |      | 102,200      |       |                                             |   |                             |   | 251,700                     |   |   |   |
| Shares acquired  or redeemed by ESOP (Note 15)                              |   |              |   |                  |      | (321,000     | )          |                                             |   |                             |   | (321,000                    | )      |   |   |
| Cash dividends - $0.30 per share                                            |   |              |   |                  |      |         |       | (1,081,900                                       | )      |                             |   | (1,081,900                  | )      |   |   |
| Balance, December 31, 2003                                                  |   | 3,621,824         |   | 7,271,400             |      | (1,070,700   | )          | 23,745,700                                       |   | 2,100                            |   | 29,948,500                  |   |   |   |
| Comprehensive income:                                                       |   |              |   |                  |      |         |       |                                             |   |                             |   |                        |   |   |   |
| Net income                                                                  |   |              |   |                  |      |         |       | 5,609,600                                        |   |                             |   | 5,609,600                   |   | $ | 5,609,600 |   |
| Other  comprehensive income:                                                |   |              |   |                  |      |         |       |                                             |   |                             |   |                        |   |   |   |
| Net change in  unrealized gains on available-for-sale investment securities |   |              |   |                  |      |         |       |                                             |   | 9,500                            |   | 9,500                       |   | 9,500 |   |
| Total  comprehensive income                                                 |   |              |   |                  |      |         |       |                                             |   |                             |   |                        |   | $ | 5,619,100 |   |
| Exercise of stock  options and related tax benefit (Note 11)                |   | 34,202            |   | 532,400               |      |         |       |                                             |   |                             |   | 532,400                     |   |   |   |
| Amortization of  stock compensation - ESOP shares (Note 15)                 |   |              |   | 103,800               |      | 76,400       |       |                                             |   |                             |   | 180,200                     |   |   |   |
| Shares acquired  or redeemed by ESOP (Note 15)                              |   |              |   |                  |      | (150,000     | )          |                                             |   |                             |   | (150,000                    | )      |   |   |
| Cash dividends - $0.30 per share                                            |   |              |   |                  |      |         |       | (1,090,900                                       | )      |                             |   | (1,090,900                  | )      |   |   |
| Cash in lieu of  fractional shares in four- for-three stock split (Note 11) |   |              |   | (6,000                | )         |         |       |                                             |   |                             |   | (6,000                      | )      |   |   |
| Repurchase and  retirement of common stock                                  |   | (19,235           | )      | (39,800               | )         |         |       | (462,400                                         | )      |                             |   | (502,200                    | )      |   |   |
| Balance, December 31, 2004                                                  |   | 3,636,791         |   | $                     | 7,861,800 |         | (1,144,300 | )                                                | $      | 27,802,000                       |   | $                           | 11,600 |   | $ | 34,531,100 |   |   |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

7

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### **COMMUNITY VALLEY BANCORPAND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

 

**For the Years Ended December 31, 2004, 2003and 2002**

 
| ** **                                                                         | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                               |       |        |       |        |       |        |       |
| Cash flows  from operating activities:                                             |       |        |       |        |       |        |       |
| Net income                                                                         |       | $           | 5,609,600  |        | $          | 5,269,200   |       | $ | 4,849,600 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |        |       |        |       |        |       |
| Provision for loan losses                                                          |       | 790,000     |       | 655,000     |       | 603,000     |       |
| (Decrease) increase in loan origination  fees, net                                 |       | (11,000     | )          | 196,000     |       | 162,800     |       |
| Depreciation, amortization and accretion,  net                                     |       | 1,349,900   |       | 973,300     |       | 764,400     |       |
| Increase in cash surrender value of life  insurance policies, net                  |       | (284,400    | )          | (379,700    | )          | (176,600    | )          |
| Non-cash compensation cost associated with  the ESOP                               |       | 180,200     |       | 251,700     |       | 158,000     |       |
| Loss (gain) on disposition of equipment                                            |       |        |       | 8,400       |       | (153,000    | )          |
| Gain on life insurance death benefit                                               |       |        |       |        |       | (1,172,600  | )          |
| Decrease (increase) in loans held for sale                                         |       | 789,300     |       | 5,632,600   |       | (1,933,200  | )          |
| Decrease (increase) in accrued interest  receivable and other assets               |       | 1,218,500   |       | (1,019,700  | )          | (2,388,700  | )          |
| Increase in accrued interest payable and  other liabilities                        |       | 1,820,000   |       | 38,200      |       | 699,900     |       |
| Provision for deferred income taxes                                                |       | (64,000     | )          | (639,000    | )          | (634,000    | )          |
|                                                                               |       |        |       |        |       |        |       |
| Net cash provided by operating activities                                          |       | 11,398,100  |       | 10,986,000  |       | 779,600     |       |
|                                                                               |       |        |       |        |       |        |       |
| Cash flows  from investing activities:                                             |       |        |       |        |       |        |       |
| Purchases of held-to-maturity investment  securities                               |       | (1,012,700  | )          | (4,542,300  | )          | (1,617,000  | )          |
| Purchases of available-for-sale investment  securities                             |       | (4,145,700  | )          |        |       |        |       |
| Proceeds from called available-for-sale  investment securities                     |       | 300,000     |       |        |       |        |       |
| Proceeds from matured or called held-to-  maturity investment securities           |       | 1,870,000   |       | 3,440,000   |       | 1,135,000   |       |
| Proceeds from principal repayments of  held-to-maturity investment securities      |       | 331,900     |       | 112,900     |       | 94,600      |       |
| Net increase in interest-bearing deposits  in banks                                |       | (790,000    | )          | (3,864,000  | )          | (3,367,000  | )          |
| Net increase in loans                                                              |       | (69,721,600 | )          | (41,383,100 | )          | (32,589,900 | )          |
| Premiums paid for life insurance policies                                          |       | (121,900    | )          | (1,626,200  | )          | (396,300    | )          |
| Death benefit from life insurance policies                                         |       |        |       |        |       | 1,750,000   |       |
| Purchases of premises and equipment                                                |       | (1,786,000  | )          | (2,869,600  | )          | (2,017,000  | )          |
| Proceeds from sale of equipment                                                    |       |        |       | 26,900      |       | 416,000     |       |
| Proceeds from sale of other real estate                                            |       |        |       |        |       | 12,600      |       |
|                                                                               |       |        |       |        |       |        |       |
| Net cash used in investing activities                                              |       | (75,076,000 | )          | (50,705,400 | )          | (36,579,000 | )          |
|                                                                                    |            |             |            |             |            |             |            |  |  |  |

 

8

----

 
| ** **                                                                  | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**    | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|
|                                                                        |       |       |       |       |       |        |       |
| Cash flows  from financing activities:                                      |       |       |       |       |       |        |       |
| Net increase in demand, interest-bearing  and savings deposits              |       | $          | 37,110,000 |       | $          | 43,926,500  |       | $ | 72,408,500 |   |
| Net increase (decrease) in time deposits                                    |       | 19,437,500 |       | 604,100    |       | (20,847,600 | )          |
| Repayments of ESOP note payable                                             |       | (877,800   | )          | (221,200   | )          | (119,400    | )          |
| Proceeds from ESOP note payable                                             |       | 879,100    |       | 321,000    |       |        |       |
| Purchase of unallocated ESOP shares                                         |       | (150,000   | )          | (321,000   | )          |        |       |
| Proceeds from exercise of stock options                                     |       | 285,100    |       | 267,300    |       | 287,200     |       |
| Cash paid for fractional shares                                             |       | (6,000     | )          |       |       | (5,300      | )          |
| Payment of cash dividends                                                   |       | (1,089,500 | )          | (1,079,000 | )          | (812,200    | )          |
| Repurchase of common stock                                                  |       | (502,200   | )          |       |       |        |       |
| Proceeds from junior subordinated  debentures                               |       |       |       |       |       | 8,248,000   |       |
|                                                                        |       |       |       |       |       |        |       |
| Net cash provided by financing activities                                   |       | 55,086,200 |       | 43,497,700 |       | 59,159,200  |       |
|                                                                        |       |       |       |       |       |        |       |
| Increase in cash and cash equivalents                                       |       | (8,591,700 | )          | 3,778,300  |       | 23,359,800  |       |
|                                                                        |       |       |       |       |       |        |       |
| Cash and  cash equivalents at beginning of year                             |       | 76,809,700 |       | 73,031,400 |       | 49,671,600  |       |
|                                                                        |       |       |       |       |       |        |       |
| Cash and  cash equivalents at end of year                                   |       | $          | 68,218,000 |       | $          | 76,809,700  |       | $ | 73,031,400 |   |
|                                                                        |       |       |       |       |       |        |       |
| Supplemental  disclosure of cash flow information:                          |       |       |       |       |       |        |       |
|                                                                        |       |       |       |       |       |        |       |
| Cash paid  during the year for:                                             |       |       |       |       |       |        |       |
| Interest                                                                    |       | $          | 4,083,500  |       | $          | 4,395,700   |       | $ | 5,523,700 |   |
| Income taxes                                                                |       | $          | 2,830,000  |       | $          | 4,350,000   |       | $ | 2,751,000 |   |
|                                                                        |       |       |       |       |       |        |       |
| Non-cash  investing activities:                                             |       |       |       |       |       |        |       |
| Net change in unrealized gain on available-  for-sale investment securities |       | $          | 9,500      |       | $          | (12,000     | )          | $ | 14,100 |   |
|                                                                        |       |       |       |       |       |        |       |
| Non-cash  financing activities:                                             |       |       |       |       |       |        |       |
| Release of unallocated ESOP shares                                          |       | $          | 76,400     |       | $          | 102,200     |       | $ | 50,200 |   |
| Accrual of cash dividend declared                                           |       | $          | 272,800    |       | $          | 271,400     |       | $ | 268,500 |   |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

9

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##### **COMMUNITY VALLEY BANCORP AND SUBSIDIARIES**

##### ** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****             SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

###### **General**

 

In May 2002, Community Valley Bancorp (“Community Valley”) wasincorporated as a bank holding company for the purpose of acquiring ButteCommunity Bank (the “Bank”) in a one bank holding company reorganization.  In October 2004, Community Valley filed forstatus as a Financial Holding Company for the purpose of establishing CVBInsurance Agency LLC (“CVBIA”).  The newcorporate structure gives Community Valley, the Bank and CVBIA greaterflexibility in terms of operation, expansion and diversification.

 

Founded in 1990, the Bank is a state-chartered financial institutionwith eleven branches in eight cities including Chico, Magalia, Oroville,Paradise, Red Bluff, Colusa, Marysville and Yuba City and loan productionoffices in Citrus Heights and Redding. The Bank provides traditional deposit and lending services includingcommercial and construction loans, government guaranteed loans such as thoseavailable from the USDA and SBA, merchant services and investment services.

 

On December 19, 2002, Community Valley formed a wholly-ownedsubsidiary, Community Valley Bancorp Trust I (the “Trust”), a Delawarestatutory business trust, for the purpose of issuing trust preferred securities(see Note 9).

 

On December 1, 2004, Community Valley formed a wholly-owned subsidiary,CVB Insurance Agency LLC for the purpose of providing insurance relatedservices.

 

The accounting and reporting policies of Community Valley Bancorp andits subsidiaries (collectively, the “Company”) conform with accountingprinciples generally accepted in the United States of America and prevailingpractice within the banking industry. The more significant of these policies applied in the preparation of theaccompanying consolidated financial statements are discussed below.

