Valley Commerce Bancorp (VCBP) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

	(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                                TO

COMMISSION FILE NUMBER: 000-51949

VALLEY COMMERCE BANCORP

(Name of small business issuer as specified in its charter)

California	46-1981399
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
200 South Court Street Visalia, California  93291
(Address of principal executive offices)
(559) 622-9000 (Issuer’s telephone number)

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

Yes  ý     No  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Act).

Yes  o     No  ý

The number of shares outstanding of the issuer’s Common Stock was 2,423,875 as of November 10, 2007.

Transitional Small Business Disclosure Format (check one)

Yes  o     No  ý

1

INDEX

PART I - FINANCIAL INFORMATION	3
ITEM 1 - FINANCIAL STATEMENTS	4
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATONS	13
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26
ITEM 4 – CONTROLS AND PROCEDURES	26
PART II - OTHER INFORMATION	28
ITEM 1 LEGAL PROCEEDINGS	28
ITEM 1A  RISK FACTORS	28
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	28
ITEM 3 DEFAULTS UPON SENIOR SECURITIES	28
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	28
ITEM 5 OTHER INFORMATION	29
ITEM 6 EXHIBITS	29
SIGNATURES	30
EXHIBIT INDEX	31

2

PART I

Forward-Looking Information

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

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

3

ITEM 1 – FINANCIAL STATEMENTS

VALLEY COMMERCE BANCORP

CONDENSED CONSOLIDATED BALANCE SHEET

(UNAUDITED)

	September 30, 2007			December 31, 2006
Assets
Cash and due from banks	$	9,761,596		$	13,265,547
Available-for-sale investment securities, at fair value		58,964,000			55,298,000
Loans, less allowance for loan losses of $1,751,799 at September 30, 2007 and $1,745,582 at December 31, 2006		198,122,170			182,331,506
Bank premises and equipment, net		2,596,446			1,832,177
Cash surrender value of bank-owned life insurance		6,124,474			5,934,563
Accrued interest receivable and other assets		5,016,402			5,002,900
Total assets	$	280,585,088		$	263,664,693
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing	$	56,915,795		$	63,019,956
Interest-bearing		87,824,034			75,292,723
Time		65,664,908			69,263,490
Total deposits		210,404,737			207,576,169
Accrued interest payable and other liabilities		5,726,024			1,399,787
Short-term debt		24,840,300			17,600,000
Long-term debt		8,197,374			8,547,638
Junior subordinated deferrable interest debentures		3,093,000			3,093,000
Total liabilities		252,261,435			238,216,594
Commitments and contingencies (Note 6)
Shareholders’ equity (Note 2 and 5):
Serial preferred stock - no par value; 10,000,000 shares authorized, none issued
Common stock - no par value; 30,000,000 shares authorized; issued and outstanding –  2,423,875 shares at September 30, 2007 and 2,326,553 shares  at December 31, 2006		23,757,936			20,683,720
Retained earnings		4,861,870			5,040,381
Accumulated other comprehensive loss, net of taxes (Note 5)		(296,153	)		(276,002	)
Total shareholders’ equity		28,323,653			25,448,099
Total liabilities and shareholders’ equity	$	280,585,088		$	263,664,693
See notes to unaudited condensed consolidated financial statements.

4

VALLEY COMMERCE BANCORP

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2007		2006		2007			2006
Interest Income:
Interest and fees on loans	$	4,164,148	$	3,854,467	$	12,071,084		$	10,485,908
Interest on investment securities:
Taxable		358,814		385,855		1,141,512			1,063,598
Exempt from Federal income taxes		192,494		187,916		573,734			525,300
Interest on Federal funds sold		834		3,021		2,835			136,965
Total interest income		4,716,290		4,431,259		13,789,165			12,211,771
Interest Expense:
Interest on deposits		1,534,709		1,185,353		4,484,395			3,015,825
Interest on short-term debt		131,308		198,269		484,758			268,784
Interest on long-term debt		90,652		95,408		272,432			286,253
Interest on junior subordinated deferrable interest debentures		68,450		69,386		203,097			195,426
Total interest expense		1,825,119		1,548,416		5,444,682			3,766,288
Net interest income before provision for loan losses		2,891,171		2,882,843		8,344,483			8,445,483
Provision for loan losses		-		-		-			-
Net interest income after provision for loan losses		2,891,171		2,882,843		8,344,483			8,445,483
Non-Interest Income:
Service charges		156,207		147,638		431,773			409,548
Loss on sale of available-for-sale investment securities, net		-		-		(1,145	)		(52,737	)
Mortgage loan brokerage fees		19,213		34,445		66,543			76,429
Earnings on cash surrender value of life insurance policies		66,564		38,952		194,691			93,265
Other		57,862		59,354		181,154			161,981
Total non-interest income		299,846		280,389		873,016			688,486
Non-Interest Expense:
Salaries and employee benefits		1,147,489		1,043,529		3,563,025			3,173,177
Occupancy and equipment		260,942		229,838		756,218			659,914
Other		740,994		619,293		2,055,402			1,897,279
Total non-interest expense		2,149,425		1,892,660		6,374,645			5,730,370
Income before provision for income taxes		1,041,592		1,270,572		2,842,854			3,403,599
Provision for income taxes		320,000		454,000		857,000			1,194,000
Net income	$	721,592	$	816,572	$	1,985,854		$	2,209,599
Basic earnings per share (Notes 2 and 4)	$	0.31	$	0.33	$	0.85		$	0.96
Diluted earnings per share (Notes 2 and 4)	$	0.30	$	0.32	$	0.81		$	0.92
See notes to unaudited condensed consolidated financial statements.

