Community Valley Bancorp (CVLL) 10-Q 2006 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2006

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMUNITY VALLEY BANCORP

(Exact name of registrant as specified in its charter)

California	000-51678	68-0479553
(State or other jurisdiction of	(Commission File Number)	(IRS Employer ID Number)
incorporation or organization)
2041 Forest Avenue, Chico, California		95928
(Address of principal executive offices)		(Zip code)

(530) 899-2344

(Registrant’s telephone number,
including area code)

not applicable
(Former name, former address and former fiscal year, if changed
since last report.)

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 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  x  No  o

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

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2. Yes  o  No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

No par value Common Stock — 7,471,362 shares outstanding at November 9, 2006.

PART 1-FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

COMMUNITY VALLEY BANCORP
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

(In thousands except per share data)	September 30, 2006			December 31, 2005
ASSETS
Cash and due from banks	$	16,455		$	18,988
Federal funds sold	8,410			29,015
Total cash and cash equivalents	24,865			48,003
Interest-bearing deposits in banks	3,664			6,636
Investment securities (fair value of $5,201 at September 30, 2006 and $6,640 at December 31, 2005)	5,231			6,676
Loans held for sale at lower of cost or market	1,899			2,197
Loans, less allowance for loan losses of $5,368 at September 30, 2006 and $4,716 at December 31, 2005	461,498			401,221
Premises and equipment, net	14,366			11,221
Accrued interest receivable and other assets	19,898			18,823
Total assets	$	531,421		$	494,777
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing	$	84,625		$	83,336
Interest bearing	381,806			350,682
Total deposits	466,431			434,018
Notes payable	1,244			1,782
Junior subordinated debentures	8,248			8,248
Accrued interest payable and other liabilities	9,686			9,174
Total liabilities	485,609			453,222
Commitments and contingencies
Shareholders’ equity:
Common stock – no par value; 20,000,000 shares authorized; issued and outstanding – 7,469,163 shares at September 30, 2006 and 7,408,047 shares at December 31, 2005	9,844			9,051
Unallocated ESOP shares (169,868 shares at September 30, 2006 and 185,051 shares at December 31, 2005, at cost)	(1,575		)	(1,391		)
Retained earnings	37,554			33,908
Accumulated other comprehensive loss net of taxes	(11		)	(13		)
Total shareholders’ equity	45,812			41,555
Total liabilities and shareholders equity	$	531,421		$	494,777

See Notes to Unaudited Condensed Consolidated Financial  Statements

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COMMUNITY VALLEY BANCORP
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)

	For the periods ended September 30,
	Three months				Nine Months
(In thousands, except per share data)	2006		2005		2006		2005
Interest income:
Interest and fees on loans	$	10,414	$	8,273	$	29,203	$	22,252
Interest on Federal funds sold	166		177		521		642
Interest on deposits in banks	36		60		143		188
Interest and dividends on investment securities:
Taxable	37		43		131		137
Exempt from Federal income taxes	17		27		49		83
Dividends			3		8		10
Total interest income	10,670		8,583		30,055		23,312
Interest expense:
Interest on deposits	2,346		1,231		5,900		3,248
Interest on junior subordinated debentures	192		153		544		428
Interest on note payable	23		21		60		46
Total interest expense	2,561		1,405		6,504		3,722
Net interest income before provision for loan losses	8,109		7,178		23,551		19,590
Provision for loan losses	225		225		675		675
Net interest income after provision for loan losses	7,884		6,953		22,876		18,915
Non-interest income	1,523		1,966		4,884		5,231
Non-interest expenses:
Salaries and employee benefits	3,804		3,096		11,292		8,920
Occupancy	393		326		1,032		884
Furniture and equipment	483		465		1,422		1,295
Other expense	1,590		1,468		4,319		4,061
Total non-interest expense	6,270		5,355		18,065		15,160
Income before provision for income taxes	3,137		3,564		9,695		8,986
Provision for income taxes	1,404		1,405		4,103		3,643
Net income	$	1,733	$	2,159	$	5,592	$	5,343
Basic earnings per share	$	.24	$	.30	$	.77	$	.75
Diluted earnings per share	$	.23	$	.28	$	.73	$	.70
Cash dividends per share	$	.07	$	.04	$	.18	$	.1175

See Notes to Unaudited Condensed Consolidated Financial Statements

3

COMMUNITY VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands except share data)

												Accumulated
						Unallocated						Other			Total
	Common Stock					ESOP			Retained			Comprehensive			Shareholders’			Comprehensive
	Shares		Amount			Shares			Earnings			Income			Equity			Income
Balance, January 1, 2005	7,273,582		$	7,862		$	(1,144	)	$	27,802		$	11		$	34,531
Comprehensive income:
Net income									7,198						7,198			$	7,198
Other comprehensive income, net of tax
Net change in unrealized gains on available-for-sale investment securities												(24		)	(24		)	(24		)
Total comprehensive income																		$	7,174
Exercise of stock options and related tax benefit	134,465		1,039												1,039
Amortization of stock compensation - ESOP shares			150			101									251
Shares acquired or redeemed by ESOP						(348		)							(348		)
Cash dividends- $.15 per share									(1,092		)				(1,092		)
Balance, December 31, 2005	7,408,047		9,051			(1,391		)	33,908			(13		)	41,555
Comprehensive income
Net income									5,592						5,592			$	5,592
Other comprehensive income, net of taxes:
Net change in unrealized gain (loss) on available-for-sale investment securities												2			2			2
Total comprehensive income																		$	5,590
Exercise of stock options and related tax benefit	104,716		763												763
Repurchase of common stock	(43,600	)	(332		)				(605		)				(937		)
Amortization of stock compensation - ESOP shares			233			(184		)							49
Stock-based compensation expense			129												129
Cash dividends $.18 per share									(1,341		)				(1,341		)
Balance, September 30, 2006	7,469,163		$	9,844		$	(1,575	)	$	37,554		$	(11	)	$	45,812

See Notes to Unaudited Condensed Consolidated Financial Statements

4

COMMUNITY VALLEY BANCORP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In thousands)

For the nine months ended September 30,	2006			2005
Cash flows from operating activities:
Net income	$	5,592		$	5,343
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	675			675
(Decrease) increase in deferred loan origination costs, net	(176		)	47
Depreciation and amortization, net	1,218			1,140
Loss (gain) on disposition of Bank premises and equipment	11			(20		)
Net decrease (increase) decrease in loans held for sale	298			(1,453		)
Increase in cash surrender value of bank-owned life insurance	(258		)	(217		)
Non-cash compensation expense associated with the ESOP	404			205
Share based compensation expense associated with stock options	129
Provision for deferred tax benefit	(10		)
Increase in accrued interest receivable and other assets	(428		)	(1,188		)
Increase in accrued interest payable and other liabilities	308			3,406
Net cash provided by operating activities	7,763			7,938
Cash flows from investing activities:
Decrease in interest-bearing deposits in banks	2,972			2,079
Proceeds from called available-for-sale investment securities				1,000
Proceeds from matured available-for-sale investment securities	1,000
Proceeds from principal payments on available-for-sale investment securities	20
Proceeds from called held-to-maturity investment securities	246
Proceeds from matured held-to-maturity investment securities				106
Proceeds from principal payments of held-to-maturity investment securities	176			280
Purchases of held-to-maturity investment securities				(1,234		)
Purchase of available-for-sale investment securities				(2,008		)
Purchases of premises and equipment	(4,365		)	(3,149		)
Proceeds from sale of premises and equipment	(2		)	54
Premiums paid for bank-owned life insurance				(1,450		)
Investment in ATM program				(9,989		)
Net increase in loans	(60,797		)	(64,682		)
Net cash used in investing activities	(60,750		)	(69,004		)
Cash flows from financing activities:
Net (decrease) increase in demand, interest-bearing and savings deposits	$	(22,034	)	$	27,750
Net increase in time deposits	54,446			13,791
Repayment of note payable	(800		)
Proceeds from note payable				800
Repayment of ESOP loan, net	(92		)	(170		)
Proceeds from ESOP loan	354			348
Purchase of unallocated ESOP shares	(354		)	(348		)
Payment of cash dividends	(1,116		)	(841		)
Proceeds from the exercise of stock options	383			453
Repurchase of common stock	(937		)
Net cash provided by financing activities	29,850			41,783
Decrease in cash and cash equivalents	(23,137		)	(19,283		)
Cash and cash equivalents at beginning of year	48,003			68,218
Cash and cash equivalents at end of period	$	24,866		$	48,935

See Notes to Unaudited Condensed Consolidated Financial Statements

5

Community Valley Bancorp and Subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Community Valley Bancorp and subsidiaries (the “Company”) have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures required by accounting principles generally accepted in the United States of America for annual financial statements are not included herein, however the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (which consist solely of normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods presented have been included. These interim consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2005 Annual Report to Shareholders on Form 10-K.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Butte Community Bank (the “Bank”) and Butte Community Insurance Agency, LLC formerly CVB Insurance Agency, LLC. All significant inter-company balances and transactions have been eliminated in consolidation. The Company has also established a wholly-owned unconsolidated subsidiary, Community Valley Bancorp Trust I (the “Trust”), a Delaware statutory business trust, formed for the sole purpose of issuing trust preferred securities. The results of operations for the three-month and nine-month periods ended September 30, 2006 may not necessarily be indicative of the operating results for the full year 2006.