 

###### **Principles of Consolidation**

 

The accompanying consolidated financial statements include the accountsof Community Valley and its wholly-owned subsidiaries, Butte Community Bank andCVB Insurance Agency LLC.  Significantintercompany transactions and balances have been eliminated in consolidation.

 

For financial reporting purposes, the Company’s investment in the Trustof $248,000 (see Note 9) is accounted for under the equity method and isincluded in accrued interest receivable and other assets on the consolidatedbalance sheet.  The junior subordinateddebentures issued and guaranteed by the Company and held by the Trust arereflected as debt in the Company’s consolidated balance sheet.

 

**Stock Splits**

 

On February 20, 2004, the Board ofDirectors declared a four-for-three stock split effective March 26, 2004 forshareholders of record on March 2, 2004. On August 20, 2002, the Board of Directors declared a four-for-threestock split effective September 30, 2002 for shareholders of record onSeptember 16, 2002.  All share and pershare data has been retroactively adjusted to reflect these stock splits.

 

###### **Reclassifications**

 

Certain reclassifications have been made to prior years’ balances toconform to classifications used in 2004.

 

**Use of Estimates**

 

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions.  These estimates and assumptions affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from theseestimates.

 

10

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###### **Cash and Cash Equivalents**

 

For purposes of the consolidated statement of cash flows, cash and cashequivalents include cash and due from banks and federal funds sold.  Federal funds are generally sold for one-dayperiods.

 

###### **ATM Cash Funding Program**

 

The Company has an ATM cash funding agreement through a correspondentbank.  The program provides fee income tothe Company equal to the average amount provided at the federal funds rate plusfifty basis points.  Under rules andregulations of the Federal Reserve Bank, these funds, totaling $8,970,000 atDecember 31, 2004, are considered to be vault cash and, accordingly, areincluded in the Company’s consolidated balance sheet as cash and due frombanks.

 

**Investment Securities**

 

Investment securities are classified intothe following categories:

 

•                                          Available-for-salesecurities, reported at fair value, with unrealized gains and losses excludedfrom earnings and reported, net of taxes, as accumulated other comprehensiveincome within shareholders’ equity.

 

•                                          Held-to-maturitysecurities, which management has the positive intent and ability to hold,reported at amortized cost, adjusted for the accretion of discounts andamortization of premiums.

 

Management determines the appropriate classification of its investmentsat the time of purchase and may only change the classification in certainlimited circumstances.  All transfersbetween categories are accounted for at fair value.

 

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

 

Investment securities are evaluated forimpairment on at least a quarterly basis and more frequently when economic ormarket conditions warrant such an evaluation to determine whether a decline intheir value is other than temporary. Management utilizes criteria such as the magnitude and duration of thedecline and the intent and ability of the Company to retain its investment inthe issues for a period of time sufficient to allow for an anticipated recoveryin fair value, in addition to the reasons underlying the decline, to determinewhether the loss in value is other than temporary.  The term “other than temporary” is notintended to indicate that the decline is permanent, but indicates that theprospects for a near-term recovery of value is not necessarily favorable, orthat there is a lack of evidence to support a realizable value equal to orgreater than the carrying value of the investment.  Once a decline in value is determined to beother than temporary, the value of the security is reduced and a correspondingcharge to earnings equal is recognized.

 

**Loans**

 

Loans are stated at principal balancesoutstanding, except for loans transferred from loans held for sale which arecarried at the lower of principal balance or market value at the date oftransfer, adjusted for accretion of discounts. Interest is accrued daily based upon outstanding loan balances.  However, when, in the opinion of management,loans are considered to be impaired and the future collectibility of interestand principal is in serious doubt, loans are placed on nonaccrual status andthe accrual of interest income is suspended. Any interest accrued but unpaid is charged against income.  Payments received are applied to reduceprincipal to the extent necessary to ensure collection.  Subsequent payments on these loans, orpayments received on nonaccrual loans for which the ultimate collectibility ofprincipal is not in doubt, are applied first to earned but unpaid interest andthen to principal.

 

11

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A loan is considered impaired when, based on current information andevents, it is probable that the Company will be unable to collect all amountsdue (including both principal and interest) in accordance with the contractualterms of the loan agreement.  An impairedloan is measured based on the present value of expected future cash flowsdiscounted at the loan’s effective interest rate or, as a practical matter, atthe loan’s observable market price or the fair value of collateral if the loanis collateral dependent.  Interest incomeon impaired loans, if appropriate, is recognized on a cash basis.

 

Substantially all loan origination fees, commitment fees, direct loanorigination costs and purchase premiums and discounts on loans are deferred andrecognized as an adjustment of yield, to be amortized to interest income overthe contractual term of the loan.  Theunamortized balance of deferred fees and costs is reported as a component ofnet loans.

 

***Loans Held for Sale, Loan Sales and ServicingRights***

 

The Company accounts for the transfer and servicing of financial assetsbased on the financial and servicing assets it controls and liabilities it hasincurred, derecognizes financial assets when control has been surrendered, andderecognizes liabilities when extinguished.

 

Servicing rights acquired through 1) a purchase or 2) the originationof loans which are sold with servicing rights retained are recognized asseparate assets or liabilities. Servicing assets or liabilities are recorded at the difference betweenthe contractual servicing fees and adequate compensation for performing theservicing, and are subsequently amortized in proportion to and over the periodof the related net servicing income or expense. Servicing assets are periodically evaluated for impairment.  Fair values are estimated using discountedcash flows based on current market interest rates.  For purposes of measuring impairment,servicing assets are stratified based on note rate and term.  The amount of impairment recognized is theamount by which the servicing assets for a stratum exceed their fair value.

 

Any servicing assets in excess of the contractually specified servicingfees have been reclassified at fair value as an interest-only (IO) stripreceivable and treated like an available-for-sale security.  The servicing asset, net of any requiredvaluation allowance, and IO strip receivable are included in accrued interestand other assets.

 

***Government Guaranteed Loans***

 

Included in the loan portfolio are loans which are 85% to 90%guaranteed by the Small Business Administration (SBA), U.S. Department ofAgriculture, Rural Business – Cooperative Service (RBS) and Farm ServicesAgency (FSA).  The guaranteed portion ofthese loans may be sold to a third party, with the Company retaining theunguaranteed portion.  The Companygenerally receives a premium in excess of the adjusted carrying value of theloan at the time of sale.  The Companymay be required to refund a portion of the sales premium if the borrowerdefaults or the loan prepays within ninety days of the settlement date.

 

The Company’s investment in the loan is allocated between the retainedportion of the loan, the servicing asset, the IO strip, and the sold portion ofthe loan based on their relative fair values on the date the loan is sold.  The gain on the sold portion of the loan isrecognized as income at the time of sale. The carrying value of the retained portion of the loan is discountedbased on the estimated value of a comparable non-guaranteed loan.  The servicing asset is recognized andamortized over the estimated life of the related loan.  Significant future prepayments of these loanswill result in the recognition of additional amortization of related servicingassets and an adjustment to the carrying value of related IO strips.

 

The Company serviced SBA, RBS and FSA government guaranteed loans forothers totaling $68,608,700 and $63,510,800 as of December 31, 2004 and 2003,respectively.

 

***Mortgage Loans***

 

The Company originates mortgage loansthat are either held in the Company’s loan portfolio or sold in the secondarymarket.  Loans held for sale are carriedat the lower of cost or market value. Market value is determined by the specific identification method as ofthe balance sheet date or the date which the purchasers have committed topurchase the loans.  At the time the loanis sold, the related right to service the loan is either retained, with theCompany recognizing the servicing asset, or released in exchange for a one-timeservicing-released premium.  Loanssubsequently transferred to the loan portfolio are transferred at the lower ofcost or market value at the date of transfer. Any difference between the carrying amount of the loan and itsoutstanding principal balance is recognized as an adjustment to yield by theinterest method.

 

12

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The Company serviced loans for the Federal National MortgageAssociation (FNMA) totaling $161,831,700 and $155,994,200 as of December 31,2004 and 2003, respectively.

 

***Participation Loans***

 

The Company also serviced loans which it has participated with otherfinancial institutions totaling $2,615,800 and $3,200,100 as of December 31,2004 and 2003, respectively.

 

**Allowancefor Loan Losses**

 

The allowance for loan losses is maintained to provide for lossesrelated to impaired loans and other losses that can be reasonably expected tooccur in the normal course of business. The determination of the allowance for loan losses is based on estimatesmade by management, to include consideration of the character of the loanportfolio, specifically identified problem loans, potential losses inherent inthe portfolio taken as a whole and economic conditions in the Company’s servicearea.

 

Loans determined to be impaired orclassified are individually evaluated by management for specific risk ofloss.  In addition, a reserve factor isassigned to currently performing loans based on management’s assessment of thefollowing for each identified loan type: (1) inherent credit risk, (2) historical losses and, (3) where theCompany has not experienced losses, the loss experience of peer banks.  These estimates are particularly susceptibleto changes in the economic environment and market conditions.

 

The Company’s Board of Directors reviews the adequacy of the allowancefor loan losses at least quarterly, to include consideration of the relativerisks in the portfolio and current economic conditions.  The allowance for loan losses is adjustedbased on that review if, in the judgment of the Board of Directors andmanagement, changes are warranted.

 

The allowance for loan losses is established through a provision forloan losses which is charged to expense. Additions to the allowance for loan losses are expected to maintain theadequacy of the total allowance after loan losses and loan growth.  The allowance for loan losses atDecember 31, 2004 and 2003 reflects management’s estimate of possiblelosses in the portfolio.

 

###### **Premises and Equipment**

 

Premises and equipment are carried at cost.  Depreciation is determined using thestraight-line method over the estimated useful lives of the relatedassets.  The useful lives of premises areestimated to be thirty to thirty-nine years. Leasehold improvements are amortized over the life of the improvement orthe life of the related lease, whichever is shorter.  The useful lives of furniture, fixtures andequipment are estimated to be three to ten years.  When assets are sold or otherwise disposedof, the cost and related accumulated depreciation are removed from theaccounts, and any resulting gain or loss is recognized in income for theperiod.  The cost of maintenance andrepairs is charged to expense as incurred.

 

The Company evaluates premises and equipment for financial impairmentas events or changes in circumstances indicate that the carrying amount of suchassets may not be fully recoverable.

 

**Income Taxes**

 

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

 

The Company accounts for income taxesusing the liability or balance sheet method. Under this method, deferred tax assets and liabilities are recognizedfor the tax consequences of temporary differences between the reported amountsof assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of enactment.  On the consolidated balance sheet, netdeferred tax assets are included in accrued interest receivable and otherassets.

 

13

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###### **Earnings Per Share**

 

Basic earnings per share (EPS), which excludes dilution, is computed bydividing income available to common shareholders by the weighted-average numberof common shares outstanding for the period, excluding the effect ofunallocated shares of the Employee Stock Ownership Plan.  Diluted EPS reflects the potential dilutionthat could occur if securities or other contracts to issue common stock, suchas stock options, result in the issuance of common stock which shares in theearnings of the Company.  The treasurystock method has been applied to determine the dilutive effect of stock optionsin computing diluted EPS.

