Valley Commerce Bancorp (VCBP) 10-K 2007 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

T Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year December 31, 2007

£ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 000-51949

Valley Commerce Bancorp

(Name of Small Business Issuer 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 and Zip Code)

(559) 622-9000

(Issuer’s telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  £ No  T

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes  £ No  T

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

Yes  T No  £

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

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

Large accelerated filer £	Accelerated filer £	Non-accelerated filer £	Smaller reporting company T
		(Do not check if a
		smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  £ No  T

As of June 30, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $18.75 based on the average bid and asked price.

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

Common Stock, No Par Value	Outstanding at March 14, 2008
[Common Stock, No par value per share]	2,396,435 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document	Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2008 (Proxy Statement)	Part III

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TABLE OF CONTENTS

Part I
		Page
Item 1.	Business	5
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	12
Item 3.	Legal Proceedings	13
Item 4.	Submission of Matters to a Vote of Security Holders	13
Part II
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities	14
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	35
Item 8.	Financial Statements and Supplementary Data	35
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	78
Item 9A.	Controls and Procedures	78
Item 9B.	Other Information	78
Part III
Item 10.	Directors, Executive Officers, and Corporate Governance.	79
Item 11.	Executive Compensation	79
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	79
Item 13.	Certain Relationships and Related Transactions and Director Independence	79
Item 14.	Principal Accountant Fees and Services	79
Part IV
Item 15.	Exhibits, Financial Statement Schedules	79
	Signatures

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PART I

Forward-Looking Information

Certain matters discussed in this Annual Report on Form 10-K including, but not limited to, those described in Item 7 - 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 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K.  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.

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ITEM 1 – BUSINESS

General

The Company.  Valley Commerce Bancorp (the “Company”) was incorporated on February 2, 2002 as a California corporation, for the purpose of becoming the holding company for Valley Business Bank (the “Bank,” formerly Bank of Visalia), a California state chartered bank, through a corporate reorganization.  In the reorganization, the Bank became the wholly-owned subsidiary of the Company, and the shareholders of the Bank became the shareholders of the Company.  The Company is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Board of Governors”).

At December 31, 2007, the Company had one banking subsidiary, the Bank.  The Company’s principal source of income is dividends from the Bank. The cash outlays of the Company, including operating expenses and debt service costs, as well as any future cash dividends paid to Company shareholders, will generally be paid from dividends paid to the Company by the Bank.  Other sources of cash include settlement of intercompany transactions and funds received from exercise of stock options.

The Company’s principal business is to provide, through its banking subsidiary, financial services in its primary market area in California. The Company serves Tulare and Fresno Counties and the surrounding area through the Bank. The Company does not currently conduct any operations other than through the Bank. Unless the context otherwise requires, references to the Company refer to the Company and the Bank on a consolidated basis.

At December 31, 2007, the Company’s assets totaled $279.1 million.  As of January 31, 2008, the Company had a total of 80 employees and 79.1 full time equivalent employees, including the employees of the Bank.

This Annual Report on Form 10-K and other reports filed under the Securities Exchange Act of 1934 with the Securities and Exchange Commission (SEC) will be accessible on the Company’s website, www.valleybusinessbank.net, as soon as practicable after the Company files the document with the SEC.  These reports are also available through the SEC’s website at www.sec.gov.

The Bank.  The Bank was organized in 1995 and commenced business as a California state chartered bank in 1996.  The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable limits.  The Bank is not a member of the Federal Reserve System.

The Bank’s target customers are local businesses, professionals and commercial property owners.  The Bank’s income is derived 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 the interest paid on deposits and borrowings, and general operating expenses.  In general, the business of the Bank is not seasonal.

The Bank conducts its business through its branch offices located in Visalia, Fresno, Woodlake and Tipton, and a loan production office in Tulare, all in California’s South San Joaquin Valley.  The Visalia office opened in 1996 and the Visalia/Tulare county area is the current principal market of the Bank.  The Woodlake and Tipton branch offices were acquired from Bank of America in 1998, primarily to obtain core deposits.  The Fresno Branch was acquired in 2003 to allow the Bank to commence commercial banking operations in the Fresno metropolitan area.

In July 2005, the Bank changed its name from Bank of Visalia to Valley Business Bank to facilitate its further expansion within the South San Joaquin Valley.

On August 16, 2006, the Company closed escrow on the purchase of land in the city of Tulare in the amount of $401,000.  A full service branch is being constructed on the site and is expected to be completed in May 2008.  The new branch office will replace the Tulare loan production office that has been operating in leased quarters since January 2005.

The Bank intends to continue expanding within the South San Joaquin Valley by opening de novo branches and loan production offices, and by acquiring branches from other institutions.  New branches and loan production offices provide the Bank with greater opportunity to expand its core deposit base and increase its lending activities.  All future branches are subject to regulatory approval.

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Bank Lending Activities. The Bank originates primarily commercial mortgage loans, secured and unsecured commercial loans and construction loans.  It also originates a small number of consumer and agricultural loans and brokers single-family residential loans to other mortgage lenders.  The Bank targets small businesses, professionals and commercial property owners in its market area for loans.  It attracts and retains borrowers primarily on the basis of personalized service, responsive handling of their needs, local promotional activity, and personal contacts by officers, directors and staff.  The majority of loans bear interest at adjustable rates tied to the Valley Business Bank prime rate, which is administered by management and will not necessarily change at the same time or by the same amount as the prevailing national prime rate.  At March 14, 2008, Valley Business Bank’s prime rate was equivalent to the prevailing national prime rate as published in the Wall Street Journal.  The remaining loans in the Bank’s portfolio either bear interest at adjustable rates tied to the national prime rate or are priced with fixed rates or under custom pricing programs.  For customers whose loan demands exceed the Bank’s lending limits, the Bank seeks to make those loans and concurrently sell participation interests in them to other lenders.

No individual or single group of related accounts is considered material in relation to the Bank’s assets or in relation to the overall business of the Bank.  At December 31, 2007 approximately 75% of the Bank’s loan portfolio consisted of real estate-related loans, including construction loans, real estate mortgage loans and commercial loans secured by real estate, while 21% of the loan portfolio was comprised of commercial loans.   Currently, the business activities of the Bank are mainly concentrated in Tulare County, California.  Consequently, the results of operations and financial condition of the Bank are dependent upon the general trends in this part of the California economy and, in particular, the residential and commercial real estate markets. In addition, the concentration of the Bank’s operations in this area of California exposes it to greater risk than other banking companies with a wider geographic base.

Bank Deposit Activities.  The Bank offers a full range of deposit products including non-interest bearing demand deposit accounts and interest-bearing money market, savings, and time deposit accounts.  The Bank also has access to time deposits through deposit brokers.

The Bank’s deposits are a combination of business and consumer accounts.  No individual deposit account or group of related deposit accounts is considered material in relation to the Bank’s total deposits.  The loss of any one account or group of related accounts is not expected to have a material adverse effect on the Bank.

Other Bank Services.  The Bank has offered Internet banking services since July 2002.  As new technology becomes available, the Bank intends to continue expanding its Internet based banking services for the benefit of its customers.  The Bank also offers courier services, travelers’ checks, safe deposit boxes, banking-by-mail, and other customary bank services. The Bank provides certain services such as international banking transactions to its customers through correspondent banks.

During the past fiscal year, the Bank began offering Valley Express deposit, a remote deposit capture product, to its customers.  These services allow customers to scan deposit items and transmit the images to the Bank via the Internet.  Bank management is continually engaged in the evaluation of products and services to enable the Bank to retain and improve its competitive position.  The Bank holds no patents or licenses (other than licenses required by appropriate bank regulatory agencies), franchises, or concessions.

Competition and Growth.  The Company’s primary market area has been Tulare County.  In California generally and in the Company’s market area specifically, major banks and large regional banks dominate the commercial banking industry.  Many of the Company’s competitors have substantially greater lending limits than the Bank, as well as more locations, more products and services, greater economies of scale and greater ability to make investments in technology for the delivery of financial services.

The Company’s principal competitors for deposits and loans are major banks, other local banks, savings and loan associations, credit unions, and brokerages.  In addition, management anticipates that improved technology and effective marketing strategies will enable nontraditional competitors such as internet based financial services companies to effectively compete for loan and deposit business.

Despite a very competitive banking environment, the Company has grown significantly in the last three years.  Total assets grew from $186.0 million at December 31, 2004, to $279.1 million at December 31, 2007, an increase of 50%.  Growth in the regional economy and the Company’s success in marketing to its target customers are primarily responsible for this growth.

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The Company’s growth over the last three years is detailed further in the following table:

	December 31,
(dollars in 000’s)	2004		2005		2006		2007
Total assets	$	186,007	$	228,011	$	263,800	$	279,081
Loans, net		114,834		149,991		184,077		199,514
Deposits		156,424		192,581		207,576		215,386
Shareholders’ equity		16,333		21,909		25,448		28,873

As of June 30, 2007 (date of latest available statistics from FDIC), there were 17 commercial banks and savings associations with a total of 66 offices in Tulare County.  On this same date, the Company’s market share of FDIC-insured deposits in Tulare County was approximately 6% of the total $36 billion in deposits.  The Company believes that it can gain additional market share in its principal market of Tulare County while it develops a core customer base in the metropolitan Fresno area.

Regulation and Supervision

Regulatory Environment.  The banking and financial services industry is extensively regulated.  Statutes, regulations and policies affecting the industry are frequently under review by Congress and state legislatures, and by the federal and state agencies charged with supervisory and examination authority over banking institutions.  Changes in the statutes, regulations, or policies that impact the Company cannot necessarily be predicted and may have a material effect on its business and earnings.  In addition, the operations of bank holding companies and their subsidiaries are affected by the credit and monetary policies of the Federal Reserve Board, which influence the over-all level of bank loans, investments and deposits, the interest rates charged on loans and paid for deposits, the price of the dollar in foreign exchange markets, and the level of inflation.  Set forth below is a summary of some significant statutes, regulations and policies that apply to the operation of banking institutions.  This summary is qualified in its entirety by reference to the full text of such statutes, regulations and policies.