Management has determined that because all of the commercial banking products and services offered by the Company are available in each branch of the bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No single customer accounts for more than 10% of the revenues of the Company or the Bank.

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.

2.  EARNINGS PER SHARE COMPUTATION

Basic earnings per share are computed by dividing net income by the weighted average common shares outstanding for the period (7,302,769 and 7,276,991 shares for the three and nine month periods ended September 30, 2006 and 7,183,171 and  7,147,502 shares for the three and nine month periods ended September 30, 2005).  Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised using the treasury stock method.   Diluted earnings per share is computed by dividing net income by the weighted average common shares outstanding for the period plus the dilutive effect of options (399,415 and 406,098 shares for the three and nine month periods ended September 30, 2006 and 441,51 0 and 456,626 shares for the three and  nine month periods ended September 30, 2005).    During the periods covered the Company had no stock options that were considered anti-dilutive.

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3.  COMPREHENSIVE INCOME

Comprehensive income is reported in addition to net income for all periods presented.  Comprehensive income is made up of net income plus other comprehensive income or loss.  The Company’s only source of other  comprehensive income or loss, is comprised of changes in unrealized gains or losses, net of taxes, on available-for-sale securities, adjusted for the effect of realized gains or losses on available-for-sale securities, net of taxes.

4.  STOCK –BASED COMPENSATION

The Company issues stock options under two stock-based compensation plans, the Community Valley Bancorp 1997 and 2000 Stock Option Plans. 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 plan, 227,540 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 this plan. Under the Company’s 2000 stock option plan, 584,371 shares of common stock remain reserved for issuance to employees and directors, of which 75,877 shares are available for future grants.

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” which addresses the accounting for stock-based payment transactions. SFAS No. 123(R) eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and instead generally requires that such transactions be accounted for using a fair-value based method. The Company has elected the modified prospective transition method as permitted under SFAS No. 123(R), and accordingly prior periods have not been restated to reflect the impact of SFAS No. 123(R). The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options that are ultimately expected to vest as the requisite service is rendered beginning on January 1, 2006. Stock-based compensation for awards granted prior to January 1, 2006 is based upon the grant-date fair value of such compensation as determined under the pro forma provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company issues new shares of common stock upon the exercise of stock options.

The Company uses a Black-Scholes option valuation model to determine the fair value of stock-based compensation under SFAS No. 123(R), consistent with that used for pro forma disclosures under SFAS No. 123. The Black-Scholes model incorporates various assumptions including the expected term of awards, volatility of stock price, risk-free rates of return and dividend yield. The expected term of an award is generally no less than the option vesting period and is based on the Company’s historical experience. Expected volatility is based upon the historical volatility of the Company’s stock price. The risk-free interest rate is approximated using rates available on U.S. Treasury securities with a remaining term equal to the option’s expected life.

SFAS 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as a cash flow from financing in the statement of cash flows. These excess tax benefits for the three and nine months ending September 30, 2006 were $54,000 and $380,844 for the Company.

The Company recorded an incremental $43 thousand ($40 thousand after tax) of stock-based compensation expense during the three months ended September 30, 2006 and $129 thousand ($119 thousand after tax) for the nine month period ended September 30, 2006 as a result of the adoption of SFAS No. 123(R). As a result, there was not a significant impact on the net income before or after the provision for income taxes or on the basic or diluted earnings per share.  SFAS No. 123(R),  Share-Based Payment , requires the fair value method of accounting for stock options whereby compensation expense will be recognized based on the computed fair value of the options on the grant date for stock options granted on or after January 1, 2006.

7

Certain pro forma disclosures of the expense recognition provisions of Statement No. 123 are required for periods prior to implementation of the standard for companies, such as Community Valley Bancorp, which used the intrinsic-value method for accounting for stock options, and are as follows:

	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005
Net earnings as reported	$	2,159		$	5,343
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects	$	(90	)	$	(267	)
Pro forma net income	$	2,069		$	5,076
Basic earnings per share - as reported	$	0.30		$	0.75
Basic earnings per share - pro forma	$	0.29		$	0.71
Diluted earnings per share - as reported	$	0.28		$	0.70
Diluted earnings per share - pro forma	$	0.27		$	0.67

The fair value of the options granted during the nine month period ended September 30, 2006 and 2005 are noted below and are based on the following assumptions:

	Nine Months Ended
	September 30, 2006			September 30, 2005
Dividend Yield	1.11		%	1.12		%
Expected Volatility	32.35		%	58.0		%
Risk-free interest rate	4.50		%	4.00		%
Expected Option Life	7.5 years			6.5 years
Weighted average fair value of options granted during the year	$	3.58		$	5.81

Stock option activity for the nine month period ended September 30, 2006 and 2005 is summarized as follows:

	Number of Stock				Weighted Average		Weighted Average
2006	Options Outstanding		Exercise Price Range		Exercise Price		Contractual Life
Outstanding at January 1	841,950		$	2.30 to $14.75	$	5.74
Exercised	(104,716	)	$	2.23 to $13.25	$	3.64
Granted	6,000		$	15.40	$	15.40
Cancelled or expired	(7,200	)	$	7.13 to $14.75	$	11.36
Outstanding at September 30	736,034		$	2.30 to $15.40	$	5.84	5.18 years
Options vested or expected to vestat September 30	724,363		$	2.30 to $15.40	$	5.76	2.9 years
Exercisable at September 30	629,983		$	2.30 to $15.40	$	4.79	5.0 years

					Weighted
	Number of				Average
	Stock Options		Exercise Price		Exercise
2005	Outstanding		Range		Price
Outstanding at January 1	966,028		$	1.02 to $13.88	$	5.22
Exercised	(109,198	)	$	1.02 to $7.50	$	3.92
Granted	34,000		$	13.25 to $13.75	$	14.05
Cancelled or expired	(10,000	)	$	13.75	$	13.75
Outstanding at September 30	880,830		$	2.30 to $13.75	$	5.46
Exercisable at September 30	759,832		$	2.30 to $13.75	$	4.70

8

The total fair value of the shares that vested during the quarter and nine months ended September 30, 2006 was $140,000 and $374,000.  The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for options that were in-the-money at September 30, 2006. The intrinsic value of options outstanding, options vested or expected to vest, and exercisable relating to the above stock option plan was $7.84 million, $7.79 million and $7.35 million, respectively, as of September 30, 2006. During the nine months ended September 30, 2006 and 2005, the aggregate intrinsic value of options exercised relating to the above stock option plan was $1,396,000and $1,083,000, respectively.

As required by SFAS 123 (R), management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest. Management has estimated the forfeiture rate to be approximately 2% for the remaining non-vested options.

At September 30, 2006, the total compensation cost related to non-vested stock option awards granted to employees under the Company’s stock option plans but not yet recognized was $352,000. Stock option compensation expense is recognized on a straight-line basis over the vesting period of the option. This cost is expected to be recognized over a weighted average remaining period of 2.3 years and will be adjusted for subsequent changes in estimated forfeitures.

5.  COMMITMENTS AND CONTINGENCIES

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

In the normal course of business, there are various outstanding commitments to extend credit which are not reflected in the financial statements, including loan commitments of $188,837,000 and $200,693,000 and stand-by letters of credit of $6,003,000 and $4,895,000 at September 30, 2006 and December 31, 2005, respectively.

Of the loan commitments outstanding at September 30, 2006, $115,261,000 are real estate construction loan commitments that are expected to fund within the next twelve months. The remaining commitments primarily relate to revolving lines of credit or other commercial loans, and many of these are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each loan commitment and the amount and type of collateral obtained, if any, are evaluated on an individual basis. Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

9

Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party. These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used.  The fair value of the liability related to these stand-by letters of credit, which represents the fees received for issuing the guarantees, was not significant at September 30, 2006 and December 31, 2005.  The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used.