 

###### **Comprehensive Income**

 

Comprehensive income is a more inclusive financialreporting methodology that includes disclosure of other comprehensive income(loss) that historically has not been recognized in the calculation of netincome.  Unrealized gains or losses onthe Company’s available-for-sale investment securities and IO strip are theprinciple source of other comprehensive income or loss.  Total comprehensive income and the componentsof accumulated other comprehensive income (loss) are presented in the consolidatedstatement of changes in shareholders’ equity.

 

###### **Stock-Based Compensation**

 

At December 31, 2004, the Company has threestock-based compensation plans, which are described more fully in Note 11.  The Company accounts for these plans underthe recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related Interpretations.  Nostock-based compensation cost is reflected in net income, as all optionsgranted under these plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant.

 

The following table illustrates the effect on netincome and earnings per share if the Company had applied the fair valuerecognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*, to stock-basedcompensation.  Pro forma adjustments tothe Company’s consolidated net earnings and earnings per share are disclosedduring the years in which the options become vested.

 
| ** **                                                                                                                               | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income,  as reported                                                                                                                 |       | $          | 5,609,600  |       | $          | 5,269,200  |       | $ | 4,849,600 |   |
| Deduct: Total stock-based compensation  expense determined under the fair value based method for all awards, net of  related tax effects |       | 310,900    |       | 264,700    |       | 273,900    |       |
|                                                                                                                                     |       |       |       |       |       |       |       |
| Pro forma  net income                                                                                                                    |       | $          | 5,298,700  |       | $          | 5,004,500  |       | $ | 4,575,700 |   |
|                                                                                                                                     |       |       |       |       |       |       |       |
| Basic  earnings per share -as reported                                                                                                   |       | $          | 1.58       |       | $          | 1.50       |       | $ | 1.40 |   |
| Basic  earnings per share - pro forma                                                                                                    |       | $          | 1.49       |       | $          | 1.42       |       | $ | 1.32 |   |
|                                                                                                                                     |       |       |       |       |       |       |       |
| Diluted  earnings per share - as reported                                                                                                |       | $          | 1.48       |       | $          | 1.42       |       | $ | 1.33 |   |
| Diluted  earnings per share - pro forma                                                                                                  |       | $          | 1.40       |       | $          | 1.36       |       | $ | 1.28 |   |

 

The fair value of eachoption is estimated on the date of grant using an option-pricing model with thefollowing assumptions:

 
| ** **                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected  volatility                                            |       | 15.21    | %          | 30.09    | %          |
| Risk-free  interest rate                                        |       | 4.02     | %          | 4.52     | %          |
| Expected  option life                                           |       | 10 years |       | 10 years |       |
| Expected  dividend yield                                        |       | 1.36     | %          | 1.72     | %          |
| Weighted  average fair value of options granted during the year |       | $        | 7.70       |     | $          | 7.31 |   |
|                                                                 |            |          |            |          |            |  |  |

 

There were no stock options granted in 2002.

 

14

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**Impact of New Financial Accounting Standards**

 

### ***Other-Than-Temporary Impairment of Securities***

 

In June 2004, the Financial AccountingStandards Board (FASB) ratified Emerging Issues Task Force (EITF) Issue 03-1, *The Meaning of Other-than-Temporary Impairment andIts Application to Certain Investments* (EITF 03-1).  EITF 03-1 includes additional guidance forevaluating and recording impairment losses on debt and equity investments, aswell as disclosure requirements for investments that are deemed to betemporarily impaired.  The proposedguidance indicates that an investor must have the intent and ability to hold aninvestment until a forecasted recovery of the fair value up to or beyond thecost of the investment in order to determine that any impairment istemporary.  In September 2004, theFASB delayed the effective date of the recognition and measurement guidance ofEITF 03-1, pending further deliberations. The disclosures for investments that are deemed temporarily impaired areincluded in Note 2 to the consolidated financial statements.  Once the FASB has reached a final decision onthe measurement and recognition provisions, the Company will evaluate theimpact of the adoption of EITF 03-1.

 

***Share-Based Payments***

** **

InDecember 2004 the FASB issued Statement Number 123 (revised 2004)(FAS 123 (R)), *Share-BasedPayments*.  FAS 123 (R)requires all entities to recognize compensation expense in an amount equal tothe fair value of share-based payments such as stock options granted to employees.  The Company is required to apply FAS 123(R) on a modified prospective method. Under this method, the Company is required to record compensationexpense (as previous awards continue to vest) for the unvested portion ofpreviously granted awards that remain outstanding at the date of adoption.  In addition, the Company may elect to adoptFAS 123 (R) by restating previously issued financial statements, basing theexpense on that previously reported in their pro forma disclosures required byFAS 123.  FAS 123 (R) is effective forthe first reporting period beginning after June 15, 2005. Management hasnot completed its evaluation of the effect that FAS 123 (R) will have, butbelieves that the effect will be consistent with its previous pro forma disclosures.

 

***Accounting for Loans or Debt Securities Acquired in aTransfer***

** **

In December 2003, the Accounting StandardsExecutive Committee of the American Institute of Certified Public Accountantsissued Statement of Position 03-03, *Accountingfor Certain Loans or Debt Securities Acquired in a Transfer*(SOP).  This SOP addresses accounting fordifferences between contractual cash flows and cash flows expected to becollected from an investor’s initial investment in loans or debt securities(loans) acquired in a transfer if those differences are attributable, at leastin part, to credit quality.  It alsoincludes such loans acquired in purchase business combinations.  This SOP does not apply to loans originatedby the entity.  This SOP limits the yieldthat may be accreted and requires that the excess of contractual cash flowsover cash flows expected to be collected not be recognized as an adjustment ofyield, loss accrual, or valuation allowance.

 

This SOP prohibits “carrying over” or creation ofvaluation allowances in the initial accounting for loans acquired in a transferthat are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to thepurchase of an individual loan, a pool of loans, a group of loans, and loansacquired in a purchase business combination.

 

This SOP is effective for loans acquired in fiscalyears beginning after December 15, 2004. In management’s opinion, the adoption of this pronouncement will nothave a material impact on the Company’s financial position or results ofoperations.

 

15

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**2.****            ****INVESTMENT SECURITIES**

 

The amortized cost andestimated fair value of investment securities at December 31, 2004 and2003 consisted of the following:

 

Available-for-Sale:

 
| ** **                                       | ** ** | **2004**            | ** ** |
|--------------------------------------------------|------------|---------------------|------------|
| ** **                                       | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
| ** **                                       | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt  securities:                                |       |                |       |   |   |   |   |   |   |
| U.S. Government agencies                         |       | $                   | 2,000,000  |   |   |   | $ | (9,000 | ) | $ | 1,991,000 |   |
| Obligations of states and political subdivisions |       | 1,356,100           |       | $ | 20,900 |   |   |   | 1,377,000 |   |
| Treasuries                                       |       | 1,003,600           |       | 7,400 |   |   |   | 1,011,000 |   |
|                                             |       |                |       |   |   |   |   |   |   |
|                                             |       | $                   | 4,359,700  |   | $ | 28,300 |   | $ | (9,000 | ) | $ | 4,379,000 |   |

 
| ** **                                        | ** ** | **2003**            | ** ** |
|---------------------------------------------------|------------|---------------------|------------|
| ** **                                        | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
| ** **                                        | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt  securities:                                 |       |                |       |   |   |   |   |   |   |
| U.S. Government agencies                          |       | $                   | 299,900    |   | $ | 2,100 |   |   |   | $ | 302,000 |   |
| Obligations of states and political  subdivisions |       | 200,000             |       |   |   |   |   | 200,000 |   |
|                                              |       |                |       |   |   |   |   |   |   |
|                                              |       | $                   | 499,900    |   | $ | 2,100 |   | $ | — |   | $ | 502,000 |   |
|                                                   |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

Net unrealized gains on available-for-saleinvestment securities totaling $19,300 and $2,100 were recorded, net of $7,700and $0 in tax liabilities, respectively, as accumulated other comprehensiveincome within shareholders’ equity at December 31, 2004 and 2003,respectively.  There were no sales ortransfers of available-for-sale investment securities for the years endedDecember 31, 2004, 2003 and 2002.

 

Held-to-Maturity:

 
| ** **                                        | ** ** | **2004**            | ** ** |
|---------------------------------------------------|------------|---------------------|------------|
| ** **                                        | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
| ** **                                        | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt  securities:                                 |       |                |       |   |   |   |   |   |   |
| U.S. Government agencies                          |       | $                   | 2,481,300  |   | $ | 10,100 |   | $ | (8,900 | ) | $ | 2,482,500 |   |
| Obligations of states and political  subdivisions |       | 100,600             |       | 900 |   |   |   | 101,500 |   |
|                                              |       |                |       |   |   |   |   |   |   |
|                                              |       | $                   | 2,581,900  |   | $ | 11,000 |   | $ | (8,900 | ) | $ | 2,584,000 |   |

 
| ** **                                        | ** ** | **2003**            | ** ** |
|---------------------------------------------------|------------|---------------------|------------|
| ** **                                        | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
| ** **                                        | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt  securities:                                 |       |                |       |   |   |   |   |   |   |
| U.S. Government agencies                          |       | $                   | 3,278,100  |   | $ | 18,100 |   | $ | (26,400 | ) | $ | 3,269,800 |   |
| Obligations of states and political  subdivisions |       | 544,400             |       | 9,500 |   |   |   | 553,900 |   |
|                                              |       |                |       |   |   |   |   |   |   |
|                                              |       | $                   | 3,822,500  |   | $ | 27,600 |   | $ | (26,400 | ) | $ | 3,823,700 |   |

 

There were no sales ortransfers of held-to-maturity investment securities for the years endedDecember 31, 2004, 2003 and 2002.

 

16

----

 

At December 31, 2004, the Company held thirteeninvestment securities of which four U.S. Government agencies securities, withan estimated fair value of $3,927,000, had gross unrealized losses of$17,900.  None of these unrealized losseshave been in a continuous loss position for more than a year.  Management periodically evaluates eachinvestment security for other than temporary impairment relying primarily onindustry analyst reports, observation of market conditions and interest ratefluctuations.  Management believes itwill be able to collect all amounts due according to the contractual terms ofthe underlying investment securities and that the noted decline in fair valueis considered temporary and due only to interest rate fluctuations.

 

The amortized cost andestimated fair value of investment securities at December 31, 2004, bycontractual maturity, are shown below. Expected maturities will differ from contractual maturities because theissuers of securities may have the right to call or prepay obligations with orwithout prepayment penalties.

 
| ** **                                                          | ** ** | **Available-for-Sale** | ** ** | **Held-to-Maturity**       | ** ** |
|---------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                          | ** ** | **Amortized  Cost**    | ** ** | **Estimated  Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair  Value** | ** ** |
| ** **                                                          | ** ** | ** **             | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Within one  year                                                    |       |                   |       |                       |       | $ | 100,600 |   | $ | 101,500 |   |
| After one  year through five years                                  |       | $                      | 2,000,000  |                       | $          | 1,991,000 |   | 1,001,200 |   | 997,200 |   |
| After five  years through ten years                                 |       | 1,003,600              |       | 1,011,000                  |       |   |   |   |   |
| After ten  years                                                    |       | 1,356,100              |       | 1,377,000                  |       |   |   |   |   |
|                                                                |       | 4,359,700              |       | 4,379,000                  |       | 1,101,800 |   | 1,098,700 |   |
| Investment securities not due at a single  maturity date: SBA pools |       |                   |       |                       |       | 1,480,100 |   | 1,485,300 |   |
|                                                                |       |                   |       |                       |       |   |   |   |   |
|                                                                |       | $                      | 4,359,700  |                       | $          | 4,379,000 |   | $ | 2,581,900 |   | $ | 2,584,000 |   |

 

Investment securitieswith amortized costs totaling $2,304,200 and $994,400 and fair values totaling$2,297,000 and $1,004,000 were pledged to secure public deposits and treasury,tax and loan accounts at December 31, 2004 and 2003, respectively.