5

VALLEY COMMERCE BANCORP

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	For the Nine Months
	Ended September 30,
	2007			2006
Cash Flows from Operating Activities:
Net income	$	1,985,854		$	2,209,599
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		-			-
Decrease in deferred loan origination fees, net		(43,423	)		(52,520	)
Depreciation		220,049			177,196
Amortization of intangibles		46,903			46,904
Loss on sale of available-for-sale investment securities, net		1,145			52,737
Dividends on Federal Home Loan Bank stock		(62,500	)		(37,000	)
Amortization and accretion of investment securities, net		102,629			185,012
Increase in cash surrender value of bank-owned life insurance		(189,911	)		(92,435	)
Stock-based compensation expense		23,013			23,500
Deferred tax benefit from exercise of stock options		335,894			125,828
Net loss on sale of equipment		1,255			-
Deferred tax benefit		30,541			-
Decrease in accrued interest receivable and other assets		(239,125	)		(739,979	)
Increase in accrued interest payable and other liabilities		207,764			81,269
Net cash provided by operating activities		2,420,088			1,980,111
Cash Flows from Investing Activities:
Proceeds from matured and called available-for-sale investment securities		5,115,000			655,000
Proceeds from sales of available-for-sale investment securities		1,510,000			2,752,737
Purchases of available-for-sale investment securities		(8,152,270	)		(11,142,829	)
Proceeds from principal repayments from available-for-sale         mortgage-backed securities		1,730,897			1,575,968
Redemption (purchase) of Federal Home Loan Bank Stock, net		335,600			(632,600	)
Net increase in loans		(15,747,241	)		(30,749,074	)
Purchase of premises and equipment		(994,886	)		(596,572	)
Proceeds from sale of equipment		9,313			-
Premiums paid for life insurance policies		-			(3,000,000	)
Net cash used in investing activities		(16,193,587	)		(41,137,370	)
Continued on next page.

6

VALLEY COMMERCE BANCORP

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(Continued)

	For the Nine Months
	Ended September 30,
	2007			2006
Cash Flows from Financing Activities:
Net increase in noninterest-bearing and interest-bearing deposits	$	6,427,150		$	1,095,512
Net (decrease) increase in time deposits		(3,598,582	)		3,795,335
Proceeds from exercised stock options		556,336			154,403
Payments on Federal Home Loan Bank long-term advances		(350,264	)		(343,105	)
Proceeds from Federal Home Loan Bank short-term advances		7,240,300			27,756,000
Cash paid to repurchase fractional shares		(5,392	)		(5,004	)
Net cash provided by financing activities		10,269,548			32,453,141
Decrease in cash and cash equivalents		(3,503,951	)		(6,704,118	)
Cash and Cash Equivalents at Beginning of Year		13,265,547			19,618,285
Cash and Cash Equivalents at End of Period	$	9,761,596		$	12,914,167
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense	$	5,324,309		$	3,721,514
Income taxes	$	740,000		$	1,290,000
Non-Cash Investing Activities:
Net change in unrealized loss on available-for-sale securities	$	(9,705	)	$	223,416
Purchase of AFS securities, unsettled	$	(3,983,106	)	$	-
See notes to unaudited condensed consolidated financial statements.

7

VALLEY COMMERCE BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.            BASIS OF PRESENTATION

The interim unaudited condensed consolidated financial statements of Valley Commerce Bancorp and subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These interim condensed consolidated financial statements include the accounts of Valley Commerce Bancorp and its wholly owned subsidiary Valley Business Bank (the “Bank”) (collectively, the “Company”). Valley Commerce Trust I, a wholly-owned subsidiary formed for the exclusive purpose of issuing trust preferred securities, is not consolidated into the Company's consolidated financial statements and, accordingly, is accounted for under the equity method.  The Company’s investment in the Trust is included in accrued interest receivable and other assets on the consolidated balance sheet.  All significant intercompany accounts and transactions have been eliminated in consolidation.  All adjustments (consisting only of normal recurring adjustments) which, in the opinion of Management, are necessary for a fair presentation of Valley Commerce Bancorp’s (the “Company”) consolidated financial position at September 30, 2007 and December 31, 2006, the results of its operations for the three and nine-month periods ended September 30, 2007 and 2006, and its cash flows for the nine-month periods ended September 30, 2007 and 2006 have been included therein.  Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted, however, the Company believes that the disclosures made are adequate to make the information not misleading.  These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K.  The results of operations and cash flows for the interim periods presented are not necessarily indicative of the results for a full year.

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

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

On May 15, 2007 the Company declared a 5% stock dividend payable on June 20, 2007 for all shareholders of record on June 6, 2007.  All earnings per share and per share amounts have been retroactively adjusted to reflect the stock dividend.

2.           STOCK-BASED COMPENSATION

At September 30, 2007, the Company had two stock-based compensation plans, for which 259,366 shares of common stock are reserved for issuance to employees and directors and 122,007 shares are available for future grants under incentive and nonstatutory agreements.  There were no options granted during the nine-month period ended September 30, 2007.  During the nine-month period ended September 30, 2006, 10,500 options were awarded by the Company to a then-recently appointed director.  Compensation cost related to stock options recognized in operating results under SFAS No. 123R were $7,671 and $9,000 in the three month periods ended September 30, 2007 and 2006, respectively.  Compensation cost related to stock options recognized in operating results under SFAS No. 123R were $23,013 and $23,500 in the nine month periods ended September 30, 2007 and 2006, respectively.  The excess tax benefits for the nine month periods ended September 30, 2007 and 2006 were $6,459 and $5,028, respectively.

8

3.           STOCK OPTION PLAN

On May 15, 2007, the Company’s shareholders approved the Valley Commerce Bancorp 2007 Equity Incentive Plan (“Incentive Plan”).  The Incentive Plan provides for awards of stock options, restricted stock awards, qualified performance-based awards and stock grants.  Under the plan, 122,007 shares of common stock are reserved for issuance to employees and directors under incentive and nonstatutory agreements.  The purpose of the Incentive Plan is to promote the long-term success of the Company and the creation of shareholder value.  The Board of Directors believes that the availability of stock options and other forms of stock awards will be a key factor in the ability of the Company to attract and retain qualified individuals.  Additional information on the Incentive Plan may be obtained from the Company’s 2007 Annual Proxy Statement.

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

The following table summarizes information about stock option activity for the nine months ended September 30, 2007:

	For the Nine Months Ended September 30, 2007
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Incentive:
Options outstanding at January 1, 2007		35,896		$	8.20
Options granted		-			-
Options exercised		(1,914	)		6.79
Options cancelled		(608	)		11.52
Options outstanding at September 30, 2007		33,374			8.20	5.58 years	$	345,036
Options exercisable at September 30, 2007		28,751			7.80	5.58 years		308,900
Nonstatutory:
Options outstanding at January 1, 2007		199,669		$	7.47
Options granted		-			-
Options exercised		(95,684	)		5.68
Options cancelled		-			-
Options outstanding at September 30, 2007		103,985			9.10	5.73 years	$	981,500	(1)
Options exercisable at September 30, 2007		90,044			8.29	5.73 years		922,844	(1)

(1) 10,500 options at an average price are excluded from intrinsic value from table above because they are not in the money.