6.  NEW ACCOUNTING PRONOUNCEMENTS

Accounting for Servicing of Financial Assets

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 156 (SFAS 156), Accounting for Servicing of Financial Assets — An Amendment of FASB Statement No. 140.  SFAS 156 requires that a servicing asset or liability be recognized each time a contract to service a financial asset is entered into, requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits the subsequent measurement of servicing assets and servicing liabilities based on the amortization method or the fair value measurement method. SFAS 156 also permits a one-time reclassification of available-for-sale securities to trading securities provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in the fair value of servicing assets or servicing liabilities that a servicer elects to are subsequently measured at fair value.

The Company should apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions after the effective date entered into on or after January 1, 2007  SFAS 156 permits a one-time reclassification of available-for-sale securities to trading securities provided that they are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. The provisions of SFAS 156 are effective as of the beginning of the first fiscal year that begins after September 15, 2006.

Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued Financial Accounting Standards Interpretation No. 48 (FIN), Accounting for Uncertainty in Income Taxes.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes, Fin 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions.  FIN 48 is effective for fiscal years beginning after December 15, 2006.

Staff Accounting Bulletin 108: Considering the Effects of Prior Year Misstatements

On September 13, 2006, the Securities and Exchange Commission published Staff Accounting Bulleting No. 108 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.  The interpretations in this Staff Accounting Bulleting are being issued to address diversity in practice in quantifying financial statement misstatements and the potential under current practice to build up improper amounts on the balance sheet.  This guidance will apply to the first fiscal year ending after November 15, 2006 and early application in interim periods is encouraged.  We do not believe the adoption of SAB 108 will have a material impact on our financial position, results of operations or cash flows.

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In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 06-5, “Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.”  FASB Technical Bulletin No. 85-4 requires that the amount that could be realized under the insurance contract as of the date of the statement of financial position should be reported as an asset.  Since the issuance of FASB Technical Bulletin No. 85-4, there has been diversity in practice in the calculation of the amount that could be realized under insurance contracts.  EITF Issue No. 06-5, which is effective January 1, 2008, concludes that the Company should consider any additional amounts (e.g., cash stabilization reserves and deferred acquisition cost taxes) included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized in accordance with FASB Technical Bulletin No. 85-4.  The adoption of EITF Issue No. 06-5 is not expected to have a material impact on the Company’s results of operations and financial condition.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF COMMUNITY VALLEY BANCORP

The following is Community Valley Bancorp’s (the “Company”) management’s discussion and analysis of the significant changes in balance sheet accounts for September 30, 2006 and December 31, 2005 and income and expense accounts for the three and nine month periods ended September 30, 2006 and 2005.

The discussion is designed to provide a better understanding of significant trends related to the Company’s financial condition, results of operations, liquidity, capital resources and interest rate sensitivity.   In addition to the historical information contained herein, this report on Form 10-Q contains certain forward-looking statements.  The reader of this report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome.   The Company’s actual results could differ materially from those suggested by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on securities investments, rates paid on deposits, competition effects, fee and other noninterest income earned, general economic conditions, nationally, regionally and in the operating market areas of the Company and its subsidiaries, changes in the regulatory environment, changes in business conditions and inflation, changes in securities markets, data processing problems, a decline in real estate values in the Company’s market area,  the effects of terrorism, including the events of September 11, 2001 and thereafter, and the conduct of the war on terrorism by the United States and its allies, as well as other factors. This entire report should be read putting such forward-looking statements in context.

General Development of Business

The Company is a financial holding company (“FHC”) registered and authorized to engage in the activities permitted under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California in 2002 and elected to change to a FHC in 2004.    As a financial holding company, the Company is subject to the Federal Holding Company Act and to supervision by the board of Governors of the Federal Reserve System (“FRB”).  Its principal office is located at 2041 Forest Avenue, Chico, California 95928 and its telephone number is (530) 899-2344.

The Company owns 100% of the issued and outstanding common shares of Butte Community Bank.  Butte Community Bank was incorporated and commenced business in Paradise and Oroville, California in 1990.  Butte Community Bank operates thirteen full service offices within its primary service areas of Butte, Sutter, Yuba, Tehama, and Shasta Counties.  The Bank also maintains Loan Production Offices in Citrus Heights and Gridley. Butte Community Bank’s primary business is serving the commercial banking needs of small to mid-sized businesses and consumers within those counties.  Butte Community Bank accepts checking and savings deposits, offers money market deposit accounts and certificates of deposit, makes secured and unsecured commercial, secured real estate, and other installment and term loans and offers other customary banking services.

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On December 19, 2002, the Company formed a wholly-owned unconsolidated subsidiary, Community Valley Bancorp Trust I (the “Trust”), a Delaware statutory business trust, for the purpose of issuing trust preferred securities.

On December 1, 2004, the Company formed a wholly-owned subsidiary, CVB Insurance Agency LLC for the purpose of providing insurance related services. The name was changed to Butte Community Insurance Agency LLC in April, 2006.

Critical Accounting Policies

General

The Company’s significant accounting principles are described in Note 1 of the consolidated financial statements in the Company’s 2005 Annual Report to Shareholders on Form 10-K and are essential to understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. Community Valley Bancorp’s annual consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. Some of the Company’s accounting principles require significant judgment to estimate values of assets or liabilities. In addition, certain accounting principles require significant judgment in applying the complex accounting principles to transactions to determine the most appropriate treatment. The following is a summary of the more judgmental and complex accounting estimates and principles.

Allowance for Loan Losses (ALL)

The allowance for loan losses is management’s best estimate of the probable losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting:  (1) SFAS No.5 which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, which requires that losses be accrued on impaired loans based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

The Company performs periodic and systematic detailed evaluations of its lending portfolio to identify and estimate the inherent risks and assess the overall collectibility. These evaluations include general conditions such as the portfolio composition, size and maturities of various segmented portions of the portfolio such as secured, unsecured, construction, and Small Business Administration (“SBA”).

Additional factors include concentrations of borrowers, industries, geographical sectors, loan product, loan classes and collateral types, volume and trends of loan delinquencies and non-accrual, criticized and classified assets and trends in the aggregate in significant credits identified as watch list items. There are several components to the determination of the adequacy of the ALL. Each of these components is determined based upon estimates that can and do change when the actual events occur. The Company estimates the SFAS No. 5 portion of the ALL based on the segmentation of its portfolio. For those segments that require an ALL, the Company estimates loan losses on a monthly basis based upon its ongoing loan review process and analysis of loan performance. The Company follows a systematic and consistently applied approach to select the most appropriate loss measurement methods and support its conclusions and rationale with written documentation. One method of estimating loan losses for groups of loans is through the application of loss rates to the groups’ aggregate loan balances. Such rates typically reflect historical loss experience for each group of loans, adjusted for relevant economic factors over a defined period of time. The Company evaluates and modifies its loss estimation model as needed to ensure that the resulting loss estimate is consistent with GAAP.

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For individually impaired loans, SFAS No. 114 provides guidance on the acceptable methods to measure impairment. Specifically, SFAS No. 114 states that when a loan is impaired, the Company should measure impairment based on the present value of expected future principal and interest cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price or the fair value of collateral, if the loan is collateral dependent. When developing the estimate of future cash flows for a loan, the Company considers all available information reflecting past events and current conditions, including the effect of existing environmental factors.

Loan Sales and Servicing

The Company originates government guaranteed loans and mortgage loans that may be sold in the secondary market.  The amounts of gains recorded on sales of loans and the initial recording of servicing assets and interest only (I/O) strips is based on the estimated fair values of the respective components.  In recording the initial value of the servicing assets and the fair value of the I/O strips receivable, the Company uses estimates which are based on management’s expectations of future prepayments and discount rates.  Servicing assets are amortized over the estimated life of the related loan.  I/O strips are not significant at September 30, 2006.  These prepayment and discount rates were based on current market conditions and historical performance of the various pools of serviced loans.  If actual prepayments with respect to sold loans occur more quickly than projected the carrying value of the servicing assets may have to be adjusted through a charge to earnings.

Stock-Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share Based Payment (“SFAS 123(R)”) using the modified prospective transition method.

Prior periods have not been restated to reflect the impact of SFAS No. 123(R). Prior to adoption of this statement, the Company accounted for its share-based employee compensation plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock-Based Compensation  and no stock-based compensation expense was recorded ..  As a result of adopting this statement the Company will recognize stock-based compensation expense for all preexisting non-vested stock options and all new stock option grants that are expected to vest as the requisite service is rendered. See Note 4 to the Condensed Consolidated Financial Statements for additional information related to implementation of SFAS 123(R).