Holding Company Regulation.  Valley Commerce Bancorp is a bank holding company within the meaning of the BHC Act and is registered as such with the Federal Reserve Board.  A bank holding company is required to file with the Federal Reserve Board annual reports and other information regarding its business operations and those of its subsidiaries.  It is also subject to examination by the Federal Reserve Board and is required to obtain Federal Reserve Board approval before acquiring ownership or control of more than 5% of the voting stock of any bank.  According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each of their subsidiary banks and to commit resources to support each subsidiary.  The Federal Reserve Board has issued regulations that describe the activities in which a bank holding company can and cannot engage.  In general, bank holding companies can engage in the business of banking, managing or controlling banks, furnishing services to or performing services for their subsidiary banks, and activities closely related to banking.

Bank Regulation.  Federal law mandates frequent examinations of all banks, with the costs of examinations assessed against the bank.  Valley Business Bank’s primary federal regulator is the FDIC.  As a California state-chartered bank whose accounts are insured by the FDIC up to a maximum of $100,000 per depositor, the Bank is subject to regulation, supervision and regular examination by the California Commissioner of Financial Institutions and the FDIC, and must comply with certain regulations of the Federal Reserve Board.  The regulations of these agencies govern most aspects of the Bank’s business, including the making of periodic reports, activities relating to dividends, investments, loans, borrowings, capital requirements, certain check-clearing activities, branching, mergers and acquisitions, reserves against deposits and numerous other areas.  Supervision, legal action and examination by these agencies are generally intended to protect depositors and is not intended for the protection of shareholders.

Capital Adequacy Requirements.  Valley Commerce Bancorp is subject to the capital adequacy regulations of the Federal Reserve Board and Valley Business Bank is subject to the capital adequacy regulations of the FDIC.  The regulations incorporate both risk-based and leverage capital requirements and define capital in terms of “core capital elements,” or Tier 1 capital, and “supplemental capital elements,” or Tier 2 capital.  Federal law requires the federal banking agencies to take prompt corrective action to resolve the problems of insured financial institutions, including institutions that fall below prescribed minimum capital ratios.  The Company’s capital requirements and actual ratios are shown in Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources, which is included as Item 7.

Safety and Soundness Standards.  The federal banking agencies have also adopted guidelines establishing safety and soundness standards for insured depository institutions.  These guidelines relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation, and interest rate exposure.  In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired.  If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan or, if an acceptable compliance plan is not submitted, institute enforcement proceedings.  Enforcement actions may include the issuance of cease and desist orders, termination of insurance of deposits (in the case of a bank), the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against “institution-affiliated” parties.

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Premiums for Deposit Insurance.  FDIC regulations implement a risk-based premium system, whereby insured depository institutions are required to pay insurance premiums depending on their risk classification.  Under this system, institutions such as Valley Business Bank which are insured by the Bank Insurance Fund are categorized into one of three capital categories (well capitalized, adequately capitalized, and undercapitalized) and one of three supervisory categories based on federal regulatory evaluations: financially sound with only a few minor weaknesses (Group A); demonstrates weaknesses that could result in significant deterioration (Group B); or poses a substantial probability of loss (Group C).

The Deposit Insurance Fund of the FDIC insures customer deposits up to prescribed limits for each depositor.  The FDIC approved a final rule to determine risk-based assessment rates on November 2, 2006. An insured depository institution’s assessment rate under the final rule is based on the new assessment rate schedule, its long-term debt issuer ratings or recent financial ratios and supervisory ratings. An increase in assessments or the assessment rate could have a material adverse effect on our business, financial condition, results of operations or cash flows, depending on the amount of the increase. Furthermore, the FDIC is authorized to raise insurance premiums under certain circumstances.

Community Reinvestment Act.  The Bank is subject to certain requirements and reporting obligations involving Community Reinvestment Act activities.  The Community Reinvestment Act generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods, and to take into account a financial institution’s record of meeting its community credit needs when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions, or holding company formations.  In its assessment of Community Reinvestment Act performance, the FDIC assigns a rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.  The Bank has a “satisfactory” rating.

Other Consumer Protection Laws and Regulations.  In addition to the other laws and regulations discussed herein, the Bank is subject to certain consumer and public interest laws and regulations that are designed to protect customers in transactions with banks.  While this list is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act and the Right to Financial Privacy Act.  These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services.  Failure to comply with these laws and regulations can subject the Bank to various penalties, including enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers and the loss of certain contractual rights.

Financial Modernization Act.  The Financial Modernization Act repealed provisions of the Glass-Steagall Act which restricted the affiliation of Federal Reserve member banks with firms “engaged principally” in specified securities activities and which restricted officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities.  In addition, it contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance.  The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a financial holding company.  The Financial Modernization Act also broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries and provides an enhanced framework for protecting the privacy of consumer information.

Sarbanes-Oxley Act.  The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) implemented legislative reforms intended to address corporate and accounting fraud.  Sarbanes-Oxley places certain restrictions on the scope of services that may be provided by accounting firms to their public company audit clients. Any non-audit services being provided to a public company audit client require pre-approval by the company’s audit committee. In addition, Sarbanes-Oxley adopted requirements for accounting firm partner rotation after five years. Sarbanes-Oxley requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willingly violate the certification requirement. In addition, under Sarbanes-Oxley, counsel are required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or to the board itself.

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USA PATRIOT Act.  The terrorist attacks in September 2001 impacted the financial services industry and led to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”).  Part of the USA PATRIOT Act is the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (“IMLAFATA”).  IMLAFATA authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks, bank holding companies and other financial institutions. These measures may include enhanced recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions.

Other legislative and regulatory initiatives which could affect the Company and the banking industry in general may be proposed or introduced, before the United States Congress, the California legislature and other governmental bodies in the future.  Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject the Company to increased regulation, disclosure and reporting requirements.  In addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing legislation.  The Company cannot predict whether, or in what form, any such legislation or regulations may be enacted or the extent to which it might affect the Company’s business.

Recent Accounting Pronouncements

Fair Value Measurements

In September 2006, the FASB issued Statement No. 157 (“SFAS 157”), Fair Value Measurements.  SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.  In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.  In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  The provisions should be applied prospectively, except for certain specifically identified financial instruments.  The Company adopted SFAS 157 on January 1, 2008 and management does not believe its adoption will have a material impact on the Company’s financial position, results of operations or cash flows.

Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued Statement No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.  This standard permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates.  The entity 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: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments.  The provisions of SFAS 159 are effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  The Company adopted SFAS 159 on January 1, 2008 and management did not elect the fair value option for any of its financial instruments.

Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements

In September 2006, the FASB ratified the consensuses reached by the Task Force on Issue No. 06-4 (“EITF 06-4”), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.  A question arose when an employer enters into an endorsement split-dollar life insurance arrangement related to whether the employer should recognize a liability for the future benefits or premiums to be provided to the employee.  EITF 06-4 indicates that an employer

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should recognize a liability for future benefits and that a liability for the benefit obligation has not been settled through the purchase of an endorsement type policy.  An entity should apply the provisions of EITF 06-4 either through a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or a change in accounting principle through retrospective application to all prior periods.  The provisions of EITF 06-4 are effective for fiscal years beginning after December 15, 2007.  The Company adopted EITF 06-04 on January 1, 2008 and management determined that a liability of approximately $102,000 will be recorded as of January 1, 2008, with corresponding reduction as a cumulative-effect adjustment to retained earnings.

Accounting for Business Combinations

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations “SFAS No. 141(R)”).  SFAS No. 141(R), among other things, establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The Company is required to adopt SFAS No. 141(R) for all business combinations for which the acquisition date is on or after January 1, 2009.  Earlier adoption is prohibited.  This standard will change the accounting treatment for business combinations on a prospective basis.

ITEM 1A - RISK FACTORS

Deterioration of local real estate values could reduce our profitability.  At December 31, 2007, approximately 75% of the Company’s loan portfolio was secured by real estate.  There has been a rapid increase in real estate values in our market area in recent years peaked in mid-2007 and began to decline in the 4th quarter of 2007.  A material downturn in such values would likely reduce the security for many of our loans and adversely affect the ability of many of our borrowers to repay their loan from us.

Deterioration of local economic conditions could reduce our profitability. Our lending operations and customer base are concentrated in Tulare and Fresno Counties which are located in the Central Valley region of California.  General recessionary conditions in our market area could directly affect the Company by causing us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio.  In addition, Tulare and Fresno Counties are among the leading counties in the United States for agricultural production and a significant downturn in the local agricultural economy due to commodity prices, real estate prices, public policy decisions, natural disaster, or other factors could result in a decline in the local economy in general, which could in turn negatively impact the Company.

The Company’s strategies for growth may prove to be unsuccessful and reduce profitability. The Company intends to continue expanding within the South San Joaquin Valley by opening de novo branches and loan production offices, and by acquiring branches from other institutions.  The success of such expansion is dependent upon the Company’s ability to attract and retain qualified personnel, negotiate effectively, manage a growing number of customer relationships, and maintain cost controls and asset quality while attracting additional loans and deposits on favorable terms.  If the Company is unsuccessful in any of these areas, its financial performance could be adversely affected. In addition, future expansion may result in compliance and operational deficiencies which may require less aggressive growth or additional expenditures to expand the operational infrastructure.

If Company’s allowance for loan losses is not sufficient to absorb actual loan losses, our profitability could be reduced.  The risk of loan losses is inherent in the lending business.  The Company maintains an allowance for loan losses (ALL) based upon the Company’s actual losses over a relevant time period and management’s assessment of all relevant factors that may cause future loss experience to differ from its historical loss experience.  Although the Company maintains a rigorous process for determining the ALL, it can give no assurance that it will be sufficient to cover future loan losses.  If the allowance for loan losses is not adequate to absorb future losses, or if bank regulatory agencies require the Company to increase its ALL, earnings could be significantly and adversely impacted.