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, 2007.  There were 97,507 and 24,138 options exercised during the nine month periods ended September 30, 2007 and 2006, respectively. The total intrinsic value, which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise, of options exercised during the nine month periods ended September 30, 2007 and 2006 was $864,016 and $331,777, respectively.  During the nine month period ended September 30, 2007, the amount of cash received from the exercise of stock options was $556,336.  There were no options that vested during the three month periods ended

9

September 30, 2007 and 2006.  The total fair value of shares vested during the nine months ended September 30, 2007 and 2006 was $150,260 and $158,175, respectively.

Management estimates expected forfeitures and recognizes compensation costs only for those equity awards expected to vest.  As of September 30, 2007, there was $65,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan.  The cost is expected to be realized over a weighted average period of 1.3 years and will be adjusted for subsequent changes in estimated forfeitures.

4.           EARNINGS PER SHARE COMPUTATION

Basic earnings per share are computed by dividing net income by the weighted average common shares outstanding for the period.  Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised.  Diluted earnings per share are computed by dividing net income by the weighted average common shares outstanding for the period plus the dilutive effect of options.  Earnings per share computations have been retroactively adjusted for stock splits and stock dividends for all periods presented.

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2007		2006		2007		2006
Earnings Per Share:
Basic earnings per share	$	0.31	$	0.33	$	0.85	$	0.96
Diluted earnings per share	$	0.30	$	0.32	$	0.81	$	0.92
Weighted Average Number of Shares Outstanding:
Basic shares		2,364,074		2,428,632		2,339,725		2,307,283
Diluted shares		2,439,305		2,516,661		2,466,771		2,396,899

There were 10,500 options excluded from the computation of diluted earnings per share for the 2007 period as they were identified as anti-dilutive.  There were no options excluded for the 2006 period.

5. COMPREHENSIVE INCOME

Comprehensive income includes net income and other comprehensive income.  The Company's only source of other comprehensive income is derived from unrealized gains and losses on investment securities available for sale.  The Company's comprehensive income was as follows:

	For the Three Months				For the Nine Months
	Ended				Ended
	September		September		September			September
(In Thousands)	30, 2007		30, 2006		30, 2007			30, 2006
Net income	$	722	$	817	$	1,986		$	2,210
Other comprehensive gain/(loss):
Unrealized holding gain/(loss) on available-for-sale		384		730		(20	)		223
investment securities, net of tax
Total other comprehensive income	$	1,106	$	1,547	$	1,966		$	2,433

10

6.           COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company has various outstanding commitments to extend credit which are not reflected in the financial statements, including loan commitments of $53.2 million and $44.1 million and letters of credit of $0.5 million and $1.7 million at September 30, 2007 and December 31, 2006, respectively.

At September 30, 2007, consumer loan commitments represent approximately 5% of total commitments and are generally unsecured.  Agricultural loan commitments represent approximately 4% of total commitments and are generally secured by crops and/or real estate.  Commercial loan commitments represent approximately 68% of total commitments and are generally secured by various assets of the borrower.  Real estate loan commitments represent the remaining 23% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%.  In addition, the majority of the Bank’s commitments have variable interest rates.  Total commitments do not necessarily represent future cash requirements.  Each loan commitment and the amount and type of collateral obtained, if any, are evaluated on an individual basis.  Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

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.

7.            INCOME TAXES

In July 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes—an Interpretation of FASB statement No. 109.  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 also prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income 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. The Company has adopted FIN 48 as of January 1, 2007.

The Company previously recognized income tax positions based on management’s estimate of whether it is reasonably possible that a liability has been incurred for unrecognized income tax benefits by applying FASB Statement No. 5, Accounting for Contingencies.

The provisions of FIN 48 have been applied to all tax positions of the Company as of January 1, 2007.  There was no cumulative effect of applying the provisions of FIN 48 and there was no material effect on the Company’s provision for income taxes for the three or nine months ended September 30, 2007.  The Company recognizes interest accrued related to unrecognized tax benefits and accruals for penalties in income tax expense.

11

8.            RECENT ACCOUNTING DEVELOPMENTS

Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities– Including an Amendment of FASB Statement No. 115 (“FAS 159”). The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  This standard permits entities to choose to measure many financial assets and liabilities and certain other items at fair value at specified election dates.  The Company will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  The fair value option may be applied on an instrument-by-instrument basis, with several exceptions, such as those investment accounted for by the equity method, and once elected, the option is irrevocable unless a new election date occurs.  The fair value option can be applied only to entire instruments and not to portions thereof.  The provisions of FAS 159 are effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007.  Management did not elect to early adopt FAS 159 and has not yet completed its evaluation of the impact that FAS 159 may have on the Company’s financial position or results of operations.

9.  SUBSEQUENT EVENT – STOCK REPURCHASE PROGRAM

In October 2007, the Board of Directors approved a plan to incrementally repurchase up to an aggregate of $3,000,000 of the Company’s common stock.  The repurchase program is expected to commence in November of 2007 and will continue for a period not to exceed twelve months, subject to earlier termination at the Company’s discretion.  The Company has no obligation to repurchase shares under the program, and the timing of the purchases and the number of shares to be repurchased at any given time will be at management’s discretion depending on market conditions and other factors.   

12

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes appearing in  Item 1, Financial Statements, in this Quarterly Report on Form 10-Q and the condensed consolidated financial statements and notes thereto included in Valley Commerce Bancorp’s Annual Report filed on form 10-K for the year ended December 31, 2006.

Introduction

Overview

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

The Company’s consolidated third quarter 2007 net income totaled $722,000, or $0.30 per diluted share, compared to $817,000 or $0.32 per diluted share achieved in the third quarter of 2006.  The Company earned net income of $2.0 million or $0.81 per diluted share for the nine-month period ended September 30, 2007, compared to $2.2 million, or $0.92 per diluted share, for the nine-month period ended September 30, 2006.  The annualized return on average assets was 1.00% for the nine-month period ended September 30, 2007 and 1.25% for the same 2006 period.  The annualized return on average shareholders’ equity for the nine months ended September 30, 2007 and 2006 was 10.03% and 12.85%, respectively.  The decrease in year to date return on average assets and equity resulted primarily from higher funding costs and higher non-interest expense related to the Company’s growth plans and increased regulatory burden.