Revenue recognition

The Company’s primary source of revenue is interest income, which is the difference between the interest income it receives on interest-earning assets and the interest expense it pays on interest-bearing liabilities, and (ii) fee income, which includes fees earned on deposit services, income from SBA lending, electronic-based cash management services, mortgage brokerage fee income and merchant credit card processing services. Interest income is recorded on an accrual basis. Note 1 to the Consolidated Financial Statements in the Company’s 2005 Annual Report to Shareholders on Form 10-K offers an explanation of the process for determining when the accrual of interest income is discontinued on an impaired loan.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using currently enacted tax rates applied to such taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If future income should prove non-existent or less than the amount of deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced.

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Overview

The Company recorded net income of $1,733,000 for the quarter ended September 30, 2006, which was a decrease of 19.7% from the $2,159,000 reported for the same period of 2005.  Diluted earnings per share for the third quarter of 2006 were $0.23, compared to the $0.28 recorded in the third quarter of 2005.  The annualized return on average equity (ROAE) and return on average assets (ROA) for the third quarter of 2006 were 14.98% and 1.31%, respectively, as compared to 21.82% and 1.73%, respectively, for the same period in 2005.  During the third quarter of 2005 the Company recognized substantial gains from the sale of loans into the secondary market through our Government Lending and Real Estate divisions.   These gains were $590,000 less during the current quarter but were partially offset by an increase of $120,000 in service charge income.

Net income for the nine months ended September 30, 2006 was $5,592,000 (up 4.7%) compared to the $5,343,000 recorded in the first nine months of 2005.   Diluted earnings per share for the first nine months of 2006 were $0.73, compared to the $0.70 recorded in the same period of 2005.  The annualized ROAE and ROA for the first nine months of 2006 were 16.86% and 1.46%, respectively, as compared to 19.14% and 1.52%, respectively, for the same period in 2005. The primary reasons for the increase in net income for the first nine months of 2006 was the growth in the net interest margin, as a result of the overall positive effect of the rising interest rate environment, and in the growth in earning assets the Company experienced. As a result the increase in net interest income of $3,961,000 was partially offset by decreases in non-interest income of $347,000 and increases in non-interest expenses of $ 2,905,000.

Total assets of the Company increased by $36,644,000 or (7.4%) from December 31, 2005 to $531,421,000 at September 30, 2006.  Net loans totaled $463,397,000, up $59,979,000 (14.9%) from the ending balances on December 31, 2005.  Deposit balances at September 30, 2006 totaled $466,431,000, up $32,413,000 (7.5%) from December 31, 2005.

Table One below provides a summary of the components of net income for the periods indicated:

Table One:  Components of Net Income

	Three months ended						Nine months ended
	September 30,						September 30,
(In thousands, except percentages)	2006			2005			2006			2005
Net interest income	$	8,109		$	7,178		$	23,551		$	19,590
Provision for loan losses	(225		)	(225		)	(675		)	(675		)
Non-interest income	1,523			1,966			4,884			5,231
Non-interest expense	(6,270		)	(5,355		)	(18,065		)	(15,160		)
Provision for income taxes	(1,404		)	(1,405		)	(4,103		)	(3,643		)
Net income	$	1,733		$	2,159		$	5,592		$	5,343
Average total assets (In millions)	$	523.4		$	495.1		$	512.6		$	470.3
Net income (annualized) as a percentage of average total assets	1.31		%	1.73		%	1.46		%	1.52		%

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Results of Operations

Net Interest Income and Net Interest Margin

Net interest income represents the excess of interest and fees earned on interest earning assets (loans, securities, federal funds sold and investments in time deposits) over the interest paid on deposits and borrowed funds.  Net interest margin is net interest income expressed as a percentage of average earning assets.

The Company’s net interest margin was 6.74% for the three months ended September 30, 2006 and 6.75% for the nine month period ending September 30, 2006 up from 6.45% and 6.22% for the same periods in the prior year.  Net interest income increased $931,000 (13.0%) for the third quarter of 2006 compared to the same period in 2005.  Net interest income increased $3,961,000 (20.2%) for the nine months ended September 30, 2006 over the same period in 2005.  The primary reason for this increase was the growth in average loans of $53,794,000 and 65,820,000 for the third quarter and first nine months of 2006 over the same periods in 2005 along with the overall positive impact of the rising interest rate environment.

The average balances of interest bearing liabilities were $39,506,000 (11.4%) higher in the third quarter of 2006 versus the same quarter in 2005. Rates paid on these liabilities also increased 106 basis points on a quarter over quarter basis.  As a result, interest expense was $1,115,000 (90.6%) higher in the third quarter of 2006 versus the prior year period.  The average balances of interest bearing liabilities were $40,475,000 (12.1%) higher in the nine-month period ended September 30, 2006 versus the same period in 2005.  Rates paid on interest bearing liabilities increased 83 basis points compared to the nine month period ended September 30, 2005.  As a result, interest expense was $2,782,000 (74.7%) higher in the first nine months of 2006 versus the same period in the prior year. Management expects to see an increase in interest expense for the remainder of this year due in part to a rising interest rate environment and increasing levels of deposits at higher rates as a funding source for loan growth.

Table Two, Analysis of Net Interest Margin, and Table Three, Analysis of Volume and Rate Changes on Net Interest Income and Expenses, are provided to enable the reader to understand the components and past trends of the Company’s interest income and expense.  Table Two provides an analysis of net interest margin setting forth average assets, liabilities and shareholders’ equity; interest income earned and interest expense paid and average rates earned and paid; and the net interest margin.

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Table Two:  Analysis of Net Interest Margin

	2006						2005
Three Months Ended September 30, (In thousands, except percentages)	Avg Balance		Interest		Avg Yield (4)		Avg Balance		Interest		Avg Yield (4)
Assets:
Earning assets
Loans (1)	$	455,586	$	10,414	9.17	%	$	405,419	$	8,273	8.10	%
Taxable investment securities	3,860		37		3.84	%	5,640		46		3.24	%
Tax-exempt investment securities (2)	1,349		17		5.05	%	2,372		27		4.52	%
Federal funds sold	12,510		166		5.32	%	20,287		177		3.46	%
Interest bearing deposits in banks	3,783		36		3.82	%	7,751		60		3.07	%
Total earning assets	477,088		$	10,670	8.97	%	441,470		$	8,583	7.71	%
Cash & due from banks	18,109						18,829
Other assets	28,213						34,759
Average total assets	$	523,410					$	495,058
Liabilities & Shareholders’ Equity
Interest bearing liabilities:
NOW & MMDA	$	170,598	$	446	1.05	%	$	183,817	$	322	0.69	%
Savings	33,934		42		0.50	%	38,587		49		0.50	%
Time deposits	171,120		1,858		4.36	%	113,202		860		3.01	%
Other borrowings	9,367		215		9.21	%	9,907		174		6.97	%
Total interest bearing liabilities	385,019		$	2,561	2.67	%	345,513		$	1,405
Demand deposits	87,974						97,123
Other liabilities	4,521						13,169
Total liabilities	477,514						455,805
Shareholders’ equity	45,896						39,253
Average liabilities and equity	$	523,410					$	495,058
Net interest income & margin (3)	477,088		8,109		6.74	%	441,470		$	7,178	6.45	%

(1)Loan interest includes loan fees of $664,000 and $636,000 during the three months ended September 30, 2006 and September 30, 2005 respectively.

(2)Does not include taxable-equivalent adjustments that primarily relate to income on certain securities that are exempt from federal income taxes.

(3)Net interest margin is computed by dividing net interest income by total average earning assets.

(4)Average yield is calculated based on actual days in quarter (92 for September 30, 2006 and September 30, 2005) and annualized to actual days in year (365 for 2006 and 2005).

