Community Valley Bancorp (CVLL) 10-K/A 2004 FY Annual report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20006

FORM 10-K/A

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

COMMUNITY VALLEY BANCORP

(Exact name of registrant as specified in its charter)

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 area code

Securities registered pursuant to Section 12(b) of the Act:  None

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

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

Yes   ý      No   o

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

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

As of June 30, 2004, the aggregate market value of 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 date of $26.30 per share.

Shares of Common Stock held by each officer and director and each person owning more than five percent of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates.  This determination of the affiliate status is not necessarily a conclusive determination for other purposes.

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

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

EXPLANATORY NOTE

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

1

PART IV

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

(a)List of documents filed as part of this report

(1)           Financial Statements

The following financial statements and independent auditor’s reports are 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)           Financial Statement Schedules

Schedules to the financial statements are omitted because the required information is not applicable or because the required information is presented in 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

COMMUNITY VALLEY 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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
and Shareholders

Community Valley Bancorp

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

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

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

/s/ Perry-Smith LLP

Sacramento, California

February 25, 2005

4

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 consolidated financial statements.

5

COMMUNITY VALLEY BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

For the Years Ended December 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 integral
part of these consolidated financial statements.

6

COMMUNITY VALLEY BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2004, 2003 and 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 consolidated financial statements.

7

COMMUNITY VALLEY BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Years Ended December 31, 2004, 2003 and 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 integral
part of these consolidated financial statements.

9

COMMUNITY VALLEY BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

In May 2002, Community Valley Bancorp (“Community Valley”) was incorporated as a bank holding company for the purpose of acquiring Butte Community Bank (the “Bank”) in a one bank holding company reorganization.  In October 2004, Community Valley filed for status as a Financial Holding Company for the purpose of establishing CVB Insurance Agency LLC (“CVBIA”).  The new corporate structure gives Community Valley, the Bank and CVBIA greater flexibility in terms of operation, expansion and diversification.

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

On December 19, 2002, Community Valley formed a wholly-owned subsidiary, Community Valley Bancorp Trust I (the “Trust”), a Delaware statutory 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 related services.

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

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Community Valley and its wholly-owned subsidiaries, Butte Community Bank and CVB Insurance Agency LLC.  Significant intercompany transactions and balances have been eliminated in consolidation.

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

Stock Splits

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

Reclassifications

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

Use of Estimates

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

10

Cash and Cash Equivalents

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

ATM Cash Funding Program

The Company has an ATM cash funding agreement through a correspondent bank.  The program provides fee income to the Company equal to the average amount provided at the federal funds rate plus fifty basis points.  Under rules and regulations of the Federal Reserve Bank, these funds, totaling $8,970,000 at December 31, 2004, are considered to be vault cash and, accordingly, are included in the Company’s consolidated balance sheet as cash and due from banks.

Investment Securities

Investment securities are classified into the following categories:

•Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income within shareholders’ equity.

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

Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances.  All transfers between categories are accounted for at fair value.

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

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

Loans

Loans are stated at principal balances outstanding, except for loans transferred from loans held for sale which are carried at the lower of principal balance or market value at the date of transfer, 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 interest and principal is in serious doubt, loans are placed on nonaccrual status and the accrual of interest income is suspended.  Any interest accrued but unpaid is charged against income.  Payments received are applied to reduce principal to the extent necessary to ensure collection.  Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectibility of principal is not in doubt, are applied first to earned but unpaid interest and then to principal.

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

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

Loans Held for Sale, Loan Sales and Servicing Rights

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

Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold with servicing rights retained are recognized as separate assets or liabilities.  Servicing assets or liabilities are recorded at the difference between the contractual servicing fees and adequate compensation for performing the servicing, and are subsequently amortized in proportion to and over the period of the related net servicing income or expense.  Servicing assets are periodically evaluated for impairment.  Fair values are estimated using discounted cash 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 the amount by which the servicing assets for a stratum exceed their fair value.

Any servicing assets in excess of the contractually specified servicing fees have been reclassified at fair value as an interest-only (IO) strip receivable and treated like an available-for-sale security.  The servicing asset, net of any required valuation allowance, and IO strip receivable are included in accrued interest and 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 of Agriculture, Rural Business – Cooperative Service (RBS) and Farm Services Agency (FSA).  The guaranteed portion of these loans may be sold to a third party, with the Company retaining the unguaranteed portion.  The Company generally receives a premium in excess of the adjusted carrying value of the loan at the time of sale.  The Company may be required to refund a portion of the sales premium if the borrower defaults or the loan prepays within ninety days of the settlement date.