 

17

----

 

**3.****            ****LOANS**

 

Outstanding loans aresummarized as follows:

 
| ** **                           | ** ** | **December 31,** | ** **  |
|--------------------------------------|------------|-----------------------|-------------|
| ** **                           | ** ** | **2004**              | ** **  | **2003** | ** ** |
| Real estate  - mortgage              |       | $                     | 146,875,600 |   | $ | 114,911,700 |   |
| Real estate  - construction          |       | 90,643,000            |        | 63,195,500 |   |
| Commercial                           |       | 58,662,200            |        | 54,076,500 |   |
| Agricultural                         |       | 22,176,500            |        | 20,819,900 |   |
| Installment                          |       | 26,219,300            |        | 21,847,400 |   |
|                                 |       |                  |        |   |   |
|                                 |       | 344,576,600           |        | 274,851,000 |   |
|                                 |       |                  |        |   |   |
| Deferred  loan origination fees, net |       | (1,021,500            | )           | (1,032,500 | ) |
| Allowance  for loan losses           |       | (4,381,200            | )           | (3,587,200 | ) |
|                                 |       |                  |        |   |   |
|                                 |       | $                     | 339,173,900 |   | $ | 270,231,300 |   |

 

Changes in the allowancefor loan losses were as follows:

 
| ** **                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance,  beginning of year      |       | $                                | 3,587,200  |   | $ | 3,006,800 |   | $ | 2,396,700 |   |
| Provision  charged to operations |       | 790,000                          |       | 655,000 |   | 603,000 |   |
| Losses  charged to allowance     |       | (23,600                          | )          | (81,200 | ) | (7,400 | ) |
| Recoveries                       |       | 27,600                           |       | 6,600 |   | 14,500 |   |
|                             |       |                             |       |   |   |   |   |
| Balance, end of year             |       | $                                | 4,381,200  |   | $ | 3,587,200 |   | $ | 3,006,800 |   |

 

At December 31,2004 and 2003, nonaccrual loans totaled $101,300 and $54,200, which wereconsidered impaired loans.  There was novaluation allowance related to these loans in 2004 or 2003.  Interest foregone on nonaccrual loans totaled$1,000, $1,200 and $35,400 for the years ended December 31, 2004, 2003 and2002, respectively.  Interest recognizedfor cash payment received on nonaccrual loans was not significant for the yearsended December 31, 2004, 2003 and 2002, respectively.

 

The Company did not hold any real estate acquired byforeclosure at December 31, 2004 or 2003.

 

Salaries and employee benefits totaling $1,190,100,$1,032,300 and $980,100 have been deferred as loan origination costs for theyears ended December 31, 2004, 2003 and 2002, respectively.

 

**4.****            ****ACCRUED INTEREST RECEIVABLE ANDOTHER ASSETS**

 

Accrued interest receivable and other assetsconsisted of the following:

 
| ** **                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| Accrued  interest receivable                               |       | $                     | 2,758,400  |   | $ | 2,607,300 |   |
| Deferred tax  assets, net (Note 13)                        |       | 2,844,000             |       | 2,787,000 |   |
| Cash  surrender value of life insurance policies (Note 15) |       | 6,703,100             |       | 6,296,800 |   |
| Mortgage  servicing assets                                 |       | 1,348,200             |       | 1,397,000 |   |
| Prepaid  expenses                                          |       | 1,019,400             |       | 872,200 |   |
| Other                                                      |       | 1,417,600             |       | 2,638,900 |   |
|                                                       |       |                  |       |   |   |
|                                                       |       | $                     | 16,090,700 |   | $ | 16,599,200 |   |

 

18

----

 

Originated mortgage servicing assets totaling$514,700, $1,111,400 and $546,000 were recognized during the years endedDecember 31, 2004, 2003 and 2002, respectively.  Amortization of mortgage servicing assets totaled$380,600, $475,700 and $209,900 for the years ended December 31, 2004,2003 and 2002, respectively.

 

**5.****            ****PREMISES AND EQUIPMENT**

 

Premises and equipmentconsisted of the following:

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Land                                            |       | $                     | 1,518,600  |   | $ | 1,192,800 |   |
| Buildings  and improvements                     |       | 5,761,300             |       | 5,667,200 |   |
| Furniture,  fixtures and equipment              |       | 6,241,700             |       | 5,106,200 |   |
| Leasehold  improvements                         |       | 841,500               |       | 690,100 |   |
| Construction  in progress                       |       | 75,400                |       | 137,600 |   |
|                                            |       |                  |       |   |   |
|                                            |       | 14,438,500            |       | 12,793,900 |   |
|                                            |       |                  |       |   |   |
| Less  accumulated depreciation and amortization |       | 5,411,300             |       | 4,240,000 |   |
|                                            |       |                  |       |   |   |
|                                            |       | $                     | 9,027,200  |   | $ | 8,553,900 |   |

 

Depreciation and amortization included in occupancyand equipment expense totaled $1,312,700, $933,500 and $742,800 for the yearsended December 31, 2004, 2003 and 2002, respectively.

 

**6.****            ****INTEREST-BEARING DEPOSITS**

 

Interest-bearingdeposits consisted of the following:

 
| ** **                      | ** ** | **December 31,** | ** **  |
|---------------------------------|------------|-----------------------|-------------|
| ** **                      | ** ** | **2004**              | ** **  | **2003** | ** ** |
| ** **                      | ** ** | ** **            | ** **  | ** ** | ** ** |
| Savings                         |       | $                     | 33,824,200  |   | $ | 24,945,800 |   |
| Money market                    |       | 40,118,900            |        | 33,819,500 |   |
| NOW accounts                    |       | 140,270,700           |        | 130,275,200 |   |
| Individual  retirement accounts |       | 6,818,000             |        | 7,211,100 |   |
| Time,  $100,000 or more         |       | 46,120,200            |        | 31,393,700 |   |
| Other time                      |       | 51,113,900            |        | 46,403,000 |   |
|                            |       |                  |        |   |   |
|                            |       | $                     | 318,265,900 |   | $ | 274,048,300 |   |

 

Aggregate annualmaturities of time deposits at December 31, 2004 are as follows:

 
| **Year Ending  December 31,** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** |
| 2005                               |       | $          | 88,195,100 |   |
| 2006                               |       | 5,371,600  |       |
| 2007                               |       | 1,281,600  |       |
| 2008                               |       | —     |       |
| After 2008                         |       | 2,385,800  |       |
|                               |       |       |       |
|                               |       | $          | 97,234,100 |   |

 

19

----

 

Interest expense recognized on interest-bearingdeposits consisted of the following:

 
| ** **                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Savings                         |       | $                                | 145,100    |   | $ | 121,500 |   | $ | 173,400 |   |
| Money market                    |       | 284,400                          |       | 356,500 |   | 341,400 |   |
| NOW accounts                    |       | 810,800                          |       | 1,049,700 |   | 1,042,800 |   |
| Individual  retirement accounts |       | 161,300                          |       | 185,400 |   | 218,400 |   |
| Time,  $100,000 or more         |       | 1,136,200                        |       | 853,200 |   | 807,300 |   |
| Other time                      |       | 1,046,800                        |       | 1,358,000 |   | 2,151,700 |   |
|                            |       |                             |       |   |   |   |   |
|                            |       | $                                | 3,584,600  |   | $ | 3,924,300 |   | $ | 4,735,000 |   |

 

**7.****            ****SHORT-TERM BORROWING ARRANGEMENTS**

 

The Company has$15,000,000 in unsecured borrowing arrangements with two of its correspondentbanks to meet short-term liquidity needs. There were no borrowings outstanding under these arrangements atDecember 31, 2004 and 2003.

 

**8.****            ****EMPLOYEE STOCK OWNERSHIP PLAN(ESOP) NOTE PAYABLE**

 

The ESOP obtainedfinancing through a $1,200,000 unsecured line of credit from another financialinstitution with the Company acting as the guarantor (see Note 15).  The note has a variable interest rate, basedon an independent index, and a maturity date of November 12, 2012.  At December 31, 2004, the interest ratewas 5.0%.  Advances on the line of credittotaled $833,200 and $831,900 at December 31, 2004 and 2003, respectively.

 

**9.**             JUNIORSUBORDINATED DEBENTURES

** **

Community Valley Bancorp Trust I (CVB Trust I) is aDelaware statutory business trust formed by the Company for the sole purpose ofissuing trust preferred securities fully and unconditionally guaranteed by theCompany.  Under applicable regulatoryguidance, the amount of trust preferred securities that is eligible as Tier 1capital is limited to twenty-five percent of the Company’s Tier 1 capital on apro forma basis.  At December 31,2004, all of the trust preferred securities that have been issued qualify asTier 1 capital.

 

In December 2002, the Company issued to CVBTrust I Subordinated Debentures due December 31, 2032.  Simultaneously, CVB Trust I issued 8,000floating rate trust preferred securities, with liquidation values of $1,000 persecurity, for gross proceeds of $8,000,000. The Subordinated Debentures represent the sole assets of the Trust.  The Subordinated Debentures are redeemable bythe Company, subject to receipt by the Company of prior approval from theFederal Reserve Bank (FRB), if then required under applicable capitalguidelines or policies of the FRB.  TheCompany may redeem the Subordinated Debentures held by CVB Trust I on anyDecember 31st on or after December 31, 2007.  The redemption price shall be par plusaccrued and unpaid interest, except in the case of redemption under a specialevent, which is defined in the debenture. The floating rate trust preferred securities are subject to mandatoryredemption to the extent of any early redemption of the Subordinated Debenturesand upon maturity of the Subordinated Debentures on December 31, 2032.

 

Holdersof the trust preferred securities are entitled to cumulative cash distributionson the liquidation amount of $1,000 per security.  Interest rates on the trust preferred securitiesand Subordinated Debentures are the same and are computed on a 360-daybasis.  The stated interest rate is thethree-month London Interbank Offered Rate (LIBOR) plus 3.30% (5.37% atDecember 31, 2004) with a maximum rate of 12.5% annually, adjustablequarterly.

 

Interestexpense recognized by the Company for the years ended December 31, 2004and 2003 related to the subordinated debentures was $437,716 and $438,750,respectively.  There was no interestexpense recognized in 2002.  The amountof deferred costs at December 31, 2004 and 2003 was $144,000 and $192,000,respectively.  The amortization of thedeferred costs was $48,000 for both of the years ended December 31, 2004and 2003.  There was no amortization ofdeferred costs for the year ended December 31, 2002.