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	2006						2005
Nine Months Ended September 30, (In thousands, except percentages)	Avg Balance		Interest		Avg Yield (4)		Avg Balance		Interest		Avg Yield (4)
Assets:
Earning assets
Loans (1)	$	440,858	$	29,203	8.86	%	$	374,231	$	22,252	7.94	%
Taxable investment securities	4,607		139		4.03	%	5,771		147		3.40	%
Tax-exempt investment securities (2)	1,369		49		4.79	%	2,281		83		4.85	%
Federal funds sold	14,697		521		4.74	%	30,066		642		2.85	%
Interest bearing deposits in banks	4,788		143		3.99	%	8,410		188		2.99	%
Total earning assets	466,319		$	30,055	8.62	%	420,759		23,312		7.38	%
Cash & due from banks	17,134						21,692
Other assets	29,167						27,821
Average total assets	$	512,620					$	470,272
Liabilities & Shareholders’ Equity
Interest bearing liabilities:
NOW & MMDA	$	178,563	1,308		0.98	%	$	181,894	858		0.63	%
Savings	35,470		130		0.49	%	36,624		135		0.49	%
Time deposits	150,388		4,462		3.97	%	105,296		2,255		2.87	%
Other borrowings	9,287		604		8.70	%	9,419		474		6.75	%
Total interest bearing liabilities	373,708		6,504		2.33	%	333,233		3,722		1.50	%
Demand deposits	88,489						90,493
Other liabilities	6,067						9,214
Total liabilities	468,264						432,940
Shareholders’ equity	44,356						37,332
Average liabilities and equity	$	512,620					$	470,272
Net interest income & margin (3)	466,319		23,551		6.75	%	420,759		19,590		6.22	%

(1)Loan interest includes loan fees of $1,909,000 and $1,826,000 during the nine months ended September 30, 2006 and September 30, 2004, respectively.

(2)Does not include taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes.

(3)Net interest margin is computed by dividing net interest income by total average earning assets.

(4)Average yield is calculated based on actual days in period (273 for September 30, 2006 and September 30, 2005) and annualized to actual days in year (365 for 2006 and 2005).

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Table Three sets forth a summary of the changes in interest income and interest expense from changes in average asset and liability balances (volume) and changes in average interest rates.  On a quarter over quarter basis for the period ending September 30, 2006 net interest income has increased $931,000 over the same time period in 2005.  Interest income from earning assets has increased by $2,087,000. Changes in the volume of earning assets, primarily loans, have resulted in an increase in interest income of $899,000 while interest income from changes in rates has increased by $1,188,000.  Interest expense for the third quarter of 2006 was $1,156,000 more than the same time period in 2005.  Changes in the volume of interest bearing liabilities, primarily the increase in balances of time deposits, has resulted in a net increase of interest expense of $401,000.  Increases in average rates paid, primarily on NOW and Money Market accounts, time deposits and junior subordinated debentures have resulted in an interest expense increase of $755,000.  On a year-to-date basis through September 30, 2006, net interest income has increased $3,961,000 over the same time period in 2005.  Interest income from earning assets has increased by $6,743,000.  Changes in the volume of earning assets, primarily loans, have resulted in an increase in interest income of $3,476,000 while interest income from changes in rates has increased by $3,267,000.  Interest expense for the nine month period was $2,782,000 more than the same time period in 2005.  Changes in the volume of interest bearing liabilities, primarily the increase in balances of time deposits, have resulted in a net increase in interest expense of $942,000.  Increases in average rates paid, primarily on NOW and Money Market accounts, time deposits and junior subordinated debentures have resulted in an interest expense increase of $1,840,000.

Table Three:  Analysis of Volume and Rate Changes on Net Interest Income and Expenses

(In thousands) Three Months Ended September 30, 2006 over 2005

Increase (decrease) due to change in:

	Volume			Rate (3)			Net Change
Interest-earning assets:
Net loans (1)	$	1,024		$	1,117		$	2,141
Taxable investment securities	(15		)	6			(9		)
Tax exempt investment securities (2)	(12		)	2			(10		)
Federal funds sold	(68		)	57			(11		)
Interest bearing deposits in banks	(31		)	7			(24		)
Total	899			1,188			2,087
Interest-bearing liabilities:
NOW & MMDA	(23		)	147			124
Savings deposits	(6		)	(1		)	(7		)
Time deposits	440			558			998
Other borrowings	(9		)	50			41
Total	401			755			1,156
Interest differential	$	498		$	433		$	931

(1)The average balance of non-accruing loans is immaterial as a percentage of total loans and, as such, has been included in net loans.

(2)Does not include taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes.

(3)The rate/volume variance has been included in the rate variance.

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Table Three:  Analysis of Volume and Rate Changes on Net Interest Income and Expenses

(In thousands) Nine Months Ended September 30, 2006 over 2005

Increase (decrease) due to change in:

	Volume			Rate (3)			Net Change
Interest-earning assets:
Net loans (1)	$	3,947		$	3,004		$	6,951
Taxable investment securities	(30		)	22			(8		)
Tax exempt investment securities (2)	(33		)	(1		)	(34		)
Federal funds sold	(327		)	206			(121		)
Investment in time deposits	(81		)	36			(45		)
Total	3,476			3,267			6,743
Interest-bearing liabilities:
Demand deposits	(16		)	466			450
Savings deposits	(4		)	(1		)	(5		)
Time deposits	968			1,239			2,207
Other borrowings	(7		)	137			130
Total	941			1,841			2,782
Interest differential	$	2,535		$	1,426		$	3,961

(1)The average balance of non-accruing loans is immaterial as a percentage of total loans and, as such, has been included in net loans.

(2)Does not include taxable-equivalent adjustments that primarily relate to income on certain securities that is exempt from federal income taxes.

(3)The rate/volume variance has been included in the rate variance.

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Non-interest Income

Table Four below provides a summary of the components of noninterest income for the periods indicated (dollars in thousands) (percent of assets annualized):

Table Four:  Components of Noninterest Income

Three Months Ended September 30,     

			% of Avg				% of Avg.
	2006		Assets		2005		Assets
Service charges on deposit accounts	$	726	0.55	%	$	606	0.49	%
Loan servicing fees	104		0.08	%	110		0.09	%
Fees - alternative investment sales	80		0.06	%	91		0.07	%
Merchant fee income	101		0.08	%	101		0.08	%
Gain on the sale of loans	180		0.14	%	770		0.62	%
Other	332		0.25	%	288		0.23	%
Total non-interest income	$	1,523	1.16	%	$	1,966	1.58	%

Nine Months Ended September 30,

			% of Avg				% of Avg.
	2006		Assets		2005		Assets
Service charges on deposit accounts	$	1,983	0.39	%	$	1,749	0.42	%
Loan servicing fees	315		0.06	%	310		0.07	%
Fees - alternative investment sales	235		0.05	%	426		0.10	%
Merchant fee income	288		0.06	%	287		0.07	%
Gain on the sale of loans	1,112		0.22	%	1,584		0.38	%
Other	951		0.19	%	875		0.21	%
Total non-interest income	$	4,884	0.95	%	$	5,231	1.25	%

Non-interest income declined $443,000 (29.1%) to $1,523,000 for the three months ended September 30, 2006 as compared to $1,523,000 for the three months ended September 30, 2005.    Increases in non-interest income were realized in fees from service charges (up 19.8%) and other (up 15.3%).  Decreases in non-interest income were in loan servicing fees (down 5.5%), fees from alternative investment sales (down 13.8%), gain on sale of loans (down 328%).  There was no change in merchant processing fees. The increase in service charge income was the result of additional deposit accounts opened during the third quarter and fees resulting from the overdraft privilege deposit product.  Increases in the Other category were a result of increased fees from ATM transactions, commissions earned on the sales of insurance policies and fees paid for payroll processing through our Business Services Division.  Loan servicing fees were down slightly as the portfolio of serviced loans in our Government Lending and Real Estate Loan Departments decreased.

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The Investment Department, which sells third-party mutual funds and annuities, experienced a decrease in fees due to fewer sales during the third quarter.  The gain on sale of loans had the largest decrease of the non-interest income items as the level of government guaranteed loans sold into the secondary market slowed and real estate loans sold into the secondary market decreased as refinancing activity slowed.  Merchant fee income was unchanged from the third quarter of 2005.

For the nine months ended September 30, 2006, non-interest income was down $347,000 (7.1%) to $4,884,000 as compared to the $5,231,000 total for the nine months ended September 30, 2005.   All of the components of non-interest income showed gains except fees from alternative investment sales and gains received on the sale of loans.  Increases were realized in service charges on deposit accounts (up 13.4%) as more demand deposit accounts were opened, loan servicing (up 1.6%), merchant fee income (up .35%) and other (up 8.7%) from increases in wire transfer fees, safe deposit rent, commissions on insurance policy sales and ATM access fees. Decreases in non-interest income were realized from alternative investment sales (down 81.3%) as fewer non-deposit investment products were sold and gains on sale of loans (down 42.4%) as fewer loans were sold into the secondary market.