Fluctuations in interest rates could reduce profitability.  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).  The interest earned on assets and paid on liabilities are affected principally by direct competition, and general economic conditions at the state and national level and other factors beyond the Company’s control such as actions of the Federal Reserve Board, the

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general supply of money in the economy, legislative tax policies, governmental budgetary matters, and other state and federal economic policies.  Although the Company maintains a rigorous process for managing the impact of possible interest rate fluctuations on earnings, the Company can provide no assurance that its management efforts will prevent earnings from being significantly and adversely impacted by changes in interest rates.

Strong competition may reduce profitability. Along with larger national and regional banks and other local banks, the Company competes for customers with finance companies, brokerage firms, insurance companies, credit unions, and internet-based banks.  Certain of these competitors have advantages over the Company in accessing funding and in providing various services, or, in the case of credit unions, are significantly tax advantaged.  Major banks have substantially larger lending limits than the Company and can perform certain functions for their customers which the Company is not presently able to offer directly.  Other existing single or multi-branch community banks, or new community bank start-ups, have marketing strategies similar to the Company’s and compete for the same management personnel and the same potential acquisition and merger candidates. Ultimately, competition can reduce our profitability, as well as make it more difficult to increase the size of our loan portfolio and deposit base.

Loss of executive officers or key personnel could reduce the Company’s future profitability.  The Company depends upon the skills and reputations of its executive officers and other key employees for its future success. The loss of any of these key persons could adversely affect the Company. No employment or non-compete agreements have been executed with any Company employee and therefore no assurance can be given that the Company will be able to retain its existing key personnel or that key personnel will not, upon leaving the Company’s employment, become employed by a competing institution.

ITEM 1B – UNRESOLVED STAFF COMMENTS

The Company has no unresolved staff comments with the Securities and Exchange Commission

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ITEM 2 – PROPERTIES

The following table summarizes certain information about the Company’s main office and branch offices:

Office location	Year opened	Approximate square footage	Owned or leased
Main office 200 South Court Street Visalia, California	1996	8,700	Leased
Administrative office 100 Willow Plaza, Suites 101 & 105 Visalia, California	2003	4,972	Leased
Fresno branch 7391 N.  Palm Avenue Fresno, California	2003	4,654	Leased
Woodlake branch 232 North Valencia Woodlake, California	1998	5,000	Owned
Tipton branch 174 South Burnett Tipton, California	1998	5,610	Owned
Tulare Loan Production Office 1635 E. Prosperity, Suite B Tulare, California	2005	1,192	Leased

The Visalia main office is leased under a noncancelable operating lease with a nonaffiliated third party expiring 2009 with the option to extend the lease for two additional five-year terms.  The primary operating area consists of approximately 8,700 square feet of space comprising the entire usable space in a single-story building.  The lease arrangement for the primary operating area is a “triple net lease” with monthly rent of $11,200 until the term expires on November 30, 2009.  In the event the renewal option is exercised, the annual rent to be paid will be equivalent to 10% of the fair market value of the leased premises.

In close proximity to the main office is the Willow Plaza administrative office housing credit and finance personnel which is comprised of two connected office suites of approximately 4,972 square feet located in a four-story office building.  These premises are leased from a related party under noncancelable operating leases which expire June 30, 2008 with an option to extend for two additional years.  The lease arrangement is a “triple net lease” with combined monthly rent of $7,408 until the term expires on June 30, 2008.  In the event the renewal option is exercised, the annual rent to be paid will increase by approximately 3.5% in each of the extension years.

The Fresno branch relocated to a new office on October 1, 2007 which is leased under a noncancelable operating lease with a nonaffiliated third party for ten years with no option to extend.  The primary operating area consists of approximately 4,654 square feet of space comprising the entire usable space in a single-story building.  The lease arrangement for the primary operating area is a “triple net lease” expiring September 30, 2017.  Monthly rent under the lease is $7,911 through the fifth year and $9,541 for the last five years.

The Tulare loan production office is leased under a nine month noncancelable operating lease with a non affiliated third party, with options to renew every six months. The primary operating area consists of approximately 1,192 square feet of office space in a single-story building. The lease arrangement for the primary operating area has been extended to January 1, 2008. The current monthly rent is $1,560 over the term of the lease.  A new Tulare Branch office constructed at an estimated total cost of $2.1 million for land, building, and fixtures, is scheduled to open by the end of May 2008 which will result in the closing of the Tulare loan production office.  The current lease has been extended with a monthly option until the new branch is opened.

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At December 31, 2007, the total net book value of the Company’s land, buildings, leasehold improvements and equipment was approximately $3,037,000.  Each of the Company’s facilities is considered to be in good condition and adequately covered by insurance.

ITEM 3 – LEGAL PROCEEDINGS

From time to time the Company may be subject to legal proceedings and claims in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Management is not aware of any legal proceedings or claims that it believes could materially harm the Company’s business or revenues.

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

No matter was submitted to a vote of shareholders during the fourth quarter of the fiscal year covered by this annual report. The 2008 Annual Meeting of Shareholders will be held at 6 p.m., local time, on May 20, 2008, at the Visalia Convention Center, 303 East Acequia Avenue, Visalia, California 93291.

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PART II

ITEM 5 – MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

General

The Company’s common stock is traded on the OTC Bulletin Board under the symbol “VCBP.OB.”  Historically, there has been a limited over-the-counter market for the Company’s common.  Wedbush Morgan Securities Inc. and Howe Barnes Hoefer & Arnett Inc. have acted as market makers for the Company’s common stock.  These market makers have no obligation to make a market in the Company’s common stock, and they may discontinue making a market at any time.

The information in the following table indicates the high and low “bid” quotations for the Company’s common stock for each quarterly period since January 1, 2006, and is based upon information provided by market makers.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, do not reflect actual transactions, which have been very sporadic, and do not include nominal amounts traded directly by shareholders or through other dealers who are not market makers.  In addition, the quotations have been adjusted for 5% stock dividends paid in June 2007 and May 2006.

	High and low bid quotations
	High		Low
2007
Fourth quarter	$	15.45	$	13.50
Third quarter		18.65		14.00
Second quarter		21.00		18.38
First quarter		21.71		19.43
2006
Fourth quarter	$	22.86	$	18.95
Third quarter		20.00		19.00
Second quarter		19.72		18.10
First quarter		19.72		16.78

As of March 19, 2008, there were 415 record holders of the Company’s common stock and approximately 456 beneficial holders.

Dividend Policy.  The Company has not paid any cash dividends on common stock since its inception in 1996.  The Company intends to retain any future earnings for the development and operations of its business and accordingly does not anticipate paying cash dividends on capital stock in the foreseeable future.

Holders of the Company’s common stock will be entitled to receive such cash dividends as may be declared by the board of directors out of funds legally available for that purpose.  The Company is subject to certain restrictions on dividends under the California General Corporation Law.  Generally, California law permits the Company to pay dividends not exceeding its retained earnings.  In the alternative, the Company may pay a greater amount as dividends if its tangible assets after the dividends would be at least 125% of its liabilities (other than certain deferred items) and certain financial ratio tests are met.  However, a bank holding company ordinarily cannot meet these alternative requirements.  In addition, the Company has agreed not to pay cash dividends if it is in default or deferring interest payments on trust preferred securities.

The Company’s ability to pay cash dividends will also depend to a large extent upon the amount of cash dividends paid by the Bank to Valley Commerce Bancorp.  The ability of the Bank to pay cash dividends will depend upon its earnings and financial condition.  Under California law, a California-chartered bank may pay dividends not exceeding the lesser of its retained earnings or its net income for the last three fiscal years (less any previous dividends; provided, with the prior regulatory approval, a bank may pay dividends not exceeding the greatest of (a) its retained earnings, (b) its net income for the previous fiscal year or (c) its net income for the current fiscal year).  The Company’s ability to pay dividends is also subject to certain covenants contained in the indentures related to its trust preferred securities.  However, the Bank has no formal dividend policy, and dividends are issued in the sole discretion of the Bank’s board of directors.  There can be no assurance as to when or whether a dividend will be paid or the amount of any dividend.  The Bank currently has a policy of retaining earnings to support the growth of the Bank except as necessary to enable Valley Commerce Bancorp to pay its direct expenses and amounts due under subordinated debentures issued in connection with trust preferred securities.

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The Company paid 5% stock dividends in each year from 2000 to 2007, except for 2005.  The Company issued a three-for-two stock split in September 2004.

Repurchases.  On November 13, 2007 the Company announced that its Board of Directors authorized a common stock repurchase plan.  The plan calls for the repurchase of up to an aggregate of $3,000,000 of the Company’s Common Stock.  The repurchase program commenced in November of 2007 and will continue for a period of twelve months thereafter, subject to earlier termination at the Company’s discretion.  The number price and timing of the repurchase shall be at the Company’s sole discretion and the plan may be re-evaluated depending on market conditions, liquidity needs or other factors.  The Board, based on such re-evaluations, may suspend, terminate, modify or cancel the plan at any time without notice.

Share repurchases are summarized in the following table:

Period	(a) Total Number of Shares Purchased		(b) Average Price paid per share		(c) Total number of Shares purchased as Part of publicly Announced plans or Programs		(d) Maximum number (or Approximate dollar value) Of shares that may yet be Purchased under the plans Or programs
November 1-30		27,440	$	13.91		27,440	$	2,618,191
December 1-31		-		-		-		-
Total		27,440	$	13.91		27,440	$	2,618,191

Equity Compensation Plan Information

In 1997 and 2007, the Company established Stock Option Plans for which shares of stock are reserved for issuance to employees and directors under incentive and nonstatutory agreements.  During 2007, 1,823 incentive stock options and 95,684 non-statutory stock options were exercised, and 38,500 incentive stock options were granted.  During 2006, 1,542 incentive stock options and 22,596 non-statutory stock options were exercised, and 10,000 stock options were granted.