 

20

----

 

**10.****         ****COMMITMENTS AND CONTINGENCIES**

 

###### **Leases**

 

The Company leases certain of its branch offices andcertain equipment under noncancellable operating leases.  These leases expire on various dates through2014 and have various renewal options ranging from five to fifteen years.  Rental payments include minimum rentals, plusadjustments for changing price indexes. Future minimum lease payments and sublease rental income are as follows:

 
| **Year Ending  December 31,** | ** ** | **Minimum  Lease  Payments** | ** ** | **Minimum  Sublease  Rental  Income** | ** ** |
|------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | ** **                   | ** ** | ** **                            | ** ** |
| 2005                               |       | $                            | 492,100    |                                  | $          | 128,400 |   |
| 2006                               |       | 434,700                      |       | 123,600                               |       |
| 2007                               |       | 369,100                      |       | 128,400                               |       |
| 2008                               |       | 314,900                      |       | 123,100                               |       |
| 2009                               |       | 254,700                      |       | 110,900                               |       |
| Thereafter                         |       | 499,300                      |       | 201,500                               |       |
|                               |       |                         |       |                                  |       |
|                               |       | $                            | 2,364,800  |                                  | $          | 815,900 |   |

 

Rental expense included in occupancy and equipmentexpense totaled $458,300, $391,200 and $190,200 for the years endedDecember 31, 2004, 2003 and 2002, respectively.  Sublease income included in occupancy expensetotaled $132,400, $90,800 and $45,400 for the years ended December 31,2004, 2003 and 2002, respectively.

 

**Financial Instruments With Off-Balance-Sheet Risk**

 

The Company is a partyto financial instruments with off-balance-sheet risk in the normal course ofbusiness in order to meet the financing needs of its customers.  These financial instruments includecommitments to extend credit and standby letters of credit.  These instruments involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized on the consolidated balance sheet.

 

The Company’s exposure to credit loss in the eventof nonperformance by the other party for commitments to extend credit andstandby letters of credit is represented by the contractual amount of thoseinstruments.  The Company uses the samecredit policies in making commitments and standby letters of credit as it doesfor loans included on the consolidated balance sheet.

 

The following financial instruments representoff-balance-sheet credit risk:

 
| ** **                    | ** ** | **December 31,** | ** **  |
|-------------------------------|------------|-----------------------|-------------|
| ** **                    | ** ** | **2004**              | ** **  | **2003** | ** ** |
| ** **                    | ** ** | ** **            | ** **  | ** ** | ** ** |
| Commitments  to extend credit |       | $                     | 147,750,600 |   | $ | 137,857,000 |   |
| Standby  letters of credit    |       | $                     | 4,648,700   |   | $ | 3,450,700 |   |

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  Each customer’screditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemednecessary upon extension of credit, is based on management’s credit evaluationof the borrower.  Collateral held varies,but may include deposit accounts, accounts receivable, inventory, equipment anddeeds of trust on residential real estate and income-producing commercial properties.

 

Standby letters of credit are conditionalcommitments issued to guarantee the performance of a customer to a thirdparty.  The credit risk involved inissuing standby letters of credit is essentially the same as that involved inextending loans to customers.  The fairvalue of the liability related to these standby letters of credit, whichrepresents the fees received for issuing the guarantees, was not significant atDecember 31, 2004 and 2003.  TheCompany recognizes these fees as revenues over the term of the commitment orwhen the commitment is used.

 

21

----

 

Commercial loan commitments and standby letters ofcredit represent approximately 16% of total commitments and are generallyunsecured or secured by collateral other than real estate and have variableinterest rates.  Agricultural loancommitments represent approximately 6% of total commitments and are generallysecured by crop assignments, accounts receivable and farm equipment and havevariable interest rates.  Real estateloan commitments represent approximately 68% of total commitments and aregenerally secured by property with a loan-to-value ratio not to exceed80%.  The majority of real estatecommitments also have variable interest rates. Personal lines of credit and home equity lines of credit represent theremaining 10% of total commitments and are generally unsecured or secured byresidential real estate and have both variable and fixed interest rates.

 

**Concentrations of Credit Risk**

 

The Company grants real estate mortgage, real estateconstruction, commercial, agricultural and consumer loans to customersthroughout Butte, Sutter, Yuba, Tehama and Placer Counties.

 

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

 

In addition, the Company’s real estate andconstruction loans represent approximately 69% of outstanding loans atDecember 31, 2004, compared to approximately 65% at December 31,2003.  Collateral values associated withthis lending concentration can vary significantly based on the general level ofinterest rates and both local and regional economic conditions.  In management’s opinion, although thisconcentration has no more than the normal risk of collection, a substantialdecline in the performance of the economy in general or a decline in realestate values in the Company’s primary market areas, in particular, could havean adverse impact on the collectibility of these loans.

 

###### **Correspondent Banking Agreements**

 

The Company maintains funds on deposit with otherfederally insured financial institutions under correspondent bankingagreements.  Uninsured deposits totaled$1,446,300 at December 31, 2004.

 

###### **Federal Reserve Requirements**

 

Banks are required to maintain reserves with theFederal Reserve Bank equal to a percentage of their reservable deposits lessvault cash.  The Bank’s vault cashfulfilled its reserve requirement at December 31, 2004.

 

###### **Contingencies**

 

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

 

**11.****         ****SHAREHOLDERS’ EQUITY**

 

**Dividends**

 

The shareholders of theCompany will be entitled to receive dividends when and as declared by its Boardof Directors, out of funds legally available for the payment of dividends, asprovided in the California General Corporation Law.  The California general corporation lawprohibits the Company from paying dividends on its common stock unless: (i) itsretained earnings, immediately prior to the dividend payment, equals or exceedsthe amount of the dividend or (ii) immediately after giving effect to thedividend, the sum of the Company’s assets (exclusive of goodwill and deferredcharges) would be at least equal to 125% of its liabilities (not includingdeferred taxes, deferred income and other deferred liabilities) and the currentassets of the Company would be at least equal to its current liabilities, or,if the average of its earnings before taxes on income and before interestexpense for the two preceding fiscal years was less than the average of itsinterest expense for the two preceding fiscal yeas, at least equal to 125% ofits current liabilities.  In certaincircumstances, the Company may be required to obtain the prior approval of theFederal Reserve Board to make capital distributions to shareholders of theCompany.

 

22

----

 

The California Financial Code restricts the totaldividend payment of any bank in any calendar year to the lesser of (1) the bank’sretained earnings or (2) the bank’s net income for its last three fiscal years,less distributions made to shareholders during the same three-year period.  At December 31, 2004, retained earningsof $11,688,800 were free of such restrictions.

 

###### **Stock Repurchase Plan**

 

The Board of Directors approved a plan to repurchaseup to $3,000,000 of the outstanding common stock of the Company in 2003.  Stock repurchases may be made from time totime on the open market or through privately negotiated transactions.  The timing of purchases and the exact numberof shares to be purchased will depend on market conditions.  The share repurchase program does not includespecific price targets or timetables and may be suspended at any time.  During 2004, 19,235 shares of the Company’scommon stock were repurchased for $502,200. No shares were repurchased under this program in 2003.

 

**Stock Options**

 

The Company hasestablished stock option plans for which shares of common stock have been reservedfor issuance to employees and directors under incentive and nonstatutoryagreements.  The plans require that theoption price may not be less than the fair market value of the stock at thedate the option is granted, and that the stock must be paid in full at the timethe option is exercised.  The optionsexpire on a date determined by the Board of Directors, but not later than tenyears from the date of grant.  Thevesting period is determined by the Board of Directors and is generally overfive years; however, nonstatutory options granted during 1997 vestedimmediately.  Under the 1997 and 1991plans, 182,889 shares of common stock remain reserved for issuance to employeesand directors, and the related options are exercisable until their expiration.  However, no new options will be granted underthese plans.  Under the Company’s 2000stock option plan, 342,675 shares of common stock remain reserved for issuanceto employees and directors, of which 37,200 shares are available for futuregrants.

 
| ** **                             | ** ** | **2004**   | ** ** | **2003**                               | ** ** | **2002**   | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***Incentive Options***                | ** ** | ** ** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Options outstanding, beginning of year |       | 240,535    |       | $                                      | 9.41       |       | 266,113    |   | $ | 8.84 |   | 216,865 |   | $ | 6.35 |   |
|                                   |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Options granted                        |       | 53,809     |       | $                                      | 25.98      |       | 6,667      |   | $ | 19.31 |   | 84,888 |   | $ | 14.16 |   |
| Options exercised                      |       | (18,670    | )          | $                                      | 10.62      |       | (28,689    | ) | $ | 5.95 |   | (35,640 | ) | $ | 6.31 |   |
| Options cancelled                      |       |       |       |                                   |       | (3,556     | )          | $ | 13.73 |   |   |   |   |   |
|                                   |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Options  outstanding, end of year      |       | 275,674    |       | $                                      | 12.56      |       | 240,535    |   | $ | 9.41 |   | 266,113 |   | $ | 8.84 |   |
|                                   |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Options  exercisable, end of year      |       | 163,477    |       | $                                      | 10.29      |       | 160,531    |   | $ | 7.36 |   | 144,207 |   | $ | 5.61 |   |
|                                   |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| ***Non-Qualified Options***            |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Options outstanding, beginning of year |       | 222,872    |       | $                                      | 7.49       |       | 232,872    |   | $ | 7.35 |   | 246,515 |   | $ | 7.20 |   |
|                                   |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Options granted                        |       |       |       |                                   |       | 2,667      |       | $ | 19.31 |   |   |   |   |   |
| Options exercised                      |       | (15,532    | )          | $                                      | 5.58       |       | (12,667    | ) | $ | 7.64 |   | (13,643 | ) | $ | 4.59 |   |
|                                   |       |       |       |                                   |       |       |       |   |   |   |   |   |   |
| Options  outstanding, end of year      |       | 207,340    |       | $                                      | 7.63       |       | 222,872    |   | $ | 7.49 |   | 232,872 |   | $ | 7.35 |   |
| Options  exercisable, end of year      |       | 180,777    |       | $                                      | 7.24       |       | 170,072    |   | $ | 6.73 |   | 152,872 |   | $ | 6.28 |   |

 

23

----

 

A summary of options outstanding atDecember 31, 2004 follows:

 
| **Range of Exercise Prices** | ** ** | **Number of  Options  Outstanding  December 31,  2004** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Number of  Options  Exercisable  December 31,  2004** | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------|------------|
|                         |       |                                                    |       |                                                |       |                                                    |       |
| Incentive  Options           |       |                                                    |       |                                                |       |                                                    |       |
|                         |       |                                                    |       |                                                |       |                                                    |       |
| $                            | 2.05       | -                                                       | $          | 7.59                                                |       |                                                    | 93,446     |   | 2.5 years |   | 93,446 |   |
| $                            | 9.07       | -                                                       | $          | 10.58                                               |       |                                                    | 50,960     |   | 5.1 years |   | 40,193 |   |
| $                            | 13.78      | -                                                       | $          | 19.31                                               |       |                                                    | 77,436     |   | 7.9 years |   | 29,838 |   |
| $                            | 24.75      | -                                                       | $          | 27.75                                               |       |                                                    | 53,832     |   | 9.6 years |   |   |   |
|                         |       |                                                    |       |                                                |       |                                                    |       |
|                         |       | 275,674                                                 |       |                                                |       | 163,477                                                 |       |
|                         |       |                                                    |       |                                                |       |                                                    |       |
| Non-qualified  Options       |       |                                                    |       |                                                |       |                                                    |       |
|                         |       |                                                    |       |                                                |       |                                                    |       |
| $                            | 4.59       |                                                    |       | 82,543                                              |       | 2.3 years                                               |       | 82,543 |   |
| $                            | 9.42       |                                                    |       | 122,131                                             |       | 5.3 years                                               |       | 97,701 |   |
| $                            | 10.31      |                                                    |       | 2,666                                               |       | 8.8 years                                               |       | 533 |   |
|                         |       |                                                    |       |                                                |       |                                                    |       |
|                         |       | 207,340                                                 |       |                                                |       | 180,777                                                 |       |
|                              |            |                                                         |            |                                                     |            |                                                         |            |  |  |  |  |  |  |