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

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

Mortgage Loans

The Company originates mortgage loans that are either held in the Company’s loan portfolio or sold in the secondary market.  Loans held for sale are carried at the lower of cost or market value.  Market value is determined by the specific identification method as of the balance sheet date or the date which the purchasers have committed to purchase the loans.  At the time the loan is sold, the related right to service the loan is either retained, with the Company recognizing the servicing asset, or released in exchange for a one-time servicing-released premium.  Loans subsequently transferred to the loan portfolio are transferred at the lower of cost or market value at the date of transfer.  Any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest method.

12

The Company serviced loans for the Federal National Mortgage Association (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 other financial institutions totaling $2,615,800 and $3,200,100 as of December 31, 2004 and 2003, respectively.

Allowance for Loan Losses

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

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

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

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

Premises and Equipment

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

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

Income Taxes

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

The Company accounts for income taxes using the liability or balance sheet method.  Under this method, deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

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Earnings Per Share

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

Comprehensive Income

Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income (loss) that historically has not been recognized in the calculation of net income.  Unrealized gains or losses on the Company’s available-for-sale investment securities and IO strip are the principle source of other comprehensive income or loss.  Total comprehensive income and the components of accumulated other comprehensive income (loss) are presented in the consolidated statement of changes in shareholders’ equity.

Stock-Based Compensation

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

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.  Pro forma adjustments to the Company’s consolidated net earnings and earnings per share are disclosed during 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 each option is estimated on the date of grant using an option-pricing model with the following 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.

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Impact of New Financial Accounting Standards

Other-Than-Temporary Impairment of Securities

In June 2004, the Financial Accounting Standards Board (FASB) ratified Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of Other-than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1).  EITF 03-1 includes additional guidance for evaluating and recording impairment losses on debt and equity investments, as well as disclosure requirements for investments that are deemed to be temporarily impaired.  The proposed guidance indicates that an investor must have the intent and ability to hold an investment until a forecasted recovery of the fair value up to or beyond the cost of the investment in order to determine that any impairment is temporary.  In September 2004, the FASB delayed the effective date of the recognition and measurement guidance of EITF 03-1, pending further deliberations.  The disclosures for investments that are deemed temporarily impaired are included in Note 2 to the consolidated financial statements.  Once the FASB has reached a final decision on the measurement and recognition provisions, the Company will evaluate the impact of the adoption of EITF 03-1.

Share-Based Payments

In December 2004 the FASB issued Statement Number 123 (revised 2004) (FAS 123 (R)), Share-Based Payments.  FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the 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 compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption.  In addition, the Company may elect to adopt FAS 123 (R) by restating previously issued financial statements, basing the expense on that previously reported in their pro forma disclosures required by FAS 123.  FAS 123 (R) is effective for the first reporting period beginning after June 15, 2005. Management has not completed its evaluation of the effect that FAS 123 (R) will have, but believes that the effect will be consistent with its previous pro forma disclosures.

Accounting for Loans or Debt Securities Acquired in a Transfer

In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP).  This SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality.  It also includes such loans acquired in purchase business combinations.  This SOP does not apply to loans originated by the entity.  This SOP limits the yield that may be accreted and requires that the excess of contractual cash flows over cash flows expected to be collected not be recognized as an adjustment of yield, loss accrual, or valuation allowance.

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

This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004.  In management’s opinion, the adoption of this pronouncement will not have a material impact on the Company’s financial position or results of operations.

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2.INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities at December 31, 2004 and 2003 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-sale investment securities totaling $19,300 and $2,100 were recorded, net of $7,700 and $0 in tax liabilities, respectively, as accumulated other comprehensive income within shareholders’ equity at December 31, 2004 and 2003, respectively.  There were no sales or transfers of available-for-sale investment securities for the years ended December 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 or transfers of held-to-maturity investment securities for the years ended December 31, 2004, 2003 and 2002.

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

The amortized cost and estimated fair value of investment securities at December 31, 2004, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because the issuers of securities may have the right to call or prepay obligations with or without 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 securities with 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.