The information in the following table is provided as of the end of the fiscal year ended December 31, 2007, with respect to compensation plans (including individual compensation arrangements) under which equity securities are issuable:

Plan category	Column (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column (a))
Equity compensation plans approved by security holders		175,859	$	10.11		83,507
Equity compensation plans not approved by security holders	None		Not applicable.		None

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ITEM 6 – SELECTED FINANCIAL DATA

The following table presents a five year summary of selected financial information which should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in Item 8, Financial Statements, and with the Management’s Discussion and Analysis of Financial Condition and Results of Operations which is included as Item 7.  The financial information contained in the table is unaudited.  The results of operations for 2007 are not necessarily indicative of the results of operations that may be expected for future years.

(dollars in thousands	As of and for the year ended December 31,
except per share data)	2007			2006			2005			2004			2003
Statement of Income
Interest income	$	18,470		$	16,750		$	12,504		$	8,737		$	7,188
Interest expense		7,131			5,561			2,683			1,622			1,426
Net interest income		11,339			11,189			9,821			7,115			5,762
Provision for loan losses		-			-			369			138			315
Net interest income after provision for loan losses		11,339			11,189			9,452			6,977			5,447
Non-interest income		1,155			996			888			1,341			1,055
Non-interest expense		8,699			7,653			6,810			5,662			4,648
Income before income taxes		3,795			4,532			3,530			2,656			1,854
Income taxes		1,134			1,576			1,367			1,027			705
Net income		2,661			2,956			2,163			1,629			1,149
Per Share Data (4):
Basic earnings per share	$	1.13		$	1.28		$	0.95		$	1.03		$	0.73
Diluted earnings per share	$	1.09		$	1.22		$	0.90		$	0.96		$	0.70
Book value - end of period	$	12.05		$	10.94		$	9.52		$	8.28		$	6.94
Average shares outstanding-basic		2,358,353			2,312,140			2,274,093			1,588,022			1,567,435
Average shares outstanding-diluted		2,448,889			2,429,080			2,407,603			1,695,705			1,636,059
Shares outstanding - end of period		2,396,435			2,326,553			2,301,209			1,971,554			1,509,854
Balance Sheet
Total loans, net	$	199,514		$	182,332		$	149,991		$	114,834		$	101,177
Allowance for loan losses		1,758			1,746			1,766			1,401			1,393
Total assets		279,081			263,800			228,011			186,007			139,611
Total deposits		215,386			207,576			192,581			156,424			119,668
Total shareholders' equity		28,873			25,448			21,909			16,333			11,020
Selected Performance Ratios:
Return on average assets		0.99	%		1.22	%		1.05	%		1.04	%		0.89	%
Return on average equity		9.83	%		12.59	%		10.44	%		13.84	%		11.01	%
Net interest margin (1)		4.71	%		5.15	%		5.23	%		5.00	%		4.85	%
Average net loans as a percentage of average deposits		91.0	%		85.8	%		78.3	%		80.2	%		81.4	%
Efficiency ratio		69.6	%		62.8	%		63.6	%		66.2	%		67.4	%

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Selected Financial Data (continued)

	As of and for the year ended December 31,
	2003			2004			2005			2006			2007
Selected Asset Quality Ratios:
Nonperforming assets to total assets		0.7	%		0.0	%(3)		0.0	%(3)			---- (2)			---- (2)
Nonperforming loans to total loans		1.0	%		0.1	%		0.0	%(3)			---- (2)			---- (2)
Net loan charge-offs to average loans		0.0	%		0.1	%		0.0	%(3)		0.0	%(3)		0.0	%
Allowance for loan losses to total loans		1.40	%		1.20	%		1.16	%		0.95	%		0.87	%
Allowance for loan losses to nonperforming loans		138.2	%		1729.6	%		8409.5	%			---- (2)			---- (2)
Capital Ratios:
Bank
Leverage		9.8	%		8.4	%		11.3	%		11.0	%		11.4	%
Tier 1 Risk-Based		12.7	%		11.4	%		14.6	%		13.4	%		13.7	%
Total Risk-Based		14.0	%		12.5	%		15.6	%		14.2	%		14.4	%
Consolidated
Leverage		10.0	%		10.8	%		11.5	%		11.1	%		11.5	%
Tier 1 Risk-Based		13.0	%		14.7	%		14.8	%		13.5	%		13.8	%
Total Risk-Based		14.2	%		15.8	%		15.9	%		14.3	%		14.6	%

Notes: (1) Interest income is not presented on a taxable-equivalent basis, however, the net interest margin was calculated on a taxable-equivalent basis by using a marginal tax rate of 34%

(2) There were no nonperforming loans at December 31, 2007 and 2006

(3) Less than .05%

(4) All share and per share data has been retroactively restated to reflect the  September 2004 three-for-two stock split and the 5% stock dividends issued in June 2007, May 2006, 2004 and 2003.

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ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read together with the selected financial data appearing in Item 1, Business, and the financial statements and notes thereto appearing in  Item 8, Financial Statements and Supplementary Data, included in this Annual Report on Form 10-K.

Overview

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, through its banking subsidiary, financial services in its primary market area in California. The Company serves Tulare and Fresno Counties and the surrounding area through the Bank. 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 the interest paid on deposits and borrowings, and general operating expenses, including 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.

Critical Accounting Policies

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).  The Company’s accounting policies are integral to understanding the financial results reported.  The most complex of these accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies.  The Company has established detailed policies and internal control procedures that are intended to ensure valuation methods are well controlled and consistently applied from period to period.  In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner.  The accounting areas where management’s judgment is most likely to materially impact the Company’s financial results are:

Allowance for Loan Losses.  The allowance for loan losses is maintained 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 by loan type based on historical loss rates and adjusted for various qualitative factors such as economic and market conditions, concentrations and other trends within the loan portfolio.  When management believes that additional reserves are needed, the allowance for loan losses is increased by recording a charge to operations through the provision for loan losses.  The allowance is decreased as loans are charged-off, net of recoveries.

Management believes the allowance for loan losses is a “critical accounting estimate” because management’s estimate of credit losses on loans not already identified as impaired; i.e., loans that are currently performing, requires management to carefully evaluate the pertinent facts and circumstances as of the balance sheet date to determine how much, if any, adjustment is required to the historical loss rate for each loan type.  In addition, estimates of credit losses on currently performing loans are subject to change in future reporting periods as facts and circumstances change.  For example, a decline in the California real estate market may result in management raising its estimate of credit losses if such estimated losses are considered probable at the balance sheet date.

Management reviews the adequacy of the allowance for loan losses at least quarterly.  Further information is provided in the “Provision for Loan Losses” and “Allowance for Loan Losses” sections of this discussion and analysis.

Available for Sale Securities. Available-for-sale securities are required to be carried at fair value.  Management believes this is a “critical accounting estimate” in that the fair value of a security is based on quoted market prices or if quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments.  Changes in the fair value of available-for-sale securities impact the consolidated financial statements by increasing or decreasing assets and shareholders’ equity.

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

Deferred income taxes reflect the estimated future tax effects of temporary differences between the reported amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations.  Management believes this is a “critical accounting estimate” in that an estimate of future earnings is required to support its position that the benefit of the

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Company’s deferred tax assets will be realized.  If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and the Company’s net income will be reduced.

The provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) have been applied to all tax positions of the Company as of January 1, 2007.  FIN 48 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.  Only tax positions that met the more-likely-than-not recognition threshold on January 1, 2007 were recognized or continue to be recognized upon adoption.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Stock-Based Compensation.  Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment (“SFAS 123 (R)”). Under SFAS 123(R), compensation cost is recognized for all awards that vest subsequent to the date of adoption based on the grant-date fair value estimated in accordance with SFAS No. 123, Accounting for Stock-Based Compensation and SFAS 123(R). We believe this is a “critical accounting estimate” since the grant-date fair value is estimated using the Black-Scholes option-pricing formula, which involves making estimates of the assumptions used, including the expected term of the option, expected volatility over the option term, expected dividend yield over the option term and risk-free interest rate.  In addition, when determining the compensation expense to amortize over the vesting period, management makes estimates about the expected forfeiture rate of options.

Results of Operations

Overview

The Company earned net income of $2.66 million, or $1.09 per diluted share, for the year ended December 31, 2007, compared to $2.96 million, or $1.22 per diluted share, for the year ended December 31, 2006.  Net income was $2.16 million, or $0.90 per diluted share, for the year ended December 31, 2005.  The return on average assets was 0.99% for 2007, 1.22% for 2006, and 1.05% for 2005.  The return on average shareholders’ equity for 2007, 2006, and 2005 was 9.83%, 12.59%, and 10.44%, respectively.

The decrease in earnings for 2007  resulted primarily from additional personnel and occupancy costs associated with the Company’s continued expansion partially offset by the increase in both net interest income and non-interest income.  In addition, the Company’s non-interest expense increased due to cost incurred for compliance with Sarbanes-Oxley legislation and for improving the Company’s information technology capabilities.  The ratio of non-interest expense to net operating revenue (efficiency ratio) increased to 69.6% for 2007 from 62.8% for 2006 and 63.6% for 2005.  This ratio reflects changes in non-interest expense as well as changes in revenue from interest and non-interest sources.  The unfavorable increase in the efficiency ratio resulted primarily from the rise in non-interest expense associated with increases in personnel and occupancy costs related to branch and loan department growth.

At December 31, 2007, the Company’s total assets were $279.1 million, an increase of $15.4 million or 6% compared to December 31, 2006.  Total loans, net of the allowance for loan losses, were $199.5 million at December 31, 2007, representing an increase of $17.2 million or 9% compared to December 31, 2006.  Total deposits were $215.4 million at December 31, 2007, representing an increase of $7.8 million or 4% compared to December 31, 2006.

At December 31, 2007, the Company’s leverage ratio was 11.5% while its tier 1 risk-based capital ratio and total risk-based capital ratios were 13.8% and 14.6%, respectively.  The leverage, tier 1 risk-based capital and total risk-based capital ratios at December 31, 2006 were 11.1%, 13.5% and 14.3%, respectively. The increase in the Company’s capital ratios in 2007 resulted from the 13% increase in equity from the retention of earnings and the exercise of stock options which outpaced the Company’s 6% growth in assets.