Non-interest Expense

Non-interest expense increased $915,000 (17.1%) to $6,270,000 in the third quarter of 2006 versus $5,355,000 in the third quarter of 2005.    Salary and employee benefits increased $708,000 (22.9%) resulting from normal cost of living raises, commissions paid and staffing additions made during the year as the Company continues to grow. Benefit costs and employer taxes increased commensurate with the salaries.    On a quarter over quarter basis, occupancy expenses were higher by $67,000 (20.6%) which is related to building depreciation, utilities, janitorial services and property taxes.   Furniture and equipment expense was $483,000 in the third quarter of 2006 compared to $465,000 in the same period of 2005, representing a 3.9% increase.   This increase relates to the depreciation recorded on the purchase of new technology software and hardware as well as additional furniture and fixtures as the Red Bluff and Redding branches have been relocated to larger facilities. Other expenses increased $122,000 (8.3%) in the third quarter of 2006 versus the third quarter of 2005.   This increase was attributed to higher telephone, postage and insurance costs as well as increased advertising and promotion costs associated with the new offices.

Non-interest expense for the nine month period ended September 30, 2006 increased $2,905,000 (19.2%) to $18,065,000 versus $15,160,000 for the same period in 2005.  Salaries and benefits increased by $2,372,000 (26.6%) due to cost of living raises added benefit costs and employer taxes along with the staffing additions made during the year as the Company continues to grow. On a year over year basis, full time equivalent employees increased by 20 to 250.   Occupancy expense was up $148,000 (16.7%) from the first nine months of 2005 to the first nine months of 2006 which is related to building depreciation, utilities, janitorial services and property taxes as the Red Bluff and Redding branches have been relocated to larger more expensive quarters.  Furniture and equipment expense was up 129,000 (10.0%) which is also related to the relocation of the two branches mentioned above.    Other expenses increased by $256,000 (6.3%).   This increase was attributed to higher telephone, postage and insurance costs as well as increased advertising and promotion costs associated with the new offices.

Provision for Loan Losses

The Company provided $225,000 for loan losses for the third quarter of 2006 which was the same amount as the third quarter of 2005.  Net loan charge-offs for the three months ended September 30, 2006 were $36,000 as compared to $2,000 in net charge-offs for the three months ended September 30, 2005.   For the first nine months of 2006, the Company made provisions for loan losses of $675,000 which was the same as the provision for the first nine months of 2005.  Net loan charge-offs for the nine months ended September 30, 2006 were $45,000 as compared to net charge-offs of $9,000 for the nine months ended September 30, 2005.  Management assesses its loan quality on a monthly basis to maintain an adequate allowance for loan losses.  The Company’s loan portfolio composition, non-performing assets and allowance for loan losses are further discussed under the Balance Sheet Analysis section below.

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Provision for Income Taxes

The effective tax rate for the third quarter and first nine months of 2006 was 44.8% and 42.3%, versus 39.4% and 40.5%, for the same period in 2005.

Balance Sheet Analysis

The Company’s total assets were $531,421,000 at September 30, 2006 as compared to $494,777,000 at December 31, 2005, representing an increase of 7.4%.  The average balance of total assets for the nine months ended September 30, 2006 was $512,620,000, which represents an increase of $42,348,000 (9.0%) over the $470,272,000 for the nine-month period ended September 30, 2005.

Loans

The Company concentrates its lending activities in the following principal areas: 1) commercial; 2) real estate; 3) residential real estate and real estate construction (both commercial and residential); 4) agriculture; and 5) consumer loans.  Commercial and residential real estate loans are generally secured by improved property, with original maturities of 3-10 years.  At September 30, 2006, these principal areas accounted for approximately 15%, 43%, 25%, 8% and 9%, respectively, of the Company’s loan portfolio.    The mix at December 31, 2005 was 15%, 43%, 27%, 6% and 9%.    Continuing strong economic activity in the Company’s market area, new borrowers developed through the Company’s marketing efforts and credit extensions expanded to existing borrowers, offset by normal loan pay-downs and payoffs, resulted in net increases in loan balances for commercial loans ($6,869,000 or 11.0%), residential real estate ($29,427,000 or 17.0%), real estate construction ($6,995,000 or 6.3%), agricultural loans ($10,145,000 or 40.9%) and consumer ($7,317,000 or 20.0%).  These changes in real estate lending are consistent with the Company’s history of increased real estate activity during the summer months.  Table Five below summarizes the composition of the loan portfolio as of September 30, 2006 and December 31, 2005.

Table Five: Loan Portfolio Composition

	September 30,			December 31,
(In thousands)	2006			2005
Commercial	$	68,031		$	61,162
Real estate:
Mortgage	202,876			173,449
Construction	118,125			111,130
Agriculture	34,948			24,803
Consumer	43,818			36,501
Total loans	467,798			407,045
Allowance for loan losses	(5,368		)	(4,716		)
Deferred loan fees, net	(932		)	(1,108		)
Total net loans	$	461,498		$	401,221

The majority of the Company’s loans are direct loans made to individuals and local businesses.  The Company relies substantially on local promotional activity and personal contacts by bank officers, directors and employees to compete with other financial institutions.  The Company makes loans to borrowers whose applications include a sound purpose and a viable primary repayment source, generally supported by a secondary source of repayment.

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Commercial loans consist of credit lines for operating needs, loans for equipment purchases, working capital, and various other business loan products.  Consumer loans include a range of traditional consumer loan products such as personal lines of credit and loans to finance purchases of autos, boats, recreational vehicles, mobile homes and various other consumer items.

Real estate construction loans are generally composed of commitments to customers within the Company’s service area for construction of both commercial properties and custom and semi-custom single-family residences.  Real estate mortgage loans consist primarily of loans secured by first trust deeds on commercial and residential properties typically with maturities from 3 to 10 years and original loan to value ratios generally from 65% to 80%.  Agriculture loans consist primarily of crop loans to farmers of peaches, prunes, walnuts, and almonds.  In general, except in the case of loans with SBA or FMHA guarantees, the Company does not make long-term mortgage loans; however, Butte Community Bank has a residential lending division to assist customers in securing most forms of longer term single-family mortgage financing.

Risk Elements

The Company assesses and manages credit risk on an ongoing basis through a credit culture that emphasizes excellent credit quality, extensive internal monitoring and established formal lending policies.  Additionally, the Company contracts with an outside loan review consultant to periodically review the existing loan portfolio.  Management believes its ability to identify and assess risk and return characteristics of the Company’s loan portfolio is critical for profitability and growth.  Management strives to continue its emphasis on credit quality in the loan approval process, active credit administration and regular monitoring.  With this in mind, management has designed and implemented a comprehensive loan review and grading system that functions to continually assess the credit risk inherent in the loan portfolio.

Ultimately, underlying trends in economic and business cycles may influence credit quality.  The Company’s business is concentrated in the Butte, Sutter and Shasta County Areas. The economy of these three counties is diversified with professional services, manufacturing, agriculture and real estate investment and construction.

Special emphasis is placed within the communities in which the Company has branches (Chico, Paradise, Magalia, Oroville, Yuba City, Red Bluff, Marysville, Colusa, Corning and Redding).  The Company also maintains loan production offices in the cities of Citrus Heights and Gridley. Single-family residential construction is the primary lending product from the Citrus Heights location serving the greater Sacramento area.  The primary focus of the loan production office in Gridley is commercial and agricultural loans.

The Company has significant extensions of credit and commitments to extend credit that are secured by real estate.  The ultimate repayment of these loans is generally dependent on personal or business cash flows or the sale or refinancing of the real estate.  The Company monitors the effects of current and expected market conditions and other factors on the collectability of real estate loans.  The more significant factors management considers involve the following:  lease, absorption and sale rates; real estate values and rates of return; operating expenses; inflation; and sufficiency of collateral independent of the real estate including, in limited instances, personal guarantees.

In extending credit and commitments to borrowers, the Company generally requires collateral and/or guarantees as security.  The repayment of such loans is expected to come from cash flow or from proceeds from the sale of selected assets of the borrowers.  The Company’s requirement for collateral and/or guarantees is determined on a case-by-case basis in connection with management’s evaluation of the creditworthiness of the borrower.  Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing properties, residences and other real property.  The Company secures its collateral by perfecting its security interest in business assets, obtaining deeds of trust, or outright possession among other means.

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In management’s judgment, a concentration exists in real estate loans, which represented approximately 68.6% of the Company’s loan portfolio at September 30, 2006, which is a slight decrease from the 69.9% concentration level at December 31, 2005.  Management believes the concentration to have no more than the normal risk of collectability; however, a substantial decline in 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 collectability of these loans and require an increase in the provision for loan losses which could adversely affect the Company’s future prospects, results of operations, profitability and stock price.  Management believes that its lending policies and underwriting standards will tend to minimize losses in an economic downturn; however, there is no assurance that losses will not occur under such circumstances.  The Company’s loan policies and underwriting standards include, but are not limited to, the following: (1) maintaining a thorough understanding of the Company’s service area and originating a significant majority of its loans within that area, (2) maintaining a thorough understanding of borrowers’ knowledge, capacity, and market position in their field of expertise, (3) basing real estate loan approvals not only on market demand for the project, but also on the borrowers’ capacity to support the project financially in the event it does not perform to expectations (whether sale or income performance), and (4) maintaining conforming and prudent loan to value and loan to cost ratios based on independent outside appraisals and ongoing inspection and analysis by the Company’s lending officers.