At September 30, 2007, the Company’s total assets were $280.6 million, representing an increase of $17.6 million or 7% compared to September 30, 2006.  Total loans, net of the allowance for loan losses, were $198.1 million at September 30, 2007, representing an increase of $17.3 million or 10% compared to September 30, 2006.  Total deposits were $210.4 million at September 30, 2007, representing an increase of $12.9 million or 7% compared to September 30, 2006.  Comparing September 30, 2007 and December 31, 2006 balances, total assets increased by $16.9 million or 6%, total net loans increased by $15.8 million or 9%, and total deposits increased by $2.8 million or 1%.

At September 30, 2007, the Company’s leverage ratio was 11.7% while its tier 1 risk-based capital ratio and total risk-based capital ratio were 13.7% and 14.5%, respectively.  At December 31, 2006, the Company’s leverage ratio was 11.1% while its tier 1 risk-based capital ratio and total risk-based capital ratio were 13.5% and 14.3 %, respectively.  The leverage, tier 1 risk-based capital and total risk-based capital ratios at September 30, 2006 were 11.2%, 13.3% and 14.1%, respectively.  The Company’s capital ratios increased due to shareholders’ equity growing at a faster rate than assets.  The growth in shareholders’ equity was caused by the retention of earnings and the issuance of common stock in connection with the exercise of stock options.

Critical Accounting Policies

There have been no changes to the Company’s critical accounting policies from those discussed in the Company’s 2006 Annual Report to Shareholders’ on Form 10-K.

13

Results of Operations for the Nine Months Ended September 30, 2007 and 2006

Net Interest Income

The following table presents the Company’s average balance sheet, including weighted average yields and rates on a taxable-equivalent basis, for the nine-month periods indicated:

	Average balances and weighted average yields and costs Nine Months ended September 30,
	2007							2006
			Interest		Average					Interest		Average
	Average		income/		yield/			Average		income/		yield/
(dollars in thousands)	Balance		Expense		Cost			Balance		Expense		Cost
ASSETS
Federal funds sold	$	73	$	3		5.13	%	$	4,017	$	137		4.56	%
Available-for-sale investment securities:
Taxable		34,416		1,141		4.43	%		36,747		1,064		3.87	%
Exempt from Federal income taxes (1)		18,915		574		6.15	%		17,594		525		6.04	%
Total securities (1)		53,331		1,715		5.04	%		54,341		1,589		4.57	%
Loans (2) (3)		192,546		12,071		8.38	%		160,606		10,486		8.73	%
Total interest-earning assets (1)		245,950		13,789		7.66	%		218,964		12,212		7.62	%
Noninterest-earning assets, net of allowance for loan losses		18,337							17,140
Total assets	$	264,287						$	236,104
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Other interest bearing	$	80,735	$	1,821		3.02	%	$	73,228	$	1,431		2.61	%
Time deposits less than $100,000		21,303		762		4.78	%		19,908		568		3.81	%
Time deposits $100,000 or more		50,471		1,901		5.04	%		32,982		1,017		4.12	%
Total interest-bearing deposits		152,509		4,484		3.93	%		126,118		3,016		3.20	%
Short-term debt		12,241		485		5.30	%		6,808		269		5.28	%
Long-term debt		8,330		273		4.38	%		8,911		286		4.29	%
Junior subordinated deferrable interest debentures		3,093		203		8.77	%		3,093		195		8.43	%
Total interest-bearing liabilities		176,173		5,445		4.13	%		144,930		3,766		3.47	%
Noninterest-bearing deposits		59,708							66,770
Other liabilities		1,930							1,421
Total liabilities		237,811							213,121
Shareholders’ equity		26,476							22,983
Total liabilities and shareholders’ equity	$	264,287						$	236,104
Net interest income and margin (1)			$	8,344	$	4.70	%			$	8,466	$	5.32	%

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

(2)   There were no nonaccrual loan balances during either period. When nonaccrual loans are present they are included in total loans and interest income is included on nonaccrual loans only to the extent cash payments have been received. No interest was received on nonaccrual loans for the periods presented.

(3)   Interest income on loans includes amortized loan fees, net of costs, of $269 and $540 for 2007 and 2006, respectively.

14

The following table sets forth a summary of changes in interest income and interest expense from changes in average earning assets and interest-bearing liabilities (volume) and changes in average interest rates for the nine-month periods ended September 30, 2007 and 2006.

Changes in net interest income due to changes in volumes and rates
	2007 period vs. 2006 period
	Increase (decrease) due to change in:
	Average			Average
	Volume			Rate (1)			Total
(In thousands)
Increase (decrease) in interest income:
Federal funds sold	$	(135	)	$	1		$	(134	)
Investment securities
Taxable		(67	)		144			77
Exempt from Federal income taxes		60			(11	)		49
Total securities		(7	)		133			126
Loans		2,085			(500	)		1,585
Total interest income	$	1,943		$	(366	)	$	1,577
Increase (decrease) in interest expense:
Other interest bearing deposits		147			243			390
Time deposits less than $100,000		40			154			194
Time deposits $100,000 or more		539			345			884
Total interest-bearing deposits		726			742			1,468
Short-term debt		215			1			216
Long-term debt		(19	)		6			(13	)
Junior subordinated deferrable interest debentures		-			8			8
Total interest expense		922			757			1,679
Increase (decrease) in net interest income	$	1,021		$	(1,123	)	$	(102	)

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

Total interest income for the nine-month period ended September 30, 2007 was $13.8 million, an increase of $1.6 million or 13% from the same period in 2006.  The improvement was attributable primarily to increased volume of average interest-earning assets.

Average earning assets in the 2007 period increased by $27.0 million or 12% compared to the 2006 period.  Average loans increased by $31.9 million or 20% due primarily to increased mortgage-real estate and mortgage-construction lending.  In addition, average available-for-sale securities decreased by $1.0 million or 2%, primarily in the area of taxable securities.

The weighted average taxable-equivalent yield on total interest-earning assets was 7.66% in the 2007 period compared to 7.62% in the 2006 period.  The majority of the Company’s loan portfolio is priced with floating interest rates.  However, competitive pressures for high quality credits and customer demand for fixed interest rate loans, and reduced loan fees in the 2007 period caused the yields to decline slightly.