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A detailed presentation of the Company’s financial results as of, or for the fiscal years ended December 31, 2007, 2006, and 2005 follows.

Net Interest Income

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

Average balances and weighted average yields and rates
	Fiscal year ended December 31,
	2007							2006							2005
			Interest		Average					Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/			Average		Income/		Yield/
(dollars in thousands)	Balance		Expense		Cost			Balance		Expense		Cost			Balance		Expense		Cost
ASSETS
Federal funds sold	$	78	$	4		4.74	%	$	3,019	$	138		4.57	%	$	8,244	$	229		2.78	%
Available-for-sale investment securities:
Taxable		35,438		1,582		4.46	%		36,984		1,445		3.91	%		40,564		1,461		3.60	%
Exempt from Federal income taxes		19,012		771		6.14	%		17,936		719		6.07	%		7,856		303		5.84	%
Total securities (1)		54,450		2,353		5.05	%		54,920		2,164		4.61	%		48,420		1,764		3.97	%
Loans (2) (3)		194,734		16,113		8.27	%		166,620		14,448		8.67	%		134,008		10,511		7.84	%
Total interest-earning assets (1)		249,262		18,470		7.57	%		224,559		16,750		7.62	%		190,672		12,504		6.64	%
Noninterest-earning assets, net of allowance for loan losses		18,363							17,244							16,280
Total assets	$	267,625						$	241,803						$	206,952
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Interest bearing	$	83,020	$	2,382		2.87	%	$	73,534	$	1,996		2.71	%	$	61,057	$	829		1.36	%
Time deposits less than $100,000		20,717		968		4.67	%		20,268		820		4.05	%		18,927		460		2.43	%
Time deposits $100,000 or more		49,400		2,453		4.97	%		34,220		1,491		4.36	%		24,864		739		2.97	%
Total interest-bearing deposits		153,137		5,803		3.79	%		128,022		4,307		3.36	%		104,848		2,028		1.93	%
Short-term debt		13,608		695		5.11	%		11,488		611		5.32	%		1,423		53		3.72	%
Long-term debt		8,289		362		4.37	%		8,836		380		4.30	%		9,227		393		4.26	%
Junior subordinated deferrable interest debentures		3,093		271		8.76	%		3,093		263		8.50	%		3,093		209		6.76	%
Total interest-bearing liabilities		178,127		7,131		4.00	%		151,439		5,561		3.67	%		118,951		2,683		2.26	%
Noninterest bearing deposits		60,465							65,440							65,698
Other liabilities		1,964							1,438							1,949
Total liabilities		240,556							218,317							186,238
Shareholders’ equity		27,069							23,486							20,714
Total liabilities and shareholders’ equity	$	267,625						$	241,803						$	206,952
Net interest income and margin (1)			$	11,339		4.71	%			$	11,189		5.15	%			$	9,821		5.23	%

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

(2) Nonaccrual loans are included in total loans.  Interest income is included on nonaccrual loans only to the extent cash payments have been received. No interest was received on nonaccrual loans for any of the years shown.

(3) Interest income includes amortized loan fees of $305, $633, and $622 for 2007, 2006, and 2005, respectively.

20

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 years indicated.

Changes in net interest income due to changes in volumes and rates
	2007 vs 2006									2006 vs 2005
	Increase (decrease) due to change in:									Increase (decrease) due to change in:
	Average			Average						Average			Average
	Volume			Rate (1)			Total			Volume			Rate (1)			Total
(In thousands)
Increase (decrease) in interest income:
Federal funds sold	$	(134	)	$	-		$	(134	)	$	(145	)	$	54		$	(91	)
Investment securities
Taxable		(60	)		197			137			(129	)		113			(16	)
Exempt from Federal Income taxes		65			13			78			589			18			607
Total securities		5			210			215			460			131			591
Loans		2,438			(773	)		1,665			2,558			1,379			3,937
Total interest income		2,309			(563	)		1,746			2,873			1,564			4,437
(Decrease) increase  in interest expense:
Interest-bearing deposits		257			129			386			169			998			1,167
Time deposits less than $100,000		18			130			148			33			327			360
Time certificates $100,000 or more		661			301			962			278			474			752
Total interest-bearing deposits		936			560			1,496			480			1,799			2,279
Short-term debt		113			(29	)		84			375			183			558
Long-term debt		(24	)		6			(18	)		(17	)		4			(13	)
Junior subordinated deferrable interest debentures		-			8			8			-			54			54
Total interest expense		1,025			545			1,570			838			2,040			2,878
Increase (decrease) in net interest income	$	1,284		$	(1,108	)	$	176		$	2,035		$	(476	)	$	1,559

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

2007 compared to 2006. Total interest income increased from $16.7 million in 2006 to $18.5 million in 2007 due to higher average interest earning assets partially offset by a slight decline in the yield earned on average interest-earning assets.  Average earning assets in 2007 were $24.7 million or 11% greater than in 2006 due to an increase of $28.1 million or 17% in average loans outstanding.  The average yield on loans was 8.27% and 8.67% for 2007 and 2006, respectively, while the average tax equivalent yield on investment securities was 5.05% and 4.61%, respectively.  The increase in average loans was due to the Company’s continued marketing efforts which resulted in growth in real estate mortgage and construction segments of the loan portfolio.  The majority of the loan portfolio is priced with floating interest rates. Therefore, the decrease in weighted average yield on loans resulted primarily from the Federal funds rate decreases that occurred in the latter part of 2007.  In addition, competitive pressures for high quality credits and consumer demand for fixed interest rate loans, and reduced loan fees during the 2007 period caused the yields to decline slightly.  The increase in weighted average tax equivalent yield on investment securities resulted primarily from the higher yields earned on taxable investment securities.

Total interest expense increased $1.5 million or 35% from $5.6 million in 2006 to $7.1 million in 2007.  Average interest-bearing deposits increased by $25.1 million or 20% in 2007 while average noninterest-bearing deposits decreased by $5.0 million or 8% in 2007.  During 2007, market interest rate pressure on deposit accounts and increased competition for deposits caused the Company to increase the interest rates paid on its interest-bearing deposits compared with rates paid in 2006.  Although the Federal Reserve decreased interest rates in October of 2007, the movement of deposit volume to higher interest rate categories was evident through the end of 2007.

Interest expense on short-term borrowings from the Federal Home Loan Bank of San Francisco (FHLB) increased from $0.6 million in 2006 to $0.7 million in 2007.  This was due primarily to average volume of this debt increasing from $11.5 million in 2006 to $13.6 million in 2007 as the Company relied more heavily on this source to fund asset growth.

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As noted above, non-interest bearing deposits decreased with average balances of $60.5 million and $65.4 million in 2007 and 2006, respectively.  These deposits represented 28% of average total deposits during 2007, compared with 34% of average total deposits during 2006.  This further highlights the Company’s reliance on interest-bearing deposits and short-term borrowings to fund asset growth in 2007.

Net interest income before provision for loan losses increased to $11.3 million for 2007 from $11.2 million for 2006, an increase of $150,000 or 1%.  The increase generally resulted from growth of earning assets offset in part by rising costs of funds.  The increase in net interest income attributable to higher volume of average interest-earning assets in 2007 was $2.3 million while the increase attributable to higher volume of average interest-bearing liabilities was $1.0 million, a net increase of $1.3 million.  The decrease in net interest income attributable to lower interest rates on average interest-earning assets was $0.6 million and was compounded by a $0.5 million decrease in net interest income resulting from higher interest rates on average interest-bearing liabilities.

The Company’s net interest margin on a tax equivalent basis for 2007 was 4.71% compared to 5.15% in 2006, a decrease of 44 basis points.  As discussed above, the growth in average interest-earning assets outpaced the growth in net interest income.

2006 compared to 2005.  Total interest income increased from $12.5 million in 2005 to $16.7 million in 2006 due to higher average interest earning assets and higher yields during 2006.  Average earning assets in 2006 were $33.9 million or 18% greater than in 2005 due to an increase of $32.6 million or 24% in average loans outstanding, and an increase of $6.5 million or 13% in average available-for-sale investment securities.  The average yield on loans was 8.67% and 7.84% for 2006 and 2005, respectively, while the average tax equivalent yield on investment securities was 4.61% and 3.97%, respectively.  The increase in average loans was due to the Company’s continued marketing efforts which resulted in growth in real estate mortgage and construction segments of the loan portfolio, while the increase in average investment securities resulted from the purchase of municipal bonds.  The increase in weighted average yield on loans resulted primarily from the Federal funds rate increases that occurred in the latter part of 2005 as well as the four 25-basis point increases in the Federal funds rate that occurred during 2006.  The increase in weighted average tax equivalent yield on investment securities resulted primarily from the higher yields earned on municipal bonds.

Total interest expense increased from $2.7 million in 2005 to $5.6 million in 2006.  This was due primarily to an increase of $2.3 million or 112% in interest on deposits.  Average interest-bearing deposits increased by $23.2 million or 22% in 2006 while average noninterest-bearing deposits were unchanged.  During 2006, higher market interest rate pressure on deposit accounts and increased competition for deposits caused the Company to increase the interest rates paid on its interest-bearing deposits to levels which were significantly higher than in 2005.  In addition interest expense increased due to a decrease in average noninterest-bearing deposits as a percentage of average total deposits.  For 2006, this percentage was 34%, compared to 39% for 2005.  Although the Federal Reserve discontinued raising interest rates in June of 2006, the movement of deposit volume to higher interest rate categories was evident through the end of 2006.

Interest expense on short-term borrowings from the Federal Home Loan Bank of San Francisco (FHLB) increased from $53,000 in 2005 to $611,000 in 2006.  This was due primarily to average volume of this debt increasing from $1.4 million in 2005 to $11.5 million in 2006 as the Company relied more heavily on this source to fund asset growth.

As noted above, average non-interest bearing deposits remained basically unchanged at $65.4 million and $65.7 million for 2006 and 2005, respectively.  These deposits represented 34% of average total deposits during 2006, but only 39% of average total deposits during 2005.  This further highlights the increased reliance on interest-bearing deposits and short-term borrowings to fund asset growth in 2006.