Nonaccrual, Past Due and Restructured Loans

Management generally places loans on nonaccrual status when they become 90 days past due, unless the loan is well secured and in the process of collection.  Loans are charged off when, in the opinion of management, collection appears unlikely.

Table Six below sets forth nonaccrual loans as of September 30, 2006 and December 31, 2005.  There were no loans past due 90 days or more and still accruing interest at September 30, 2006 or December 31, 2005.

Table Six:  Non-Performing Loans

	September 30,		December 31,
(In thousands)	2006		2005
Nonaccrual:
Commercial
Real estate	1,858
Consumer and other	2		9
Total non-performing loans	$	1,860	$	9

At September 30, 2006, there were three non-performing loans which were considered to be impaired.  One is a real estate secured government guaranteed loan for $1,502,000 of which the unguaranteed portion representing the Company’s potential loss exposure is $300,000.  The property is in foreclosure and management does not foresee a loss from this loan.  The second non-performing loan was to finance the construction of two homes that the borrower has been unable to sell.  The foreclosure process has begun on these properties.  The final non-performing loan was for an automobile that has been repossessed and is being prepared for resale.  There is no expected loss from this loan.  There were no loan concentrations in excess of 10% of total loans not otherwise disclosed as a category of loans as of September 30, 2006 or December 31, 2005.  Management is not aware of any potential problem loans, which were accruing and current at September 30, 2006, where serious doubt exists as to the ability of the borrower to comply with the present repayment terms.

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Allowance for Loan Losses Activity

We employ a systematic methodology for determining the allowance for loan losses that includes a monthly review process and monthly adjustment of the allowance.  Our process includes a periodic review of individual loans that have been specifically identified as problem loans or have characteristics which could lead to impairment, as well as detailed reviews of other loans (either individually or in pools).  While this methodology utilizes historical and other objective information, the establishment of the allowance for loan losses and the classification of loans are, to some extent, based on management’s judgment and experience.

Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan losses that management believes is appropriate at each reporting date.  Quantitative factors include our historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans, and other factors.  Quantitative factors also incorporate known information about individual loans, including borrowers’ sensitivity to interest rate movements and borrowers’ sensitivity to quantifiable external factors including commodity prices as well as acts of nature (freezes, earthquakes, fires, etc.) that occur in a particular period.

Qualitative factors include the general economic environment in our markets and, in particular, the state of the agriculture industry and other key industries in the Northern Sacramento Valley.  The way a particular loan might be structured, the extent and nature of waivers of existing loan policies, loan concentrations and the rate of portfolio growth are other qualitative factors that are considered.

Our methodology is, and has been, consistently followed.  However, as we add new products, increase in complexity, and expand our geographic coverage, we expect to enhance our methodology to keep pace with the size and complexity of the loan portfolio.  On an ongoing basis we engage outside firms to independently assess our methodology, and to perform independent credit reviews of our loan portfolio.  The FDIC and the California Department of Financial Institutions review the allowance for loan losses as an integral part of the examination processes.  Management believes that our current methodology is appropriate given our size and level of complexity.  Further, management believes that the allowance for loan losses is adequate as of September 30, 2006 to cover known and inherent risks in the loan portfolio.  However, fluctuations in credit quality, or changes in economic conditions or other factors could cause management to increase or decrease the allowance for loan losses as necessary.

The Board of Directors of the Bank 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 is adjusted based on that review if, in the judgment of the loan committee and management, changes are warranted.  The allowance for loan losses totaled $5,368,000 or 1.15% of total loans at September 30, 2006 and $4,717,000 or 1.16% at December 31, 2005.  The Company has established a separate reserve for unfunded loan commitments of $460,000 and $481,000 as of September 30, 2006 and December 31, 2005 respectively.  Net charge-offs were $36,000 for the third quarter of 2006 and $45,000 for the nine months ended September 30, 2006.

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Table Seven below summarizes, for the periods indicated, the activity in the allowance for loan losses.

Table Seven: Allowance for Loan Losses

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except for percentages)	2006			2005			2006			2005
Average loans outstanding	$	458,887		$	405,419		$	441,325		$	374,231
Allowance for possible loan losses at beginning of period	$	5,184		$	4,825		$	4,716		$	4,381
Loans charged off:
Commercial	(35		)				(35		)	(5		)
Real estate
Consumer	(1		)	(3		)	(11		)	(4		)
Total	(36		)	(3		)	(46		)	(9		)
Recoveries of loans previously charged off:
Commercial
Real estate
Consumer							1
Total
Net loan charge-offs	(36		)	(3		)	(45		)	(9		)
Additions to allowance charged to operating expenses	225			225			675			675
Allowance for unfunded commitments	(5		)	(403		)	22			(403		)
Allowance for loan losses at end of period	$	5,368		$	4,644		5,368			4,644
Ratio of net charge-offs to average loans outstanding	.00		%	.00		%	.00		%	.00		%
Provision for probable loan losses to average loans outstanding	.05		%	.06		%	.15		%	.18		%
Allowance for loan losses to loans net of deferred fees at end of period	1.16		%	1.13		%	1.16		%	1.13		%

It is the policy of management to maintain the allowance for loan losses at a level adequate for known and inherent risks in the portfolio.  Based on information currently available to analyze inherent credit risk, including economic factors, overall credit quality, historical delinquencies and a history of actual charge-offs, management believes that the provision for loan losses and the allowance are prudent and adequate.  The Company generally makes monthly allocations to the allowance for loan losses.  The budgeted allocation is based on estimates of loss risk and loan growth.  Adjustments may be made based on differences from estimated loan growth, the types of loans constituting this growth, changes in risk ratings within the portfolio, and general economic conditions.  However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty.

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Other Real Estate

At September 30, 2006 and December 31, 2005, the Company did not have any other real estate (“ORE”) properties.

Deposits

At September 30, 2006, total deposits were $466,431,000 representing an increase of $32,413,000 (7.5%) over the December 31, 2005 balance of $434,018,000.  A change in the mix of deposits has occurred throughout the first nine months of 2006 due to a shift from interest bearing demand deposits to certificates of deposit as rates have continued to increase.  Non-interest bearing demand deposits have increased by $1.3 million while interest bearing demand deposits have decreased by $20.9 million in the first nine months of 2006.  Certificates of deposit have increased $55 million or 46% since December 31, 2005.  Brokered certificates of deposit represent $19 million. In order to keep up with the rapid growth in loans during the first nine months of 2006, rates on certificates of deposit were raised to encourage depositors to move their maturing funds from other institutions to the Bank.

Capital Resources

The current and projected capital position of the Company and the impact of capital plans and long-term strategies are reviewed regularly by management. The Company’s capital position represents the level of capital available to support continued operations and expansion.

The Board of Directors of the Company authorized the payment of quarterly cash dividends totaling $0.16 per share for 2005 and $0.18 per share for the first three quarters of 2006.  The payment of dividends in the future is subject to the discretion of the Board of Directors of the Company and will depend on earnings, the financial condition of the Company and other relevant factors.

The Company and its subsidiary Bank are subject to certain regulations issued by the Board of Governors of the Federal Reserve System and the FDIC which require maintenance of certain levels of capital.  At September 30, 2006, shareholders’ equity was $45,992,000, representing an increase of $4,437,000 (10.7%) from $41,555,000 at December 31, 2005.  The increase is primarily the result of the exercise of stock options and net income from the period offset by the stock based compensation expense recorded and cash dividends discussed above.  The Bank’s ratio of total risk-based capital to risk adjusted assets was 10.8% at September 30, 2006 compared to 11.3% at December 31, 2005.  Tier 1 risk-based capital to risk-adjusted assets was 9.7% at September 30, 2006 and 10.1% at December 31, 2005.

Table Eight below lists the Company and the Bank capital ratios at September 30, 2006 and December 31, 2005, as well as the minimum ratios required under regulatory definitions of capital adequacy.