Total interest expense for the nine-month period ended September 30, 2007 was $5.4 million, an increase of $1.7 million or 45% from the same period in 2006.  Average interest-bearing liabilities in the 2007 period increased by $31.2 million or 22% compared to the 2006 period.  This included an increase in average other interest-bearing deposits of $7.5 million or 10% and an increase in average time deposits of $18.9 million or 36%.  Average time deposits for the nine months ended September 30, 2007 included $9.9 million of brokered time deposits acquired in December 2006.

The average rate paid on interest-bearing liabilities was 4.13% in the 2007 period compared to 3.47% in the 2006 period.  The increase in rates paid was attributable primarily to higher market interest rates on deposits and increased use of wholesale funding sources, including Federal Home Loan Bank (FHLB) advances and brokered time deposits.

15

Net interest income decreased by $101,000 to $8.3 million for the 2007 period from $8.5 million for the 2006 period due to the factors described above.  The Company’s net interest income was also impacted by a decrease in the average balance of non-interest bearing deposits which primarily migrated into interest-bearing deposit categories. The average balance of noninterest-bearing deposit accounts for the 2007 period was $59.7 million, a $7.1 million or 11% decrease from the 2006 period.  The Company’s net interest margin on a taxable equivalent basis decreased 62 bps from 5.32% for the nine months ended September 30, 2006 to 4.70% for the nine months ended September 30, 2007.  As described in the preceding paragraphs, the decline in net interest margin resulted primarily from rising funding costs outweighing asset growth and other favorable factors.

Provision for Loan Losses

The provision for loan losses, which is included in operations to support the required level of the allowance for loan losses, is based on credit experience and management’s ongoing evaluation of loan portfolio risk and economic conditions.  No provisions for loan losses were recorded for the nine-month periods ended September 30, 2007 and 2006 based on management’s assessment of the loan portfolio and related credit quality.  See the sections below titled “Allowance for Loan Losses.”

Non-Interest Income

Non-interest income for the nine-month periods ended September 30, 2007 and 2006 totaled $873,000 and $688,000, respectively, an increase of $185,000 or 27%.  The components of non-interest income during each period were as follows:

Non-interest income

	Nine Months ended September 30,
	2007			2006			Increase (Decrease)
(in thousands)
Service charges	$	432		$	410		$	22
Loss on sale of available-for-sale investment securities		(1	)		(53	)		52
Mortgage loan brokerage fees		66			76			(10	)
Earnings on cash surrender value of life insurance policies		195			93			102
Other		181			162			19
Total non-interest income	$	873		$	688		$	185

The increase in non-interest income was primarily attributable to earnings on bank-owned life insurance assets which increased due to additional investments made in such assets during the latter part of 2006.  The “other” category of non-interest income includes FHLB dividend income which increased due to higher usage of FHLB credit lines and required investment in FHLB stock.  Losses on sales of available-for-sale investment securities were incurred due to transactions made to reposition the investment portfolio for interest rate risk management purposes.

Non-Interest Expense

Non-interest expense was $6.4 million for the nine-month period ended September 30, 2007 compared to $5.7 million for the nine-month period ended September 30, 2006, an increase of $644,000 or 11%.  The increase was due primarily to increased employee related costs associated with the Company’s growth.  In addition, salary continuation programs implemented in the third quarter of 2006 caused employee benefit expense in the 2007 period to increase by $60,000.   The increase in occupancy expenses was due to additional rent, depreciation and utilities associated with the expansion of the Visalia branch and administrative offices.  Professional and legal costs increased in 2007 due to use of professional consultants for compensation-related issues.  The Company also incurred professional fees related to the implementation of requirements under Section 404 of the Sarbanes-Oxley Act.  Assessment and insurance costs increased due to an increase in the FDIC assessment rate for deposit insurance.

16

The following table describes the components of non-interest expense for the nine-month periods ended September 30, 2007 and 2006:

Non-interest expense

	Nine Months ended September 30,
(in thousands)	2007		2006		Increase (Decrease)
Salaries and employee benefits	$	3,563	$	3,173	$	390
Occupancy and equipment		756		660		96
Data processing		345		338		7
Operations		346		334		12
Professional and legal		390		280		110
Advertising and business development		201		215		(14	)
Telephone and postal		160		160		-
Supplies		132		130		2
Assessment and insurance		132		83		49
Amortization expense		47		47		-
Other expenses		303		310		(7	)
Total non-interest expense	$	6,375	$	5,730	$	645

17

Provision for Income Taxes

The provisions for income taxes for the nine-month periods ended September 30, 2007 and 2006 was $857,000 and $1,194,000, respectively.  The effective tax rates for these periods were 30.4%, and 35.1%, respectively.  The decrease in effective tax rate was due in part to an increased investment in municipal securities and Bank-owned life insurance which are exempt from Federal income taxes.

Results of Operations for the Three Months Ended September 30, 2007

Net Interest Income

The following table presents the Company’s average balance sheet, including weighted average yields and rates on a taxable-equivalent basis, for the three-month periods indicated:

Average balances and weighted average yields and costs
	Three Months ended September 30,
	2007							2006
			Interest		Average					Interest		Average
	Average		income/		yield/			Average		income/		yield/
(dollars in thousands)	Balance		Expense		Cost			Balance		Expense		Cost
ASSETS
Federal funds sold	$	65	$	1		5.09	%	$	234	$	3		5.09	%
Available-for-sale investment securities:
Taxable		33,293		359		4.28	%		38,670		386		3.96	%
Exempt from Federal income taxes (1)		19,038		192		6.06	%		18,407		188		6.14	%
Total securities (1)		52,331		551		4.93	%		57,077		574		4.66	%
Loans (2) (3)		199,047		4,164		8.30	%		174,283		3,854		8.77	%
Total interest-earning assets (1)		251,443		4,716		7.60	%		231,594		4,431		7.76	%
Noninterest-earning assets, net of allowance for loan losses		18,957							17,333
Total assets	$	270,400						$	248,927
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Interest bearing	$	88,306	$	661		2.97	%	$	76,216	$	551		2.87	%
Time deposits less than $100,000		20,490		244		4.72	%		21,384		230		4.27	%
Time deposits $100,000 or more		49,901		630		5.01	%		34,407		405		4.67	%
Total interest-bearing deposits		158,697		1,535		3.84	%		132,007		1,186		3.56	%
Short-term debt		10,149		131		5.12	%		14,675		198		5.35	%
Long-term debt		8,218		91		4.39	%		8,817		95		4.27	%
Junior subordinated deferrable interest debentures		3,093		68		8.77	%		3,093		69		8.85	%
Total interest-bearing liabilities		180,157		1,825		4.02	%		158,592		1,548		3.87	%
Noninterest bearing deposits		60,412							65,234
Other liabilities		2,587							1,403
Total liabilities		243,156							225,229
Shareholders’ equity		27,244							23,698
Total liabilities and shareholders’ equity	$	270,400						$	248,927
Net interest income and margin (1)			$	2,891		4.72	%			$	2,883		5.10	%

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

(2)   There were no nonaccrual loan balances during either period. When nonaccrual loans are present they are included in total loans and interest income is included on nonaccrual loans only to the extent cash payments have been received. No interest was received on nonaccrual loans for the periods presented.