Net interest income before provision for loan losses increased to $11.2 million for 2006 from $9.8 million for 2005, an increase of $1.4 million or 14%.  The increase generally resulted from growth of earning assets in a rising rate environment offset in part by rising costs of funds.  The change in net interest income attributable to higher volume of average interest-earning assets in 2006 was an increase of $2.9 million while the change attributable to higher volume of average interest-bearing liabilities was a decrease of $0.9 million, a net increase of $2.0 million.  The increase in net interest income attributable to higher interest rates on average interest-earning assets was $1.4 million and was offset by a $2.1 million decrease in net interest income resulting from higher interest rates on average interest-bearing liabilities.

The Company’s net interest margin for 2006 was 5.15% compared to 5.23% in 2005, a decrease of 8 basis points.  As discussed above, rising interest costs for deposits and other funding sources outpaced the rise in asset yields during 2006.

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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.  The Company did not record a provision for loan losses in 2007 or 2006 based on management’s assessment of the loan portfolio and related credit quality.  The provision for loan losses was $369,000 in 2005.  See the sections below titled “Allowance for Loan Losses.”

Non-Interest Income

Non-interest income for 2007 totaled $1.2 million compared with $996,000 in 2006 and $888,000 in 2005.  The components of non-interest income during each year were as follows:

	Non-interest income
	Years Ended December 31,									Change during year
(in thousands)	2007			2006			2005			2007			2006
Service charges	$	591		$	547		$	514		$	44		$	33
(Loss) gain  on sale of available-for-sale investment securities		(1	)		(53	)		(48	)		52			(5	)
Mortgage loan brokerage fees		77			125			136			(48	)		(11	)
Earnings on cash surrender value of life insurance policies		258			153			104			105			49
Other		230			224			182			6			42
Total non-interest income	$	1,155		$	996		$	888		$	159		$	108

2007 Compared to 2006.  Non-interest income increased during 2007 due primarily to increased earnings on bank-owned life insurance policies purchased in 2006.  Income from service charges on deposit accounts increased by $44,000 in 2007 due mainly to a $27,000 increase in account analysis charges, and a $14,000 increase in NSF and overdraft charges   Other non-interest income includes FHLB dividend income which was $79,000 in 2007 and $55,000 in 2006.  FHLB dividend income increased in 2007 due to mandatory additional investments in FHLB stock resulting from higher short term borrowings.  A slowing residential real estate market caused a $48,000 decrease in mortgage loan brokerage fees.

2006 Compared to 2005.  Non-interest income increased during 2006 due primarily to the purchase of bank-owned life insurance policies resulting in increased earnings on cash surrender value of life insurance.  Income from service charges on deposit accounts increased in 2006 due to a $5,000 increase in service charges, a $19,000 increase in account analysis charges and a $5,000 increase in NSF and overdraft charges.  Other non-interest income increased by $42,000 due to FHLB dividend income which was $65,000 higher in 2006 and decreases in other accounts.  FHLB dividend income increased in 2006 due to mandatory additional investments in FHLB stock resulting from higher short term borrowings.  A slowing residential real estate market caused a $11,000 decrease in mortgage loan brokerage fees.

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Non-Interest Expense

Total non-interest expense was $8.70 million in 2007, up $1.05 or 3%, from the $7.65 million in non-interest expense in 2006.  The following table presents the major components of non-interest expense for the years indicated.

	Non-interest expense
	Years Ended December 31,						Change during year
(in thousands)	2007		2006		2005		2007			2006
Salaries and employee benefits	$	4,770	$	4,261	$	3,777	$	509		$	484
Occupancy and equipment		1,073		890		757		183			133
Data processing		495		460		422		35			38
Operations		480		454		414		26			40
Professional and legal		508		330		311		178			19
Advertising and business development		305		268		258		37			10
Telephone and postal		213		206		171		7			35
Supplies		188		180		237		8			(57	)
Assessment and insurance		197		114		125		83			(11	)
Amortization expense		63		63		63		-			-
Other expenses		407		427		275		(20	)		152
Total non-interest expense	$	8,699	$	7,653	$	6,810	$	1,046		$	843

2007 Compared to 2006.  The increase in non-interest expense resulted primarily from increased employee costs associated with the Company’s growth and the highly competitive environment for qualified bank personnel.  Salary and employee benefits increased by $509,000 including $445,000 for promotional and merit pay raises and the increase in full time equivalents from 77 to 79 employees, and a $205,000 increase in health and post retirement benefits.  These increases were partially offset by an increase in deferred salary costs of $136,000 associated with loan originations which are amortized over the estimated life of the loan.

Occupancy and equipment costs increased $183,000 in 2007 due to increased maintenance and repairs, depreciation on leasehold improvements, increased computer system maintenance and upgrades, and rent increases.  Operations costs increased $26,000 due to significantly higher correspondent bank charges which is reflective of the Company’s growth.  Professional and legal costs increased $178,000 in 2007 primarily due to the incurred professional fees related to the implementation of requirements under Section 404 of the Sarbanes-Oxley Act.  Assessment and insurance costs increased $83,000 due to an increase in FDIC assessment rate for deposit insurance.   Other expenses decreased $20,000 due to a $53,000 decrease in employee recruitment and hiring costs.

2006 Compared to 2005.  The increase in non-interest expense resulted primarily from increased employee costs associated with the Company’s growth and the highly competitive environment for qualified bank personnel.  Salary and benefits increased by $484,000 due to promotional and merit pay raises, increased cost of employee benefits, expanded employee incentive programs, and the addition of 4 full-time positions.  Also included in 2006 salaries and employee benefits was a salary continuation plan designed to retain bank officers.  This plan was implemented in the latter part of 2006 and added $37,000 to 2006 expense.

Occupancy and equipment costs increased $133,000 in 2006 due to increased maintenance and repairs, leasehold improvements and computer system upgrades.  Operations costs increased $40,000 due to significantly higher costs in the areas of correspondent bank charges and courier/armored car charges, both of which were reflective of the Company’s growth.  Telephone and postal costs increased $35,000 due to upgrades to bundled telephone and internet services. Other expenses increased $152,000 due to a $58,000 increase in employee recruitment and hiring costs, a $26,000 increase in employee and director training expenses, and a $17,000 increase in staff related expenses.

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Provision for Income Taxes

The provision for income taxes for 2007 decreased to $1.13 million compared to $1.58 million in 2006 and $1.37 million in 2005.  The decrease in the provision for income taxes for the 2007 period was mainly due to a decrease in pre-tax net income and increases in tax exempt sources of revenue including municipal bonds and earnings on bank-owned life insurance.  The increase for the 2006 period was primarily due to increased pretax net income. The Company’s effective tax rate was 29.9% for 2007 compared to 34.8% and 38.7% in 2006 and 2005, respectively.

Financial Condition

Investment Securities

The outstanding balance and composition of the portfolio as of the end of 2007 was fairly consistent with the composition of the portfolio as of the end of 2006.  The investment portfolio balances in U.S. Treasuries, mortgage-backed securities, municipal obligations and corporate debt securities were 31%, 30%, 34% and 5%, respectively, at December 31, 2007 versus 26%, 23%, 34% and 7%, respectively, at December 31, 2006.  The Company purchases investment securities to maintain liquidity and manage interest rate risk within board approved parameters, as well as to generate interest revenues.  The investment security portfolio consists of obligations of U.S. Treasury and government agencies, mortgage-backed securities of U.S. government sponsored enterprises, obligations of states and political subdivisions, and other investment grade securities.

The Company’s investments in mortgage-backed securities of U.S. Government agencies provide both an increase in yields over U.S. Treasury and Agency securities and provide cash flows for liquidity and reinvestment opportunities.  At December 31, 2007, total balances in these mortgage-backed securities amounted to $17.0 million up from $12.2 million at December 31, 2006.  Although these pass-through securities typically have final maturities of between ten and fifteen years, the pass-through nature of the monthly principal and interest payments is expected to significantly reduce the average life of these securities.

Obligations of states and political subdivisions (municipal securities) provide attractive tax equivalent yields for the Company.  Since the majority of the interest earnings on these securities are not taxable for Federal purposes the investment in municipal securities results in a reduction in the effective tax rate of the Company.

At December 31, 2007 and 2006, all investment securities were classified as available-for-sale.  In classifying its investments as available-for-sale, securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive loss within shareholders’ equity.

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

	December 31, 2007
(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. Treasury and government  agencies	$	17,544	$	80	$	(70	)	$	17,554
Mortgage-backed securities		16,853		192		(85	)		16,960
Municipal securities		19,304		42		(227	)		19,119
Corporate debt securities		3,005		1		(24	)		2,982
Total	$	56,706	$	315	$	(406	)	$	56,615

	December 31, 2006
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
U.S. government  agencies	$	20,325	$	6	$	(282	)	$	20,049
Mortgage-backed securities		12,422		65		(250	)		12,237
Municipal securities		18,950		142		(36	)		19,056
Corporate debt securities		4,033		-		(77	)		3,956
Total	$	55,730	$	213	$	(645	)	$	55,298

25

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.

26

The following table summarizes the amounts and distribution of investment securities and their weighted average yields as of December 31, 2007.  Expected maturities may differ from contractual maturities where the issuers of the securities have the right to call or prepay obligations without penalty.

	Maturities of securities available for sale
						After one					After five
	Within					but within					but within					After
	One year					five years					ten years					ten years					Total
(dollars in  thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
U.S. Treasury and government agencies	$	7,484		3.51	%	$	5,057		4.30	%	$	5,004		5.34	%	$	-		-		$	17,545		4.40	%
Mortgage-backed securities		211		3.85	%		1,939		3.83	%		4,394		4.65	%		10,309		5.21	%		16,853		4.75	%
Municipal securities (1)		-		-			19		7.23	%		2,388		6.17	%		16,896		6.04	%		19,303		5.86	%
Corporate debt securities		3,005		3.61	%		-		-			-		-			-		-			3,005		5.66	%
Total	$	10,700		3.54	%	$	7,015		4.18	%	$	11,786		5.25	%	$	27,205		5.73	%	$	56,706		4.96	%

(1) Yields shown are not computed on a tax equivalent basis.