 

###### **Earnings Per Share**

###### ** **

A reconciliation of the numerators anddenominators of the basic and diluted earnings per share computations is asfollows:

 
| **For the Year Ended**            | ** ** | **Net  Income** | ** ** | **Weighted  Average  Number of  Shares  Outstanding** | ** ** | **Per Share  Amount** | ** ** |
|-----------------------------------|------------|-----------------|------------|-------------------------------------------------------|------------|-----------------------|------------|
|                              |       |            |       |                                                  |       |                  |       |
| December 31,  2004                | ** ** | ** **      | ** ** | ** **                                            | ** ** | ** **            | ** ** |
|                              |       |            |       |                                                  |       |                  |       |
| Basic  earnings per share         |       | $               | 5,609,600  |                                                  | 3,556,193  |                  | $          | 1.58 |   |
|                              |       |            |       |                                                  |       |                  |       |
| Effect of  dilutive stock options |       |            |       | 244,353                                               |       |                  |       |
|                              |       |            |       |                                                  |       |                  |       |
| Diluted  earnings per share       |       | $               | 5,609,600  |                                                  | 3,800,546  |                  | $          | 1.48 |   |

 
| **For the Year Ended**            | ** ** | **Net  Income** | ** ** | **Weighted  Average  Number of  Shares  Outstanding** | ** ** | **Per Share  Amount** | ** ** |
|-----------------------------------|------------|-----------------|------------|-------------------------------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | ** **      | ** ** | ** **                                            | ** ** | ** **            | ** ** |
| December 31,  2003                |       |            |       |                                                  |       |                  |       |
|                              |       |            |       |                                                  |       |                  |       |
| Basic  earnings per share         |       | $               | 5,269,200  |                                                  | 3,512,645  |                  | $          | 1.50 |   |
|                              |       |            |       |                                                  |       |                  |       |
| Effect of  dilutive stock options |       |            |       | 202,613                                               |       |                  |       |
|                              |       |            |       |                                                  |       |                  |       |
| Diluted  earnings per share       |       | $               | 5,269,200  |                                                  | 3,715,258  |                  | $          | 1.42 |   |
|                              |       |            |       |                                                  |       |                  |       |
| December 31,  2002                |       |            |       |                                                  |       |                  |       |
|                              |       |            |       |                                                  |       |                  |       |
| Basic  earnings per share         |       | $               | 4,849,600  |                                                  | 3,461,115  |                  | $          | 1.40 |   |
|                              |       |            |       |                                                  |       |                  |       |
| Effect of  dilutive stock options |       |            |       | 178,815                                               |       |                  |       |
|                              |       |            |       |                                                  |       |                  |       |
| Diluted  earnings per share       |       | $               | 4,849,600  |                                                  | 3,639,930  |                  | $          | 1.33 |   |

 

24

----

 

All of the stock options outstanding wereincluded in the computation of diluted earnings per share for the years endedDecember 31, 2004, 2003 and 2002 as none of the stock options wereanti-dilutive.

 

**RegulatoryCapital**

 

The Companyand the Bank are subject to certain regulatory capital requirementsadministered by the Board of Governors of the Federal Reserve System and the FederalDepository Insurance Corporation (FDIC). Failure to meet these minimum capital requirements can initiate certainmandatory, and possibly additional discretionary, actions by regulators that,if undertaken, could have a direct material effect on the Company’sconsolidated financial statements.  Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involvequantitative measures of their assets, liabilities and certainoff-balance-sheet items as calculated under regulatory accountingpractices.  The Company’s and the Bank’scapital amounts and classifications are also subject to qualitative judgmentsby the regulators about components, risk weightings and other factors.

 

Quantitative measures established byregulation to ensure capital adequacy require the Company and the Bank tomaintain minimum amounts and ratios of total and Tier 1 capital torisk-weighted assets and of Tier 1 capital to average assets as set forth inthe following table.  Each of thesecomponents is defined in the regulations. Management believes that the Company and the Bank meet all their capitaladequacy requirements as of December 31, 2004 and 2003.

 

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

 
| ** **                               | ** ** | ** ** | ** ** | ** **  | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well Capitalized  Under Prompt Corrective  Action Provisions** | ** ** |
|------------------------------------------|------------|------------|------------|-------------|------------|------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **Actual** | ** ** | **Minimum** | ** ** | **Minimum**                        | ** ** | **Minimum**                                                            | ** ** | **Minimum** | ** ** |
| ** **                               | ** ** | **Amount** | ** ** | **Ratio**   | ** ** | **Amount**                         | ** ** | **Ratio**                                                              | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                     |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
| December 31,  2004                       |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
|                                     |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
| Company:                                 |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
| Total capital (to risk-weighted assets)  |       | $          | 46,741,700 |        | 12.5       | %                                  | $          | 29,894,600                                                             |       | 8.0 | % | N/A |   | N/A |   |
| Tier 1 capital (to risk-weighted assets) |       | $          | 42,360,500 |        | 11.3       | %                                  | $          | 14,947,300                                                             |       | 4.0 | % | N/A |   | N/A |   |
| Tier 1 capital (to average assets)       |       | $          | 42,360,500 |        | 9.5        | %                                  | $          | 17,770,200                                                             |       | 4.0 | % | N/A |   | N/A |   |
|                                     |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
| Bank:                                    |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
| Total capital (to risk-weighted assets)  |       | $          | 42,336,700 |        | 11.3       | %                                  | $          | 29,853,200                                                             |       | 8.0 | % | $ | 37,316,500 |   | 10.0 | % |
| Tier 1 capital (to risk-weighted assets) |       | $          | 37,955,500 |        | 10.2       | %                                  | $          | 14,926,600                                                             |       | 4.0 | % | $ | 22,389,900 |   | 6.0 | % |
| Tier 1 capital (to average assets)       |       | $          | 37,955,500 |        | 8.6        | %                                  | $          | 17,655,700                                                             |       | 4.0 | % | $ | 22,069,600 |   | 5.0 | % |
|                                     |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
| December 31,  2003                       |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
|                                     |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
| Company:                                 |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
| Total capital (to risk-weighted assets)  |       | $          | 41,380,600 |        | 13.3       | %                                  | $          | 24,828,600                                                             |       | 8.0 | % | N/A |   | N/A |   |
| Tier 1 capital (to risk-weighted assets) |       | $          | 37,793,400 |        | 12.2       | %                                  | $          | 12,414,300                                                             |       | 4.0 | % | N/A |   | N/A |   |
| Tier 1 capital (to average assets)       |       | $          | 37,793,400 |        | 9.9        | %                                  | $          | 15,340,000                                                             |       | 4.0 | % | N/A |   | N/A |   |
|                                     |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
| Bank:                                    |       |       |       |        |       |                               |       |                                                                   |       |   |   |   |   |
| Total capital (to risk-weighted assets)  |       | $          | 37,406,300 |        | 12.1       | %                                  | $          | 24,808,600                                                             |       | 8.0 | % | $ | 31,010,700 |   | 10.0 | % |
| Tier 1 capital (to risk-weighted assets) |       | $          | 33,819,100 |        | 10.9       | %                                  | $          | 12,404,300                                                             |       | 4.0 | % | $ | 18,606,400 |   | 6.0 | % |
| Tier 1 capital (to average assets)       |       | $          | 33,819,100 |        | 8.8        | %                                  | $          | 15,303,300                                                             |       | 4.0 | % | $ | 19,129,200 |   | 5.0 | % |

 

25

----

 

**12.          OTHERNON-INTEREST INCOME AND EXPENSES**

 

Othernon-interest income consisted of the following:

 
| ** **                                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                         |       |                        |       |   |   |   |   |
| Alternative  investment fees                                                                 |       | $                           | 427,700    |   | $ | 218,100 |   | $ | 102,500 |   |
| Merchant  card processing fees                                                               |       | 337,000                     |       | 342,700 |   | 353,700 |   |
| Earnings and death benefit from cash  surrender value life insurance policies, net (Note 15) |       | 284,400                     |       | 379,700 |   | 1,406,400 |   |
| Other                                                                                        |       | 674,900                     |       | 449,700 |   | 590,400 |   |
|                                                                                         |       |                        |       |   |   |   |   |
|                                                                                         |       | $                           | 1,724,000  |   | $ | 1,390,200 |   | $ | 2,453,000 |   |

 

Other expenses consisted of thefollowing:

 
| ** **                                                            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                  |       |                        |       |   |   |   |   |
| Professional fees                                                     |       | $                           | 633,000    |   | $ | 537,100 |   | $ | 622,300 |   |
| Telephone and postage                                                 |       | 511,200                     |       | 498,000 |   | 436,200 |   |
| Stationery and supplies                                               |       | 521,200                     |       | 548,700 |   | 457,800 |   |
| Director fees and retirement accrual                                  |       | 407,900                     |       | 357,400 |   | 298,000 |   |
| Advertising and promotion                                             |       | 301,700                     |       | 276,600 |   | 252,500 |   |
| Beneficiary benefit accrual under salary  continuation plan (Note 15) |       |                        |       |   |   | 1,136,400 |   |
| Other                                                                 |       | 1,860,100                   |       | 1,411,800 |   | 1,219,500 |   |
|                                                                  |       |                        |       |   |   |   |   |
|                                                                  |       | $                           | 4,235,100  |   | $ | 3,629,600 |   | $ | 4,422,700 |   |

 

**13.          INCOMETAXES**

 

The provisionfor income taxes for the years ended December 31, 2004, 2003 and 2002 consistedof the following:

 
| ** **                 | ** ** | **Federal** | ** ** | **State**  | ** ** | **Total**  | ** ** |
|----------------------------|------------|-------------|------------|------------|------------|------------|------------|
| 2004                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
|                       |       |        |       |       |       |       |       |
| Current                    |       | $           | 2,837,000  |       | $          | 1,030,000  |       | $ | 3,867,000 |   |
| Deferred                   |       | (21,000     | )          | (43,000    | )          | (64,000    | )          |
|                       |       |        |       |       |       |       |       |
| Provision for income taxes |       | $           | 2,816,000  |       | $          | 987,000    |       | $ | 3,803,000 |   |
|                       |       |        |       |       |       |       |       |
| 2003                       |       |        |       |       |       |       |       |
|                       |       |        |       |       |       |       |       |
| Current                    |       | $           | 2,944,000  |       | $          | 1,024,000  |       | $ | 3,968,000 |   |
| Deferred                   |       | (487,000    | )          | (152,000   | )          | (639,000   | )          |
|                       |       |        |       |       |       |       |       |
| Provision for income taxes |       | $           | 2,457,000  |       | $          | 872,000    |       | $ | 3,329,000 |   |
|                       |       |        |       |       |       |       |       |
| 2002                       |       |        |       |       |       |       |       |
|                       |       |        |       |       |       |       |       |
| Current                    |       | $           | 2,240,000  |       | $          | 769,000    |       | $ | 3,009,000 |   |
| Deferred                   |       | (497,000    | )          | (137,000   | )          | (634,000   | )          |
|                       |       |        |       |       |       |       |       |
| Provision for Income taxes |       | $           | 1,743,000  |       | $          | 632,000    |       | $ | 2,375,000 |   |