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3.LOANS

Outstanding loans are summarized 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 allowance for 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 were considered impaired loans.  There was no valuation 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 and 2002, respectively.  Interest recognized for cash payment received on nonaccrual loans was not significant for the years ended December 31, 2004, 2003 and 2002, respectively.

The Company did not hold any real estate acquired by foreclosure 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 the years ended December 31, 2004, 2003 and 2002, respectively.

4.ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable and other assets consisted 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

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Originated mortgage servicing assets totaling $514,700, $1,111,400 and $546,000 were recognized during the years ended December 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 equipment consisted 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 occupancy and equipment expense totaled $1,312,700, $933,500 and $742,800 for the years ended December 31, 2004, 2003 and 2002, respectively.

6.INTEREST-BEARING DEPOSITS

Interest-bearing deposits 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 annual maturities 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

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Interest expense recognized on interest-bearing deposits 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 correspondent banks to meet short-term liquidity needs.  There were no borrowings outstanding under these arrangements at December 31, 2004 and 2003.

8.EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) NOTE PAYABLE

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

9.JUNIOR SUBORDINATED DEBENTURES

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

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

Holders of the trust preferred securities are entitled to cumulative cash distributions on the liquidation amount of $1,000 per security.  Interest rates on the trust preferred securities and Subordinated Debentures are the same and are computed on a 360-day basis.  The stated interest rate is the three-month London Interbank Offered Rate (LIBOR) plus 3.30% (5.37% at December 31, 2004) with a maximum rate of 12.5% annually, adjustable quarterly.

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

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10.COMMITMENTS AND CONTINGENCIES

Leases

The Company leases certain of its branch offices and certain equipment under noncancellable operating leases.  These leases expire on various dates through 2014 and have various renewal options ranging from five to fifteen years.  Rental payments include minimum rentals, plus adjustments 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 equipment expense totaled $458,300, $391,200 and $190,200 for the years ended December 31, 2004, 2003 and 2002, respectively.  Sublease income included in occupancy expense totaled $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 party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet.

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

The following financial instruments represent off-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 extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower.  Collateral held varies, but may include deposit accounts, accounts receivable, inventory, equipment and deeds of trust on residential real estate and income-producing commercial properties.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.  The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2004 and 2003.  The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used.

21

Commercial loan commitments and standby letters of credit represent approximately 16% of total commitments and are generally unsecured or secured by collateral other than real estate and have variable interest rates.  Agricultural loan commitments represent approximately 6% of total commitments and are generally secured by crop assignments, accounts receivable and farm equipment and have variable interest rates.  Real estate loan commitments represent approximately 68% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%.  The majority of real estate commitments also have variable interest rates.  Personal lines of credit and home equity lines of credit represent the remaining 10% of total commitments and are generally unsecured or secured by residential real estate and have both variable and fixed interest rates.

Concentrations of Credit Risk

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

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

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

Correspondent Banking Agreements

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

Federal Reserve Requirements

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

Contingencies

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

11.SHAREHOLDERS’ EQUITY

Dividends

The shareholders of the Company will be entitled to receive dividends when and as declared by its Board of Directors, out of funds legally available for the payment of dividends, as provided in the California General Corporation Law.  The California general corporation law prohibits the Company from paying dividends on its common stock unless: (i) its retained earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend or (ii) immediately after giving effect to the dividend, the sum of the Company’s assets (exclusive of goodwill and deferred charges) would be at least equal to 125% of its liabilities (not including deferred taxes, deferred income and other deferred liabilities) and the current assets of the Company would be at least equal to its current liabilities, or, if the average of its earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of its interest expense for the two preceding fiscal yeas, at least equal to 125% of its current liabilities.  In certain circumstances, the Company may be required to obtain the prior approval of the Federal Reserve Board to make capital distributions to shareholders of the Company.

22

The California Financial Code restricts the total dividend payment of any bank in any calendar year to the lesser of (1) the bank’s retained 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 earnings of $11,688,800 were free of such restrictions.