Loan Portfolio

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:

	LOAN PORTFOLIO
(in thousands)	December 31, 2007					December 31, 2006					December 31, 2005					December 31, 2004					December 31, 2003
Commercial	$	41,824		21	%	$	41,104		22	%	$	40,271		26	%	$	34,389		29	%	$	27,900		27	%
Real estate – mortgage (1)		106,873		53	%		92,639		50	%		72,753		48	%		60,688		52	%		55,406		54	%
Real estate – construction		44,896		22	%		44,273		24	%		32,560		21	%		14,694		13	%		10,925		11	%
Agricultural		4,988		3	%		4,693		3	%		4,432		3	%		4,535		4	%		4,885		5	%
Consumer and other		2,995		1	%		1,805		1	%		2,376		2	%		2,388		2	%		3,786		3	%
Subtotal		201,576		100	%		184,514		100	%		152,392		100	%		116,694		100	%		102,902		100	%
Deferred loan fees, net		(304	)				(436	)				(635	)				(459	)				(332	)
Allowance for loan losses		(1,758	)				(1,746	)				(1,766	)				(1,401	)				(1,393	)
Total loans, net	$	199,514				$	182,332				$	149,991				$	114,834				$	101,177

(1) Consists primarily of commercial mortgage loans.

27

Retail loan products are offered primarily for the benefit of commercial business owners and professionals who typically maintain depository and other lending relationships with the Company.  Loans outstanding at December 31, 2007 increased by $17.1 million or 9% compared to December 31, 2006.  Although the Company’s marketing efforts are focused primarily on commercial loans, the strongest growth for 2007 occurred in the real estate mortgage segment of the portfolio, which was indicative of continued economic growth in the Company’s lending territory despite a slow down in the latter part of the year..  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 low cost of real estate relative to California’s urban areas.

The following table presents the maturity distribution of the loan portfolio as of December 31, 2007.  The table shows the distribution of such loans between those loans with fixed interest rates and those with floating (variable) interest rates.  Floating rates generally fluctuate with changes in the prime rate.  A majority of the Company’s floating rate loans have rate floors.  During 2007, the Company’s volume of loans with fixed interest rates increased due to customer demand.  Management considers the risk associated with fixed interest rate loans in its periodic analysis of interest rate risk.

	Maturity of loans
(in thousands)	Within one year		After one but within five years		After five years		Total
Commercial	$	21,752	$	13,927	$	6,145	$	41,824
Real estate – mortgage (1)		922		11,835		94,116		106,873
Real estate – construction		26,043		10,741		8,112		44,896
Agriculture		2,750		1,110		1,128		4,988
Consumer and other		1,465		1,269		261		2,995
Total	$	52,932	$	38,882	$	109,762	$	201,576
Loans with fixed interest rates		5,390		22,345		82,128		109,863
Loans with floating interest rates		47,542		16,537		27,634		91,713
Total	$	52,932	$	38,882	$	109,762	$	201,576

(1) Consists primarily of commercial mortgage loans.

Nonperforming Assets.  As of December 31, 2007 and 2006 there were no nonaccrual loans, loans past due 90 days and still accruing interest, restructured loans, or other real estate owned.  Nonaccrual loans and total nonperforming assets at December 31, 2005 totaled $21,000.

Generally, loans are placed on nonaccrual status when full collectibility of principal or interest is uncertain or when principal or interest is past due for 90 days (unless the loan is well secured and in the process of collection).  From the time a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed from interest income.  Any interest or principal payments received on a nonaccrual loan are normally applied as a principal reduction.  A nonaccrual loan may be restored to accrual status when none of its principal and interest is past due and unpaid, and certain other factors are satisfied.  Classification of a loan as nonaccrual does not necessarily indicate that collection of principal and interest will be uncollectible in whole or in part.

Impaired Loans.  A loan is considered impaired when collection of all amounts due according to the original contractual terms is not probable.  The category of impaired loans is not coextensive with the category of nonaccrual loans, although the two categories may overlap in part or in full and did overlap in full at December 31, 2007, 2006, and 2005.  There were no impaired loans at December 31, 2007 or 2006.  The recorded investment in loans that were considered to be impaired totaled $21,000 at December 31, 2005.  There was no specific allowance for loan losses for impaired loans at December 31, 2007, 2006, and 2005.  The average recorded investment in impaired loans for the years ended December 31, 2007, 2006, and 2005 was not considered significant for reporting purposes.  At December 31, 2007, the Company had not identified any other potential problem loans that would result in those loans being included as nonperforming loans at a future date.

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Allowance for Loan Losses

The Company attempts to minimize credit risk through its underwriting and credit review policies.  The Company’s credit review process includes internally prepared credit reviews as well as contracting with an outside firm to conduct periodic credit reviews.  The Company’s management and lending officers evaluate the loss exposure of classified and impaired loans on a quarterly basis, or more frequently as loan conditions change.  The Board of Directors, through the loan committee, reviews the asset quality of new and criticized loans on a monthly basis and reports the findings to the full Board of Directors.  In management's opinion, this loan review system facilitates the early identification of potential criticized loans.

The allowance for loan losses is established through charges to earnings in the form of the provision for loan losses.  Loan losses are charged to and recoveries are credited to the allowance for loan losses.  The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in loans.  The adequacy of the allowance for loan losses is based upon management's continuing assessment of various factors affecting the collectibility of loans; including current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, collateral, the existing allowance for loan losses, independent credit reviews, current charges and recoveries to the allowance for loan losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants retained by the Company.  There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio.  The collectibility of a loan is subjective to some degree, but must relate to the borrower’s financial condition, cash flow, quality of the borrower’s management expertise, collateral and guarantees, and state of the local economy.

The federal financial regulatory agencies issued a new interagency policy statement in December 2006 on the allowance for loan and lease losses along with supplemental frequently asked questions. When determining the adequacy of the allowance for loan losses, the Company follows these guidelines. The policy statement revises and replaces a 1993 policy statement on the allowance for loan and lease losses.  The agencies issued the revised policy statement in view of today’s uncertain economic environment and the presence of concentrations in untested loan products in the loan portfolios of insured depository institutions.  The policy statement has also been revised to conform to accounting principles generally accepted in the United States of America (“GAAP”) and post-1993 supervisory guidance.   The policy statement reiterates that each institution has a responsibility for developing, maintaining and documenting a comprehensive, systematic, and consistently applied process appropriate to its size and the nature, scope, and risk of its lending activities for determining the amounts of the allowance for loan and lease losses  and the provision for loan and lease losses and states that each institution should ensure controls are in place to consistently determine the allowance for loan and lease losses  in accordance with GAAP, the institution’s stated policies and procedures, management’s best judgment and relevant supervisory guidance.

The policy statement also restates that insured depository institutions must maintain an allowance for loan and lease losses  at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio, and that estimates of credit losses should reflect consideration of all significant factors that affect the collectibility of the portfolio as of the evaluation date.  The policy statement states that prudent, conservative, but not excessive, loan loss allowances that represent management’s best estimate from within an acceptable range of estimated losses are appropriate.  In addition, the Company incorporates the Securities and Exchange Commission Staff Accounting Bulletin No. 102, which represents the SEC staff’s view related to methodologies and supporting documentation for the Allowance for Loan and Lease Losses that should be observed by all public companies in complying with the federal securities laws and the Commission’s interpretations.

The Company’s methodology for assessing the adequacy of the allowance for loan losses consists of several key elements, which include but are not limited to:

§ specific allocation for problem graded loans, if any (“classified loans”),

§ general or formula allocation,

§ and discretionary allocation based on loan portfolio segmentation.

The Company’s methodology incorporates the following accounting pronouncements, as amended, in determining the adequacy of the allowance for loan losses:

§ Statement of Financial Accounting Standards (“SFAS”) No. 5 - “Accounting for Contingencies”,

§ SFAS No.114 - “Accounting by Creditors for Impairment of a Loan” and

§ SFAS 118 - “Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.”

29

Specific allocations are established based on management’s periodic evaluation of loss exposure inherent in classified, impaired, and other loans in which management believes that the collection of principal and interest under the original terms of the loan agreement are in question.  For purposes of this analysis, classified loans are grouped by internal risk classifications which are “special mention”, “substandard”, “doubtful”, and “loss”.  Special mention loans are currently performing but are potentially weak, as the borrower has begun to exhibit deteriorating trends, which if not corrected, could jeopardize repayment of the loan and result in further downgrade.  Substandard loans have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction of the debt.  A loan classified as “doubtful” has critical weaknesses that make full collection of the obligation improbable.  Classified loans, as defined by the Company, include loans categorized as substandard and doubtful.  Loans classified as loss are immediately charged off.

Formula allocations are calculated by applying loss factors to outstanding loans with similar characteristics.  Loss factors are based on the Company’s historical loss experience as adjusted for changes in the business cycle and on the internal risk grade of those loans and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date.  The formula allocation analysis incorporates loan losses over the past seven years adjusted for changes in the business cycle.  Loss factors are adjusted to recognize and quantify the estimated loss exposure resulting from changes in market conditions and trends in the Company’s loan portfolio.

The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances.  The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.