(3)   Interest income on loans includes amortized loan fees, net of costs, of $76 and $93 for 2007 and 2006, respectively.

18

The following table sets forth a summary of the changes in interest income and interest expense from changes in average earning assets and interest-bearing liabilities (volume) and changes in average interest rates for the three-month periods ended September 30, 2007 and 2006.

Changes in net interest income due to changes in volumes and rates
	2007 period vs. 2006 period
	Increase (decrease) due to change in:
	Average			Average
	Volume			Rate (1)			Total
(In thousands)
Increase (decrease) in interest income:
Federal funds sold	$	(2	)	$	-		$	(2	)
Investment securities
Taxable		(54	)		27			(27	)
Exempt from Federal income taxes		10			(6	)		4
Total securities		(44	)		21			(23	)
Loans		548			(238	)		310
Total interest income		502			(217	)		285
(Decrease) increase in interest expense:
Other interest-bearing deposits		87			23			110
Time deposits less than $100,000		(10	)		24			14
Time deposits $100,000 or more		182			43			225
Total interest-bearing deposits		259			90			349
Short-term debt		(61	)		(6	)		(67	)
Long-term debt		(6	)		2			(4	)
Junior subordinated deferrable interest debentures		-			(1	)		(1	)
Total interest expense		192			85			277
Decrease in net interest income	$	310		$	(302	)	$	8

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

Total interest income for the three-month period ended September 30, 2007 was $4.7 million, an increase of $285,000 or 6% from the same period in 2006.  The improvement was attributable to increased volume of average interest-earning assets.

Average earning assets in the 2007 period increased by $19.8 million or 9% compared to the 2006 period. Average loans increased by $24.8 million or 14% due primarily to increased mortgage-real estate and mortgage-construction lending.  The increase in average loans was partially offset by decreases in average Federal funds sold and available-for-sale securities.

The weighted average tax-equivalent yield on total interest-earning assets was 7.60% in the 2007 compared to 7.76% in the 2006 period.  The majority of the Company’s loan portfolio is priced with floating interest rates.  However, competitive pressures for high quality credits and customer demand for fixed interest rate loans, and reduced loan fees in the 2007 period caused the yields to decline.

Total interest expense for the three-month period ended September 30, 2007 was $1.8 million, an increase of $277,000 or 18% from the same period in 2006.  Average interest-bearing liabilities in the 2007 period increased by $21.6 million or 14% compared to the 2006 period. This included an increase in average time deposits of $14.6 million or 26%.  Average time deposits for the third quarter of 2007 included $9.9 million of brokered time deposits acquired in December 2006.

The average rate paid on interest-bearing liabilities was 4.02% in the 2007 period compared to 3.87% in the 2006 period.  The increase in rates paid was attributable primarily to higher market interest rates on deposits and increased use of wholesale funding sources, including Federal Home Loan Bank (FHLB) advances and brokered time deposits.

19

Net interest income before provision for loan losses remained at $2.9 million for both the 2007 and 2006 periods due to the factors described above.    The Company’s net interest margin on a taxable equivalent basis decreased 38 bps from 5.10% during the 2006 period to 4.72% during the 2007 period.  As described in the preceding paragraphs, the decline in net interest margin resulted primarily from rising funding costs outweighing asset growth and other favorable factors. In addition, the Company’s net interest margin was impacted by a decrease in the average balance of non-interest bearing deposits which migrated into interest-bearing deposit categories.  The average balance of non-interest bearing deposit accounts for the 2007 period was $60.4 million, a $4.8 million or 7% decrease from the 2006 period.

Provision for Loan Losses

The provision for loan losses, which is included in operations to support the required level of the allowance for loan losses, is based on credit experience and management’s ongoing evaluation of loan portfolio risk and economic conditions.  No provisions for loan losses were recorded for the three-month periods ended September 30, 2007 and 2006 based on management’s assessment of the loan portfolio and related credit quality.  See the sections below titled “Allowance for Loan Losses.”

Non-Interest Income

Non-interest income for the three-month periods ended September 30, 2007 and 2006 totaled $300,000 and $280,000, respectively, a increase of 20,000 or 7%.  The components of non-interest income during each period were as follows:

Non-interest income

	Three Months ended September 30,
(in thousands)	2007		2006		Increase (Decrease)
Service charges	$	156	$	148	$	8
Mortgage loan brokerage fees		19		34		(15	)
Earnings on cash surrender value of life insurance policies		67		39		28
Other		58		59		(1	)
Total non-interest income	$	300	$	280	$	20

The increase in non-interest income was primarily attributable to earnings on bank-owned life insurance assets which increased due to additional investments made during the latter part of 2006.  Mortgage loan brokerage fees decreased due to the weakening real estate market associated with sub-prime lending even though interest rates decreased by 25 bps during this period.

Non-Interest Expense

Non-interest expense was $2.2 million and $1.9 million, respectively, for the three-month periods ended September 30, 2007 and 2006, an increase of $257,000 or 14%.  The increase was due primarily to increased professional and legal costs associated with the regulatory requirements of the Sarbanes Oxley Act.  In addition, increase salary and benefit costs were incurred in connection with the Company’s continued growth.   That growth also caused an increase in occupancy expense due to additional rent, depreciation and utilities associated with the expansion of the Visalia branch and administrative offices.  Assessment and insurance costs increased due to an increase in the FDIC assessment rate for deposit insurance.