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Table Eight:  Capital Ratios

Capital to Risk-Adjusted Assets	At September 30, 2006		At December 31, 2005		Minimum Regulatory Requirement
Company
Leverage ratio	10.5	%	9.8	%	4.0	%
Tier 1 Risk-Based Capital	10.8	%	11.4	%	4.0	%
Total Risk-Based Capital	11.7	%	12.5	%	8.0	%
Bank
Leverage ratio	9.9	%	8.8	%	4.0	%
Tier 1 Risk-Based Capital	9.7	%	10.1	%	4.0	%
Total Risk-Based Capital	10.6	%	11.3	%	8.0	%

Capital ratios are reviewed on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet future needs.  All ratios are in excess of the regulatory definition of “Minimum” at September 30, 2006 and December 31, 2005.  The Bank was considered “well-capitalized” by regulatory standards, at September 30, 2006 and December 31, 2005.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Market Risk Management

Overview.  Market risk is the risk of loss from adverse changes in market prices and rates.  The Company’s market risk arises primarily from interest rate risk inherent in its loan, investment and deposit portfolios.  The goal for managing the assets and liabilities of the Company is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue interest rate risk.

The Board of Directors has overall responsibility for the interest rate risk management policies.  The Bank has an Asset and Liability Management Committee (ALCO) that establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates.

Asset/Liability Management.  Activities involved in asset/liability management include, but are not limited to, lending, accepting and placing deposits, investing in securities, using trust preferred securities and borrowings.  Interest rate risk is the primary market risk associated with asset/liability management.  Sensitivity of earnings to interest rate changes arises when yields on assets change in a different time period or in a different amount from that of interest costs on liabilities.  To mitigate interest rate risk, the structure of the balance sheet is managed with the goal that movements of interest rates on assets and liabilities are correlated and contributes to earnings even in periods of volatile interest rates.  The asset/liability management policy sets limits on the acceptable amount of variance in net interest margin and market value of equity under changing interest environments.  The Company uses simulation models to forecast earnings, net interest margin and market value of equity.

Simulation of earnings is the primary tool used to measure the sensitivity of earnings to interest rate changes.  Using computer-modeling techniques, the Company is able to estimate the potential impact of changing interest rates on earnings.  A balance sheet forecast is prepared monthly using inputs of actual loans, securities and interest bearing liability (i.e. deposits/borrowings) positions as the beginning base.  The forecast balance sheet is processed against seven interest rate scenarios.  These scenarios include a 100, 200 and 300 basis point rising rate forecast, a flat rate forecast and a 100, 200 and 300 basis point falling rate forecast which take place within a one year time frame.

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The net interest income is measured during the year assuming a gradual change in rates over the twelve-month horizon.  The Company’s net interest income, as forecast below, was modeled utilizing a forecast balance sheet projected from balances as of the date indicated.

Table Nine below summarizes the effect on net interest income (NII) of a ±200 basis point change in interest rates as measured against a constant rate (no change) scenario.  The results shown in Table nine for the two periods, fall within the parameters of the Bank’s policy for interest rate risk.

Table Nine:  Interest Rate Risk Simulation of Net Interest as of September 30, 2006 and December 31, 2005

(In thousands)	$ Change in NII from Current 12 Month Horizon September 30, 2006			$ Change in NII from Current 12 Month Horizon December 31, 2005
Variation from a constant rate scenario
+200bp	$	3,519		$	1,732
- 200bp	$	(4,130	)	$	(2,380	)

Assumptions are inherently uncertain, and, consequently, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and management strategies which might moderate the negative consequences of interest rate deviations. In the model above, the simulation shows that the Company is asset sensitive over the one-year horizon as increasing rates have a positive impact on net interest income and declining rates have a negative impact.

Inflation

The impact of inflation on a financial institution differs significantly from that exerted on manufacturing, or other commercial concerns, primarily because its assets and liabilities are largely monetary.  In general, inflation primarily affects the Company and it subsidiaries through its effect on market rates of interest, which affects the Company’s ability to attract loan customers.  Inflation affects the growth of total assets by increasing the level of loan demand, and potentially adversely affects capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings, which may be generated in the future.  In addition to its effects on interest rates, inflation increases overall operating expenses.  Inflation has not had a material effect upon the results of operations of the Company and its subsidiaries during the three and nine month periods ended September 30, 2006, and 2005.

Liquidity

Liquidity management refers to the Company’s ability to provide funds on an ongoing basis to meet fluctuations in deposit levels as well as the credit needs and requirements of its clients.  Both assets and liabilities contribute to the Company’s liquidity position.  Federal funds lines, short-term investments and securities, and loan repayments contribute to liquidity, along with deposit increases, while loan funding and deposit withdrawals decrease liquidity.  The Company assesses the likelihood of projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual client funding needs.  Commitments to fund loans and stand-by letters of credit at September 30, 2006 and December 31, 2005 were approximately $194,840,000 and $205,588,000, respectively.  Such loans relate primarily to revolving lines of credit and other commercial loans, and to real estate construction loans.

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The Company’s sources of liquidity consist of cash and due from correspondent banks, overnight funds sold to correspondent banks, unpledged marketable investments and loans held for sale.  On September 30, 2006, consolidated liquid assets totaled $27.7 million or 5.2% of total assets compared to $52.2 million or 10.5% of total assets on December 31, 2005.  In addition to liquid assets, the Company maintains short-term lines of credit in the amount of $15,000,000 with correspondent banks.  There were no borrowings outstanding under these arrangements at September 30, 2006.

The Bank also has informal agreements with various other banks to sell participations in loans, if necessary.  The Company serves primarily a business and professional customer base and, as such, its deposit base is susceptible to economic fluctuations.  Accordingly, management strives to maintain a balanced position of liquid assets to volatile and cyclical deposits.

Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities.  The Company can sell any of its unpledged securities held in the available-for-sale category to meet liquidity needs.

Off-Balance Sheet Items

The Company has certain ongoing commitments under operating leases.  These commitments do not significantly impact operating results. As of September 30, 2006 and December 31, 2005, commitments to extend credit and letters of credit were the only financial instruments with off-balance sheet risk.  The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments.  Loan commitments and stand-by letters of credit were $194,840,000 and $205,588,000 at September 30, 2006 and December 31, 2005, respectively.  As a percentage of net loans, these off-balance sheet items represent 44.5% and 51.2%, respectively.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management as of the end of the Company’s fiscal quarter ended September 30, 2006. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

(b) Internal Control Over Financial Reporting: An evaluation of any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), that occurred during the Company’s fiscal quarter ended September 30, 2006, was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that no change identified in connection with such evaluation has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings.

None

Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.”

Item 2.  Changes in Securities and Use of Proceeds.

The Board of Directors approved a plan at their June 2003 meeting to repurchase up to $3,000,000 of the outstanding common stock of the Company.  The plan states that 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 depends on market conditions.  The share repurchase plan does not include specific price targets or timetables and may be suspended at any time.

During the nine months ended September 30, 2006, 55,400 shares of common stock (of which 11,800 shares were in the process of cancellation and not deducted from total shares outstanding) were repurchased under the share repurchase program at an average cost of $16.91 per share, totaling $936,872.  From the beginning of the share repurchase program in June 2003 through September 30, 2006, the Company repurchased a total of 74,415 shares and returned in excess of $1.4 million to its shareholders at an average cost of $15.40 per share.  From October 1, 2006 through November 2, 2006, the Company repurchased an additional 74,900 shares of common stock at an average cost of $17.61 per share for a total of $1,318,965, resulting in remaining buyback authority under the share repurchase program of $241,925.

Shares repurchased during the third quarter ending September 30, 2006

Period	(a) Total number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)	(c)Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or approximate dollar value) of shares (or Units) that may yet be purchased under the Plans or Programs
Month #1 7-1-06 to 7-31-06	0	0.0000	0	$	2,017,915.50
Month #2 8-1-06 to 8-31-06	15,000	17.00	15,000	$	1,762,915.50
Month #3 9-1-06 to 9-30-06	11,800	17.1208	11,800	$	1,560,890.50

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Item 3.  Defaults Upon Senior Securities.

None

Item 4.  Submission of Matters to a Vote of Security Holders.

None

Item 5.  Subsequent Event

On October 30, 2006 the Company moved its full service branch office in Marysville to 904 B Street.  This location is a larger site with better visibility and a drive-up window capability.

Item 6.  Exhibits

(a)  Exhibits

Exhibit
Number	Document Description
(31.1)	Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)	Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)	Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2)	Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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
November 10, 2006	By: /s/ Keith C. Robbins
	Keith C. Robbins
	President, Chief Executive Officer
November 10, 2006	By: /s/ John F. Coger
	John F. Coger
	Executive Vice President, Chief Financial Officer
	and Chief Operating Officer

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