 

26

----

 

Deferred tax assets (liabilities) arecomprised of the following at December 31, 2004 and 2003:

 
| ** **                                                    | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|---------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                          |       |      |       |      |       |
| Deferred tax  assets:                                         |       |      |       |      |       |
| Allowance for loan losses                                     |       | $         | 1,800,000  |      | $          | 1,457,000 |   |
| Deferred compensation                                         |       | 1,644,000 |       | 1,320,000 |       |
| Future benefit of state tax deduction                         |       | 391,000   |       | 334,000   |       |
| Other                                                         |       | 5,000     |       |      |       |
|                                                          |       |      |       |      |       |
| Total deferred tax assets                                     |       | 3,840,000 |       | 3,111,000 |       |
|                                                          |       |      |       |      |       |
| Deferred tax  liabilities:                                    |       |      |       |      |       |
| Future liability of state deferred tax  assets                |       | (230,000  | )          | (215,000  | )          |
| Bank premises and equipment                                   |       | (182,000  | )          | (109,000  | )          |
| Accrual to cash - deferred loan costs                         |       | (573,000  | )          |      |       |
| Unrealized gains on  available-for-sale-investment securities |       | (7,000    | )          |      |       |
| Other                                                         |       | (4,000    | )          |      |       |
|                                                          |       |      |       |      |       |
| Total deferred tax liabilities                                |       | (996,000  | )          | (324,000  | )          |
|                                                          |       |      |       |      |       |
| Net deferred tax assets                                       |       | $         | 2,844,000  |      | $          | 2,787,000 |   |

 

The Companybelieves that it is more likely than not that it will realize the abovedeferred tax assets in future periods; therefore, no valuation allowance hasbeen provided against its deferred tax assets.

 

The provisionfor income taxes differs from amounts computed by applying the statutoryFederal income tax rate to operating income before income taxes.  The items comprising these differences are asfollows:

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                      | ** ** | **Amount**                  | ** ** | **Rate %** | ** ** | **Amount** | ** ** | **Rate %** | ** ** | **Amount** | ** ** | **Rate %** | ** ** |
|                                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Federal income tax expense, at statutory  rate  |       | $                           | 3,200,000  |   | 34.0 |   | $ | 2,923,000 |   | 34.0 |   | $ | 2,456,000 |   | 34.0 |   |
| State franchise tax, net of Federal tax  effect |       | 673,000                     |       | 7.1 |   | 589,000 |   | 6.9 |   | 422,000 |   | 5.9 |   |
| Tax-exempt income from life insurance  policies |       | (117,000                    | )          | (1.2 | ) | (137,000 | ) | (1.6 | ) | (478,000 | ) | (6.6 | ) |
| Other                                           |       | 47,000                      |       | .5 |   | (46,000 | ) | (.6 | ) | (25,000 | ) | (.4 | ) |
|                                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |
|                                            |       | $                           | 3,803,000  |   | 40.4 |   | $ | 3,329,000 |   | 38.7 |   | $ | 2,375,000 |   | 32.9 |   |

 

27

----

 

**14.          RELATEDPARTY TRANSACTIONS**

 

During the normal course of business, theCompany enters into transactions with related parties, including Directors andexecutive officers.  These transactionsinclude borrowings with substantially the same terms, including rates andcollateral, as loans to unrelated parties. The following is a summary of the aggregate activity involving relatedparty borrowers during 2004:

 
| Balance, January 1, 2004                                       |   | $          | 4,423,500 |   |
|----------------------------------------------------------------|--------|------------|-----------|--------|
|                                                           |   |       |      |
| Disbursements                                                  |   | 2,277,700  |      |
| Amounts repaid                                                 |   | (3,125,200 | )         |
|                                                           |   |       |      |
| Balance,  December 31, 2004                                    |   | $          | 3,576,000 |   |
|                                                           |   |       |      |
| Undisbursed  commitments to related parties, December 31, 2004 |   | $          | 4,592,100 |   |

 

**15.          EMPLOYEEBENEFIT PLANS**

 

**SalaryContinuation and Retirement Plans**

 

Salary continuation plans are in placefor ten key executives.  In addition, aretirement plan is in place for members of the Board of Directors.  Under these plans, the directors andexecutives, or designated beneficiaries, will receive monthly payments for fiveto fifteen years after retirement or death. These benefits are substantially equivalent to those available underinsurance policies purchased by the Company on the lives of the directors andexecutives.  In addition, the estimatedpresent value of these future benefits is accrued over the period from theeffective dates of the plans until their expected retirement dates.  The expense recognized under these plans forthe years ended December 31, 2004, 2003 and 2002 totaled $714,600, $573,600 and$225,300, respectively.

 

In connection with these plans, theCompany purchased single premium life insurance policies with cash surrendervalues totaling $6,703,100 and $6,296,800 at December 31, 2004 and 2003,respectively.  On the consolidatedbalance sheet, the cash surrender values are included in accrued interestreceivable and other assets.  Incomeearned on these policies, net of expenses, totaled $284,400, $379,700 and$233,800 for the years ended December 31, 2004, 2003 and 2002, respectively.

 

In addition,upon the death of one of the executives during 2002, salary continuation planbenefit expense totaling $1,081,600 was accelerated to accrue for benefits tobe paid to the beneficiary under the plan. This expense was offset by tax-free death benefits totaling $1,172,600from insurance policies on the life of the executive.

 

###### **Savings Plan**

###### ** **

The ButteCommunity Bank 401(k) Savings Plan commenced January 1, 1993 and is availableto employees meeting certain service requirements.  Under the plan, employees may defer aselected percentage of their annual compensation.  The Bank may make a discretionarycontribution to the plan which would be allocated as follows:

 

•              Amatching contribution to be determined by the Board of Directors each plan yearunder which the Bank will match a percentage of each participant’scontribution.

 

•              A basiccontribution that would be allocated in the same ratio as each participant’scontribution bears to total compensation.

 

There were noemployer contributions for the years ended December 31, 2004, 2003 or 2002.

 

***Employee Stock Ownership Plan***

 

Under theButte Community Bank Employee Stock Ownership Plan (“ESOP”), employees who havebeen credited with at least 1,000 hours of service during a twelve month periodand who have attained age eighteen are eligible to participate.  The ESOP has funded purchases of the Bank’scommon stock through a loan from another financial

 

28

----

 

institution(see Note 8).  The loan is repaid fromdiscretionary contributions to the ESOP determined by the Bank’s Board ofDirectors.  Annual contributions arelimited on a participant-by-participant basis to the lesser of $30,000 ortwenty-five percent of the participant’s compensation for the year.  Employee contributions are not permitted.

 

As a leveragedESOP, interest expense is recognized on the loan in the Company’s consolidatedfinancial statements.  Shares areallocated on the basis of eligible compensation, as defined in the ESOP plandocument, in the year of allocation. Benefits generally become 100% vested after seven years of creditedservice.  Employees with at least three,but fewer than seven, years of credited service receive a partial vestingaccording to a sliding schedule. However, in the event of normal retirement, disability, or death, anyunvested portion of benefits vest immediately.

 

As shares arepurchased by the ESOP with proceeds from the loan, the Company records the costof these unearned ESOP shares as a contra-equity account.  These amounts are shown as a reduction ofshareholders’ equity in the Company’s consolidated balance sheet.  As the debt is repaid, the shares arereleased from unallocated ESOP shares in proportion to the debt service paid duringthe year and allocated to eligible employees. As shares are released from unallocated ESOP shares, the Company reportscompensation expense equal to the current market price of the shares, and theshares are recognized as outstanding for earnings per share computations.  Benefits are distributed in the form ofqualifying Company securities.  However,the Company will issue a put option to each participant upon distribution ofthe securities which, if exercised, requires the Company to purchase the qualifyingsecurities at fair market value.

 

During 2004 and 2003, the ESOP purchased5,660 and 10,733 shares of the Company’s common stock at a cost of $150,000 and$186,000, respectively, using the proceeds from the line of credit to theESOP.  Additionally, during 2003, theESOP redeemed 6,487 shares of the Company’s common stock previously allocatedto participants under the put option described above.  The cost of these shares totaled $135,000 andwas funded by the proceeds from the same line of credit.  No stock was purchased with proceeds from theline of credit during the year ended December 31, 2002.  Interest expense of $33,400, $33,100 and$39,500 was recognized in connection with the line of credit during the yearsended December 31, 2004, 2003 and 2002, respectively.

 

Compensation expense of $180,200,$251,700 and $158,000 was recognized for the years ended December 31, 2004,2003 and 2002.

 

Allocated andunallocated ESOP shares at December 31, 2004, 2003 and 2002, adjusted for stocksplits, were as follows:

 
| ** **                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**  | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|-----------|------------|
|                              |       |     |       |     |       |      |       |
| Allocated  shares                 |       | 111,510  |       | 105,187  |       | 97,567    |       |
| Unallocated  shares               |       | 89,628   |       | 90,909   |       | 87,249    |       |
|                              |       |     |       |     |       |      |       |
| Total ESOP shares                 |       | 201,138  |       | 196,096  |       | 184,816   |       |
|                              |       |     |       |     |       |      |       |
| Fair value  of unallocated shares |       | $        | 2,487,177  |     | $          | 1,840,914 |       | $ | 1,328,371 |   |
|                                   |            |          |            |          |            |           |            |  |  |  |

 

**16.          DISCLOSURESABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

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

 

Because nomarket exists for a significant portion of the Company’s financial instruments,fair value estimates are based on judgments regarding current economicconditions, risk characteristics of various financial instruments and otherfactors.  These estimates are subjectivein nature and involve uncertainties and matters of significant judgment andtherefore cannot be determined with precision. Changes in assumptions could significantly affect the fair valuespresented.

 

29

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The following methods and assumptionswere used by the Company to estimate the fair value of its financialinstruments at December 31, 2004 and 2003:

 

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

 

Interest-bearing deposits in banks:  The fair values of interest-bearing depositsin banks are estimated by discounting their future cash flows using rates ateach reporting date for instruments with similar remaining maturities offeredby comparable financial institutions.

 

Investment securities:  For investment securities, fair values arebased on quoted market prices, where available. If quoted market prices are not available, fair values are estimatedusing quoted market prices for similar securities and indications of valueprovided by brokers.

 

Loans: For variable-rate loans that reprice frequently with no significantchange in credit risk, fair values are based on carrying values.  Fair values of loans held for sale areestimated using quoted market prices for similar loans or the amount thatpurchasers have committed to purchase the loans.  The fair values for other loans are estimatedusing discounted cash flow analyses, using interest rates offered at eachreporting date for loans with similar terms to borrowers of comparablecreditworthiness adjusted for the allowance for loan losses.  The carrying amount of accrued interestreceivable approximates its fair value.

 

Other investments:  Other investments include non-marketableequity securities.  The carrying value ofthese investments approximates their fair value.

 

Cash surrender value of life insurance policies:  The fair values of life insurance policiesare based on cash surrender values at each reporting date provided by theinsurers.

 

Mortgage servicing rights:  The fair value of mortgage servicing rightsis estimated using projected cash flows, adjusted for the effects ofanticipated prepayments, using a market discount rate.