20

The following table describes the components of non-interest expense for the three-month periods ended September  30, 2007 and 2006:

Non-interest expense

 

	Three Months ended September 30,
(in thousands)	2007		2006		Increase (Decrease)
Salaries and employee benefits	$	1,147	$	1,043	$	104
Occupancy and equipment		261		230		31
Data processing		124		113		11
Operations		122		119		3
Professional and legal		162		108		54
Advertising and business development		58		59		(1	)
Telephone and postal		60		50		10
Supplies		50		36		14
Assessment and insurance		64		32		32
Amortization expense		16		16		-
Other expenses		86		87		(1	)
Total non-interest expense	$	2,150	$	1,893	$	257

Provision for Income Taxes

The provision for income taxes for the nine-month periods ended September 30, 2007 and 2006 was $320,000 and $454,000, respectively.  The effective tax rates for these periods were 30.9%, and 35.7%, respectively. The decrease in effective tax rate was due in part to an increased investment in municipal securities and Bank-owned life insurance which are exempt from Federal income taxes.

Financial Condition

Investment Securities

All existing investment securities are classified as available-for-sale securities.  In classifying its investments as available-for-sale, the Company reports securities at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income or loss within shareholders’ equity.

21

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

Market value of securities available for sale
	September 30, 2007
(in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair  Value
U.S. government  agencies	$	19,299	$	8	$	(147	)	$	19,160
U.S. treasury securities		246		8		-			254
Mortgage-backed securities		17,051		57		(179	)		16,929
Municipal securities		19,298		45		(185	)		19,158
Corporate debt securities		3,511		-		(48	)		3,463
Total	$	59,405	$	118	$	(559	)	$	58,964

	December 31, 2006
(in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
U.S. government  agencies	$	20,325	$	6	$	(282	)	$	20,049
Mortgage-backed securities		12,422		65		(251	)		12,236
Municipal securities		18,950		142		(35	)		19,057
Corporate debt securities		4,033		-		(77	)		3,956
Total	$	55,730	$	213	$	(645	)	$	55,298

Management periodically evaluates each investment security for other than temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations.  Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities and that the noted decline in fair value is considered temporary and due only to interest rate fluctuations.

Loans

The Company’s lending activities are geographically concentrated in the South San Joaquin Valley, primarily in Tulare and Fresno counties.  The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets, and deposit accounts, but looks to business and personal cash flows as the primary source of repayment.  The following table sets forth the breakdown of loans outstanding by type at the dates indicated by amount and percentage of the portfolio:

(dollars in  thousands)	September 30, 2007					December 31, 2006
Commercial	$	40,238		20	%	$	41,104		22	%
Real estate – mortgage (1)		104,460		52			92,639		50
Real estate – construction		48,396		24			44,273		24
Agricultural		5,094		3			4,693		3
Consumer and other		2,078		1			1,805		1
Subtotal		200,266		100	%		184,514		100	%
Deferred loan fees, net		(392	)				(436	)
Allowance for loan losses		(1,752	)				(1,746	)
Total loans, net	$	198,122				$	182,332

(1) Consists primarily of commercial mortgage loans.

During the nine months ended September 30, 2007, loan growth occurred primarily in the category of real estate – mortgage and real estate – construction.  This growth consisted primarily of loans to local business owners, most of whom have other loan and deposit relationships with the Company, for business expansion purposes.  Tulare and Fresno counties are two of the top counties in the United States for agricultural production, but are growing in population more rapidly than many other areas of California due to the relatively low cost of real estate.  Retail loan products are offered primarily

22

for the benefit of commercial business owners and professionals who typically maintain depository and other lending relationships with the Company.

Nonperforming Assets

There were no nonperforming assets at September 30, 2007 and December 31, 2006.

Allowance for Loan Losses

The Company maintains an allowance for loan losses to provide for estimated credit losses that it is probable the Company will incur as of the balance sheet date.  Loans determined to be impaired are evaluated individually by management for determination of the specific loss, if any, that exists as of the balance sheet date.  In addition, reserve factors are assigned to currently performing loans based on historical loss rates as adjusted for current economic conditions, trends in the level and volume of past due and classified loans, and other qualitative factors.

The allowance for loan losses totaled $1.75 million or 0.87% of total loans at September 30, 2007.  This compared to $1.75 million or 0.95% of total loans at September 30, 2006 and December 31, 2006.  There were no charge offs and $6,000 in recoveries recorded during the first nine months of 2007.  There were $21,000 in charge offs and an insignificant amount of recoveries during the first nine months of 2006.  Based on an evaluation of the credit quality of the loan portfolio and delinquency trends and charge offs, management believes the allowance for loan losses to be adequate.  However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty.

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

Changes in allowance for loan losses

	Nine Months ended			Year ended
	September 30, 2007			December 31, 2006
(dollars in thousands)
Balance, beginning	$	1,746		$	1,766
Provision for  loan losses		-			-
Charge-offs		-			(21	)
Recoveries		6			1
Balance, ending	$	1,752		$	1,746
Net charge-offs (recoveries) to average loans outstanding		0.00	%		0.00	%
Average loans outstanding	$	192,546		$	166,620
Ending allowance to total loans outstanding		0.87	%		0.95	%

Deposits

Total deposits were $210.4 million as of September 30, 2007, an increase of $2.8 million or 1% from the December 31, 2006 balance of $207.6 million.  The increase was attributable to growth in interest-bearing deposits, which increased by $12.5 million or 17%.  These were offset by declines in time deposits by $3.6 million or 5% over the same period and in non-interest bearing deposits of $6.1 million or 10% due primarily to competitive pressures which caused some migration into interest-bearing accounts.  Brokered time deposits included in time deposits at September 31, 2007 and December 31, 2006 totaled $5.9 million and $9.9 million, respectively.

23

Total deposits at September 30, 2007 and December 31, 2006 are summarized in the following table:

Deposit Portfolio
(dollars in thousands)	September 30, 2007				December 31, 2006
Non-interest bearing	$	56,916	27	%	$	63,020	30	%
Interest bearing		87,824	42			75,293	36
Time deposits		65,665	31			69,263	34
Total Deposits	$	210,405	100	%	$	207,576	100	%

Borrowings

At September 30, 2007, the Company had outstanding borrowings from the Federal Home Loan Bank totaling $33.0 million an increase of $6.9 million from the $26.2 million outstanding at December 31, 2006.  This debt was comprised of $24.8 million of short-term, adjustable rate debt, and $8.2 million of long-term fixed rate debt.  At December 31, 2006, the Company had $17.6 in short-term debt and long-term debt totaling $8.5 million.  For the nine months ended September 30, 2007, the long-term weighted average borrowing rate was 4.38% and the short-term weighted average borrowing rate was 5.30%.  The Company utilized short-term borrowings from the FHLB to fund a portion of its asset growth in 2007 as rising interest rates adversely affected core deposit growth.  Long-term borrowings from the FHLB were incurred primarily for the purpose of funding fixed rate loans and are scheduled to mature at various times through January 2012.  The $3.1 million balance of junior subordinated deferrable interest debentures at September 30, 2007 remained unchanged from December 31, 2006.  The variable rate of interest paid on these debentures was 8.66% at September 30, 2007 compared to 8.67% at December 31, 2006.