Stock Repurchase Plan

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

Stock Options

The Company has established stock option plans for which shares of common stock have been reserved for issuance to employees and directors under incentive and nonstatutory agreements.  The plans require that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised.  The options expire on a date determined by the Board of Directors, but not later than ten years from the date of grant.  The vesting period is determined by the Board of Directors and is generally over five years; however, nonstatutory options granted during 1997 vested immediately.  Under the 1997 and 1991 plans, 182,889 shares of common stock remain reserved for issuance to employees and directors, and the related options are exercisable until their expiration.  However, no new options will be granted under these plans.  Under the Company’s 2000 stock option plan, 342,675 shares of common stock remain reserved for issuance to employees and directors, of which 37,200 shares are available for future grants.

	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 at December 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 and denominators of the basic and diluted earnings per share computations is as follows:

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 were included in the computation of diluted earnings per share for the years ended December 31, 2004, 2003 and 2002 as none of the stock options were anti-dilutive.

Regulatory Capital

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets as set forth in the following table.  Each of these components is defined in the regulations.  Management believes that the Company and the Bank meet all their capital adequacy requirements as of December 31, 2004 and 2003.

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

					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	%

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12.          OTHER NON-INTEREST INCOME AND EXPENSES

Other non-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 the following:

	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.          INCOME TAXES

The provision for income taxes for the years ended December 31, 2004, 2003 and 2002 consisted of 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

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Deferred tax assets (liabilities) are comprised 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 Company believes that it is more likely than not that it will realize the above deferred tax assets in future periods; therefore, no valuation allowance has been provided against its deferred tax assets.

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

	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

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14.          RELATED PARTY TRANSACTIONS

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

Salary Continuation and Retirement Plans

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

In connection with these plans, the Company purchased single premium life insurance policies with cash surrender values totaling $6,703,100 and $6,296,800 at December 31, 2004 and 2003, respectively.  On the consolidated balance sheet, the cash surrender values are included in accrued interest receivable and other assets.  Income earned 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 plan benefit expense totaling $1,081,600 was accelerated to accrue for benefits to be paid to the beneficiary under the plan.  This expense was offset by tax-free death benefits totaling $1,172,600 from insurance policies on the life of the executive.

Savings Plan

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

•A matching contribution to be determined by the Board of Directors each plan year under which the Bank will match a percentage of each participant’s contribution.

•A basic contribution that would be allocated in the same ratio as each participant’s contribution bears to total compensation.

There were no employer contributions for the years ended December 31, 2004, 2003 or 2002.

Employee Stock Ownership Plan

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

28

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

As a leveraged ESOP, interest expense is recognized on the loan in the Company’s consolidated financial statements.  Shares are allocated on the basis of eligible compensation, as defined in the ESOP plan document, in the year of allocation.  Benefits generally become 100% vested after seven years of credited service.  Employees with at least three, but fewer than seven, years of credited service receive a partial vesting according to a sliding schedule.  However, in the event of normal retirement, disability, or death, any unvested portion of benefits vest immediately.

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

During 2004 and 2003, the ESOP purchased 5,660 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 the ESOP.  Additionally, during 2003, the ESOP redeemed 6,487 shares of the Company’s common stock previously allocated to participants under the put option described above.  The cost of these shares totaled $135,000 and was funded by the proceeds from the same line of credit.  No stock was purchased with proceeds from the line 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 years ended 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 and unallocated ESOP shares at December 31, 2004, 2003 and 2002, adjusted for stock splits, 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.          DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

29

The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at December 31, 2004 and 2003:

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

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

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

Loans:  For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values.  Fair values of loans held for sale are estimated using quoted market prices for similar loans or the amount that purchasers have committed to purchase the loans.  The fair values for other loans are estimated using discounted cash flow analyses, using interest rates offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness adjusted for the allowance for loan losses.  The carrying amount of accrued interest receivable approximates its fair value.

Other investments:  Other investments include non-marketable equity securities.  The carrying value of these investments approximates their fair value.

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

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

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

Note payable: The note payable reprices based upon an independent index.  The carrying amount of the note payable approximates its fair value.

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

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

30

The estimated fair values of the 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 FINANCIAL STATEMENTS

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 FINANCIAL STATEMENTS

CONDENSED STATEMENT OF INCOME

For the Years Ended December 31, 2004, 2003 and 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 FINANCIAL STATEMENTS

CONDENSED STATEMENT OF CASH FLOWS

For the Years Ended December 31, 2004, 2003 and 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

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	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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