 

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

 

Note payable: The note payable reprices basedupon an independent index.  The carryingamount of the note payable approximates its fair value.

 

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

 

Commitments to extend credit and standby letters of credit:  Commitments to extend credit are primarilyfor variable rate loans and standby letters of credit.  For these commitments, there is no differencebetween the committed amounts and their fair values.  Commitments to fund fixed rate loans are atrates which approximate fair value at each reporting date.

 

30

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

 
| ** **                                                  | ** ** | **December 31, 2004** | ** **  | **December 31, 2003** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                                                  | ** ** | **Carrying  Amount**  | ** **  | **Fair  Value**       | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
|                                                        |       |                  |        |                  |       |   |   |   |   |
| Financial  assets:                                          |       |                  |        |                  |       |   |   |   |   |
| Cash and due from banks                                     |       | $                     | 21,778,000  |                  | $          | 21,778,000 |   | $ | 26,204,700 |   | $ | 26,204,700 |   |
| Federal funds sold                                          |       | 46,440,000            |        | 46,440,000            |       | 50,605,000 |   | 50,605,000 |   |
| Interest-bearing deposits in banks                          |       | 8,715,000             |        | 8,723,300             |       | 7,925,000 |   | 7,981,100 |   |
| Loans held for sale                                         |       | 1,489,800             |        | 1,512,800             |       | 2,279,100 |   | 2,421,300 |   |
| Investment securities                                       |       | 6,960,900             |        | 6,963,200             |       | 4,324,500 |   | 4,325,700 |   |
| Loans                                                       |       | 339,173,900           |        | 334,909,800           |       | 270,231,300 |   | 270,994,000 |   |
| Other investments                                           |       | 118,200               |        | 118,200               |       | 233,200 |   | 233,200 |   |
| Accrued interest receivable                                 |       | 2,578,400             |        | 2,578,400             |       | 2,607,300 |   | 2,607,300 |   |
| Cash surrender value of life insurance  policies            |       | 6,703,100             |        | 6,703,100             |       | 6,296,800 |   | 6,296,800 |   |
| Mortgage servicing assets                                   |       | 1,348,200             |        | 1,348,200             |       | 1,397,000 |   | 1,397,000 |   |
|                                                        |       |                  |        |                  |       |   |   |   |   |
| Financial  liabilities:                                     |       |                  |        |                  |       |   |   |   |   |
| Deposits                                                    |       | $                     | 399,059,100 |                  | $          | 398,939,800 |   | $ | 342,511,400 |   | $ | 343,424,300 |   |
| Note payable                                                |       | 833,200               |        | 833,200               |       | 831,900 |   | 831,900 |   |
| Junior subordinated debentures                              |       | 8,248,000             |        | 8,248,000             |       | 8,248,000 |   | 8,248,000 |   |
| Accrued interest payable                                    |       | 479,200               |        | 479,200               |       | 451,400 |   | 451,400 |   |
|                                                        |       |                  |        |                  |       |   |   |   |   |
| Notional value of off-balance-sheet  financial instruments: |       |                  |        |                  |       |   |   |   |   |
| Commitments to extend credit                                |       | $                     | 147,750,600 |                  | $          | 147,750,600 |   | $ | 137,857,000 |   | $ | 137,857,000 |   |
| Standby letters of credit                                   |       | $                     | 4,648,700   |                  | $          | 4,648,700 |   | $ | 3,450,700 |   | $ | 3,450,700 |   |

 

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**17.          PARENT ONLY CONDENSED FINANCIALSTATEMENTS**

 

**CONDENSED BALANCE SHEET**

** **

**December 31, 2004 and 2003**

 
| ** **                                            | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                  |       |       |       |       |       |
| **ASSETS**                                            |       |       |       |       |       |
|                                                  |       |       |       |       |       |
| Cash and  cash equivalents                            |       | $          | 3,296,400  |       | $          | 3,594,900 |   |
| Investment  in bank subsidiary                        |       | 38,126,100 |       | 33,868,700 |       |
| Investment  in non-bank subsidiary                    |       | 987,100    |       |       |       |
| Other assets                                          |       | 1,588,600  |       | 1,050,200  |       |
|                                                  |       |       |       |       |       |
| Total assets                                          |       | $          | 43,998,200 |       | $          | 38,513,800 |   |
|                                                  |       |       |       |       |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**         |       |       |       |       |       |
|                                                  |       |       |       |       |       |
| Liabilities:                                          |       |       |       |       |       |
| ESOP note payable                                     |       | $          | 833,200    |       |       |   |
| Junior subordinated debentures                        |       | 8,248,000  |       | $          | 8,248,000  |   |
| Other liabilities                                     |       | 385,900    |       | 317,300    |       |
|                                                  |       |       |       |       |       |
| Total liabilities                                     |       | 9,467,100  |       | 8,565,300  |       |
|                                                  |       |       |       |       |       |
| Shareholders’  equity:                           |       |       |       |       |       |
| Common stock                                          |       | 7,861,800  |       | 7,271,400  |       |
| Unallocated ESOP shares                               |       | (1,144,300 | )          | (1,070,700 | )          |
| Retained earnings                                     |       | 27,802,000 |       | 23,745,700 |       |
| Accumulated other comprehensive income, net  of taxes |       | 11,600     |       | 2,100      |       |
|                                                  |       |       |       |       |       |
| Total shareholders’ equity                       |       | 34,531,100 |       | 29,948,500 |       |
|                                                  |       |       |       |       |       |
| Total liabilities and shareholders’ equity       |       | $          | 43,998,200 |       | $          | 38,513,800 |   |

 

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**17.          PARENT ONLY CONDENSED FINANCIALSTATEMENTS**

** **

**CONDENSED STATEMENT OF INCOME**

 

**For the Years Ended December 31, 2004, 2003and 2002**

 
| ** **                                                    | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income:                                                       |       |       |       |       |       |       |       |
| Dividends declared by bank subsidiary                         |       | $          | 1,857,100  |       | $          | 2,064,100  |       | $ | 794,700 |   |
|                                                          |       |       |       |       |       |       |       |
| Expenses:                                                     |       |       |       |       |       |       |       |
| Professional fees                                             |       | 179,500    |       | 147,200    |       | 97,200     |       |
| Interest expense                                              |       | 439,100    |       | 438,800    |       |       |       |
| Other expenses                                                |       | 142,900    |       | 100,700    |       | 23,300     |       |
|                                                          |       |       |       |       |       |       |       |
| Total expenses                                                |       | 761,500    |       | 686,700    |       | 120,500    |       |
|                                                          |       |       |       |       |       |       |       |
| Income before equity in Undistributed  income of subsidiaries |       | 1,095,600  |       | 1,377,400  |       | 674,200    |       |
|                                                          |       |       |       |       |       |       |       |
| Equity in  undistributed income of subsidiaries               |       | 4,235,000  |       | 3,577,800  |       | 4,127,400  |       |
|                                                          |       |       |       |       |       |       |       |
| Income before income tax benefit                              |       | 5,330,600  |       | 4,955,200  |       | 4,801,600  |       |
|                                                          |       |       |       |       |       |       |       |
| Income tax  benefit                                           |       | 279,000    |       | 314,000    |       | 48,000     |       |
|                                                          |       |       |       |       |       |       |       |
| Net income                                                    |       | $          | 5,609,600  |       | $          | 5,269,200  |       | $ | 4,849,600 |   |

 

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**17.          PARENT ONLY CONDENSED FINANCIALSTATEMENTS**

 

**CONDENSED STATEMENT OF CASH FLOWS**

 

**For the Years Ended December 31, 2004, 2003and 2002**

 
| ** **                                                                         | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows  from operating activities:                                             |       |       |       |       |       |       |       |
| Net income                                                                         |       | $          | 5,609,600  |       | $          | 5,269,200  |       | $ | 4,849,600 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |       |       |       |       |       |       |
| Undistributed net income of subsidiary                                             |       | (4,235,000 | )          | (3,577,800 | )          | (4,127,400 | )          |
| Increase in other assets                                                           |       | (110,800   | )          | (375,200   | )          | (301,700   | )          |
| Increase in other liabilities                                                      |       | 67,100     |       | 91,800     |       | (45,900    | )          |
|                                                                               |       |       |       |       |       |       |       |
| Net cash provided by operating activities                                          |       | 1,330,900  |       | 1,408,000  |       | 374,600    |       |
|                                                                               |       |       |       |       |       |       |       |
| Cash flows  from investing activities:                                             |       |       |       |       |       |       |       |
| Investment in Butte Community Bank                                                 |       |       |       | (4,760,000 | )          | (85,700    | )          |
| Investment in CVB Insurance Agency LLC                                             |       | (1,000,000 | )          |       |       |       |       |
| Investment in Community Valley Bancorp  Trust I                                    |       |       |       |       |       | (248,000   | )          |
|                                                                               |       |       |       |       |       |       |       |
| Net cash used in investing activities                                              |       | (1,000,000 | )          | (4,760,000 | )          | (333,700   | )          |
|                                                                               |       |       |       |       |       |       |       |
| Cash flows  from financing activities:                                             |       |       |       |       |       |       |       |
| Proceed from ESOP note payable                                                     |       | 848,900    |       |       |       |       |       |
| Repayments of ESOP note payable                                                    |       | (15,700    | )          |       |       |       |       |
| Purchase of unallocated ESOP shares                                                |       | (150,000   | )          |       |       |       |       |
| Proceeds from the issuance of junior  subordinated debentures                      |       |       |       |       |       | 8,248,000  |       |
| Proceeds from exercise of stock options                                            |       | 285,100    |       | 267,300    |       | 287,200    |       |
| Cash paid for fractional shares                                                    |       | (6,000     | )          |       |       | (5,300     | )          |
| Payment of cash dividends                                                          |       | (1,089,500 | )          | (1,079,000 | )          | (812,200   | )          |
| Repurchase of common stock                                                         |       | (502,200   | )          |       |       |       |       |
|                                                                               |       |       |       |       |       |       |       |
| Net cash used in financing activities                                              |       | (629,400   | )          | (811,700   | )          | 7,717,700  |       |
|                                                                               |       |       |       |       |       |       |       |
| Decrease in cash and cash equivalents                                              |       | (298,500   | )          | (4,163,700 | )          | 7,758,600  |       |
|                                                                               |       |       |       |       |       |       |       |
| Cash and  cash equivalents at beginning of year                                    |       | 3,594,900  |       | 7,758,600  |       | —     |       |
|                                                                               |       |       |       |       |       |       |       |
| Cash and  cash equivalents at end of year                                          |       | $          | 3,296,400  |       | $          | 3,594,900  |       | $ | 7,758,600 |   |
|                                                                                    |            |            |            |            |            |            |            |  |  |  |  |  |

 

34

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** **

**SIGNATURES**

 

Pursuant to the requirementsof the Securities and Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|            | COMMUNITY VALLEY BANCORP |
|-----------------|--------------------------|
|            |                     |
| October 4, 2005 |                     | By: | /s/ *Keith C. Robbins* |   |
|            |                     |
|            |                     | Keith C. Robbins |
|            |                     |
|            |                     | President, Chief Executive  Officer |
|            |                     |
| October 4, 2005 |                     | By*:*  | */s/ John  F. Coger* |   |
|            |                     | * * |   |
|            |                     | John F. Coger |   |
|            |                     |   |   |
|            |                     | Executive Vice President,  CFO-COO |

 

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