24

Capital Resources

The following table summarizes the Company’s risk-based capital ratios as of September 30, 2007 and December 31, 2006:

 

 

Capital and capital adequacy ratios
	September 30, 2007					December 31, 2006
(dollars in thousands)	Amount		Ratio			Amount		Ratio
Leverage Ratio
Valley Commerce Bancorp     and Subsidiary	$	31,596		11.7	%	$	28,654		11.1	%
Minimum regulatory requirement	$	10,816		4.0	%	$	10,346		4.0	%
Valley Business Bank	$	30,705		11.4	%	$	28,336		11.0	%
Minimum requirement for “Well-     Capitalized” institution	$	13,515		5.0	%	$	12,926		5.0	%
Minimum regulatory requirement	$	10,812		4.0	%	$	10,341		4.0	%
Tier 1 Risk-Based Capital Ratio
Valley Commerce Bancorp     and Subsidiary	$	31,596		13.7	%	$	28,654		13.5	%
Minimum regulatory requirement	$	9,233		4.0	%	$	8,495		4.0	%
Valley Business Bank	$	30,705		13.3	%	$	28,336		13.4	%
Minimum requirement for “Well-     Capitalized” institution	$	13,845		6.0	%	$	12,736		6.0	%
Minimum regulatory requirement	$	9,230		4.0	%	$	8,490		4.0	%
Total Risk-Based Capital Ratio
Valley Commerce Bancorp     and Subsidiary	$	33,348		14.5	%	$	30,399		14.3	%
Minimum regulatory requirement	$	18,466		8.0	%	$	16,989		8.0	%
Valley Business Bank	$	32,456		14.1	%	$	30,081		14.2	%
Minimum requirement for “Well-     Capitalized” institution	$	23,075		10.0	%	$	21,226		10.0	%
Minimum regulatory requirement	$	18,460		8.0	%	$	16,981		8.0	%

At September 30, 2007 and December 31, 2006, all of the Company’s capital ratios were in excess of minimum regulatory requirements, and Valley Business Bank exceeded the minimum requirements of a “well capitalized” institution.

25

Liquidity

Liquidity is the ability to provide funds to meet customers’ needs and to fund operations in a timely and cost effective manner.  The Company’s primary source of funds is deposits.  On an ongoing basis, management anticipates funding needs for loans, asset purchases, maturing deposits, and other needs and initiates deposit promotions as needed.  During periods when deposit growth exceeds customer needs, funds are invested in investment securities to serve as a future source of funding.

The Company’s sources of liquidity include short-term borrowing arrangements with the FHLB and correspondent banks, available-for-sale securities portfolio, and may also include, Federal funds sold, and cash and due from banks.

The Company’s off-balance sheet financing arrangements are primarily limited to commitments to extend credit and standby letters of credit, which totaled $ 53.2 million and $0.5 million, respectively, at September 30, 2007.  Management monitors these arrangements in the overall assessment of the Company’s liquidity needs. The Company has no other off-balance sheet arrangements that are likely to have a material effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources.  The Company does not retain a repurchase option or contingent interest in any of its loan participations.

The Company’s strategic objectives include expanding through opening of “de novo” branches and loan production offices in the near term and acquiring branch offices from other institutions in the longer term.   The addition of branch offices is expected to involve significant cash outlays; e.g., for buildings, improvements, and equipment.  The Company’s planning efforts consider the impact of such cash outlays so that sufficient liquidity is maintained for both capital and operational needs.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company maintains policies and guidelines for managing risks related to on-balance sheet and off-balance sheet activities.  Such policies and guidelines are integral to the asset/liability management process conducted by the Company’s asset-liability management committee (ALCO).  Certain policies may be governed and implemented by committees or persons other than the ALCO as directed by the Board of Directors.  Asset/liability management generally encompasses the management and monitoring of asset quality, liquidity and capital needs, and in particular, interest rate risk inherent in the interest-earning assets and interest-bearing liabilities appearing on the Company’s balance sheet.

The Company’s earnings depend largely upon net interest income, which is the difference between the total interest income earned on interest earning assets (primarily loans and investment securities) and the total interest expense incurred on interest bearing liabilities (primarily deposits and borrowed funds).  Net interest income is affected by changes in the interest rates earned on interest earning assets, the interest rates paid on interest bearing liabilities, and the average account balances included in each category.  One of the principal objectives of asset/liability management is to manage the risks associated with changing interest rates and the potential impact on earnings and stockholder value.  The goal of interest rate risk management is to maintain a balance sheet that generates stable earnings and stockholder value across a variety of interest rate environments.

In management’s opinion there has not been a material change in the Company’s market risk or interest rate risk profile for the nine months ended September 30, 2007 compared to December 31, 2006 as discussed in the Company’s 2006 annual report on Form 10-K.

26

ITEM 4 – CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

(b) CHANGES IN INTERNAL CONTROLS

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

27

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

ITEM 1A – RISK FACTORS

In addition to the other information set forth in this report, 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, 2006, 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 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)           These were no unregistered sales of equity securities during the first nine months of 2007.

(b)           The Company did not repurchase any stock during the first nine months of 2007.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

28

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

None

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBITS

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

29

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	VALLEY COMMERCE BANCORP
Date:  November 14, 2007	By:	/s/ Donald A. Gilles
		Donald A. Gilles
		President and Chief Executive Officer
Date: November 14, 2007	By:	/s/ Roy O. Estridge
		Roy O. Estridge, Chief Financial Officer

30

Exhibit Index

31.1	Rule 13a-14(a)/15d-14(a) Certification
31.2	Rule 13a-14(a)/15d-14(a) Certification
32.1	Section 1350 Certifications

31