The allowance for loan losses totaled $1.76 million or 0.87% of total loans at December 31, 2007 compared to $1.75 million or 0.95% at December 31, 2006, and $1.77 million or 1.16% at December 31, 2005.  No provision for loan losses was recorded in 2007 due to continued strong credit quality and the absence of nonperforming loans.  Management believes that the allowance for loan losses was adequate at December 31, 2007.  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
	Year ended December 31,
(dollars in thousands)	2007			2006			2005			2004			2003
Balance, beginning	$	1,746		$	1,766		$	1,401		$	1,393		$	1,062
Provision for  loan losses		-			-			369			138			315
Charge-offs		-			(21	)		(4	)		(148	)		(17	)
Recoveries		12			1			-			18			33
Balance, ending	$	1,758		$	1,746		$	1,766		$	1,401		$	1,393
Net charge-offs to average loans outstanding		.000	%		.013	%		.003	%		0.120	%		(0.02	)%
Average loans outstanding		194,734		$	166,620		$	134,008		$	107,262		$	90,153
Ending allowance to total loans outstanding		0.87	%		0.95	%		1.16	%		1.20	%		1.36	%

Deposits

Deposits are obtained primarily from local businesses and residents.  The average deposits and the average rates paid for 2007, 2006, and 2005 are presented in the “Results of Operations” section under the heading “Net Interest Income.”  Average total deposits for 2007 were $213.6 million compared to $193.5 million for 2006, an increase of $20.1 million or 10%.  In December 2006, the Company acquired brokered time deposits totaling $9.9 million.  The Company utilized brokered deposits as a way of diversifying its funding sources and the $9.9 million in funds were used primarily to reduce FHLB short-term borrowings.  Average brokered deposits were $8.8 million in 2007.

In 2007, the Company continued its strong marketing effort to attract local deposits, particularly from business customers.  However, the interest rate environment in 2007 was not conducive to attracting and retaining core deposits.  Total deposits at December 31, 2007 were $215.4 million compared to $207.6 million at December 31, 2006, an increase of $7.8 million or 4%.  If the brokered time deposits acquired in late 2006 are excluded, total deposits at December 31, 2007 increased by $148 million or 7%.

30

The following chart sets forth the distribution of the Company’s average daily deposits for the periods indicated.

	For the Year ended December 31,
	2007					2006					2005
			Average					Average					Average
	Average		Yield/			Average		Yield/			Average		Yield/
(dollars in thousands)	Balance		Rate			Balance		Rate			Balance		Rate
Deposits:
Non-interest bearing deposits	$	60,465				$	65,440				$	65,698
Interest-bearing deposits:
Interest bearing demand deposits	$	27,052		2.84	%	$	21,530		2.81	%	$	20,266		1.90	%
Money market accounts		47,308		3.27	%		42,047		3.08	%		31,308		1.20	%
Savings		8,660		0.80	%		9,957		0.96	%		9,483		0.71	%
Time deposits		70,117		4.88	%		54,488		4.24	%		43,791		2.74	%
Total interest-bearing deposits		153,137		3.79	%		128,022		3.36	%		104,848		1.93	%
Total deposits	$	213,602				$	193,462				$	170,546

The following table summarizes by time remaining to maturity, the amount of certificates of deposit issued in amounts of $100,000 or more as of December 31, 2007.

Maturities of certificates of deposit of $100,000 or more
(dollars in thousands)	Balance		Percent of total
Three months or less	$	14,935		34	%
Over three months through nine months		24,545		56	%
Over nine months through twelve months		3,791		8	%
Over twelve months		743		2	%
Total certificates of deposit of $100,000 and more	$	44,014		100	%

Borrowings

Federal Home Loan Bank.  The Company maintains a borrowing relationship with the Federal Home Loan Bank of San Francisco (FHLB) which offers both long-term and short-term borrowing facilities.  The Company has pledged investment securities and qualifying loans as collateral for its borrowing lines as required by FHLB.

At December 31, 2007, long-term debt outstanding from the FHLB totaled $8.1 million compared to $8.5 million at December 31, 2006.  The Company incurred long-term debt from FHLB at various times to match the cash flow characteristics of certain fixed rate loans made by the Company.  There was no new long-term debt incurred during 2007 and the reduction from the prior year was attributable to scheduled principal repayments.  Average total long-term borrowings from FHLB totaled $8.3 million for 2007 at an average cost of 4.37% compared to average long-term borrowings of $8.8 million at an average cost of 4.30% for 2006.

There were $21.8 million in short-term borrowings from FHLB at December 31, 2007 compared to $17.6 at December 31, 2006.  The Company utilized short-term borrowings from FHLB to fund a portion of its asset growth in 2007 as rising interest rates adversely affected the ability of the Company to attract new core deposits at desirable rates.  Average total short-term borrowings from FHLB totaled $13.6 million for 2007 at an average cost of 5.11% compared to average short-term borrowings of $11.5 million in 2006 at an average cost of 5.32%.  The decrease in interest rates on short-term borrowings was reflective of the decrease in short-term market rates that occurred in the latter part of 2007.

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Other Borrowing Arrangements.  In addition to FHLB borrowing lines, the Company maintains short-term unsecured borrowing arrangements with correspondent banks to meet unforeseen cash needs.  These borrowing lines totaled $10.0 million at December 31, 2007 and $13.0 million at December 31, 2006.  The borrowing lines are utilized infrequently and there were no balances outstanding at December 31, 2007 and 2006.

Junior Subordinated Deferrable Interest Debentures.  During 2003, the Company formed Valley Commerce Trust I with a capital investment of $93,000 for the sole purpose of issuing trust preferred securities.  During the second quarter of 2003, Valley Commerce Trust I issued trust preferred securities for gross proceeds of $3.0 million and invested this amount plus the $93,000 of capital proceeds in floating rate junior subordinated deferrable interest debentures issued by the Company.  The Subordinated Debentures mature on April 7, 2033 and are repriced quarterly to an interest rate that is the sum of 3-month Libor plus 3.30%.  The interest rate at December 31, 2007 and December 31, 2006 was 8.54% and 8.67%, respectively.

Trust preferred securities are includable in the Company’s Tier 1 capital for regulatory purposes subject to certain limitations.  The action taken to form Valley Commerce Trust I and issue trust preferred securities was made for the purpose of enhancing the Company’s capital position and to provide for the continued growth of the Bank.

Off-Balance Sheet Items

As of December 31, 2007 and December 31, 2006, commitments to extend credit and letters of credit were the only financial instruments with off-balance sheet risk.  As of December 31, 2007 and December 31, 2006, commitments to extend credit totaled $53.5 million and $44.1 million, respectively, and letters of credit totaled $209,000 and $1.2 million, respectively.  The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options or similar instruments.

Contractual Obligations

 The Company’s contractual obligations are comprised of junior subordinated deferrable interest debentures, operating leases for branch, administrative and other office space in Visalia, Fresno, and Tulare which expire at various dates through 2009, and salary continuation plans.  As of December 31, 2007, contractual obligations of the Company are as follows:

	Contractual Obligations Due by Period
(dollars in thousands)	Total		Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years
Long-term debt obligations:
Junior subordinated deferrable Interest debentures	$	3,093							$	3,093
Operating lease obligations		1,328	$	47	$	542	$	195		544
Other long-term liabilities:
Salary continuation		946								946
Total contractual liabilities	$	5,367	$	47	$	542	$	195	$	4,583

Capital Resources

Federal regulations establish guidelines for calculating “risk-adjusted” capital ratios.  These guidelines, which apply to banks and bank holding companies, establish a systematic approach of assigning risk weights to assets and commitments making capital requirements more sensitive to differences in risk profiles.  For these purposes, “Tier 1” capital consists of common equity, non-cumulative perpetual preferred stock, trust preferred securities subject to regulatory limitation, and minority interests in the equity accounts of consolidated subsidiaries and excludes goodwill.  “Tier 2” capital consists of cumulative perpetual preferred stock, limited-life preferred stock, mandatory convertible securities, subordinated debt and (subject to a limit of 1.25% of risk-weighted assets) general loan loss reserves.  In calculating the relevant ratio, a company’s assets and off-balance sheet commitments are risk-weighted; thus, for example, loans are included at 100% of their book value while assets considered less risky are included at a percentage of their book value (20%, for example, for U. S. Government Agency securities, and 0% for vault cash and U. S. Government Treasury securities).

32

The Board of Directors regularly reviews the Company’s capital ratios to ensure that capital exceeds the prescribed regulatory minimums and is otherwise adequate to meet future needs.  The following table summarizes the Company’s risk-based capital ratios as of December 31, 2007 and December 31, 2006:

Capital and capital adequacy ratios
	Year ended December 31,
	2007					2006
(dollars in thousands)	Amount		Ratio			Amount		Ratio
Leverage Ratio
Valley Commerce Bancorp and Subsidiary	$	31,927		11.5	%	$	28,654		11.1	%
Minimum regulatory requirement	$	11,101		4.0	%	$	10,346		4.0	%
Valley Business Bank	$	31,538		11.4	%	$	28,336		11.0	%
Minimum requirement for “Well-Capitalized” institution	$	13,871		5.0	%	$	12,926		5.0	%
Minimum regulatory requirement	$	11,097		4.0	%	$	10,341		4.0	%
Tier 1 Risk-Based Capital Ratio
Valley Commerce Bancorp and Subsidiary	$	31,927		13.8	%	$	28,654		13.5	%
Minimum regulatory requirement	$	9,233		4.0	%	$	8,500		4.0	%
Valley Business Bank	$	31,538		13.7	%	$	28,336		13.4	%
Minimum requirement for “Well-Capitalized” institution	$	13,844		6.0	%	$	12,738		6.0	%
Minimum regulatory requirement	$	9,230		4.0	%	$	8,492		4.0	%
Total Risk-Based Capital Ratio
Valley Commerce Bancorp and Subsidiary	$	33,684		14.6	%	$	30,399		14.3	%
Minimum regulatory requirement	$	18,465		8.0	%	$	17,000		8.0	%
Valley Business Bank	$	33,296		14.4	%	$	30,081		14.2	%
Minimum requirement for “Well- Capitalized” institution	$	23,074		10.0	%	$	21,230		10.0	%
Minimum regulatory requirement	$	18,459		8.0	%	$	16,984		8.0	%

At December 31, 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.

In the second quarter of 2003, Valley Commerce Trust I issued $3.0 million of trust preferred securities.  Trust preferred securities are includable in Tier 1 capital, subject to regulatory limitation.  At December 31, 2007, and December 31, 2006, the entire $3.0 million was included in Tier 1 capital.

The Company’s average equity as a percentage of average assets was 10.11 % for 2007 and 9.71% for 2006.  Year-end shareholders’ equity as a percentage of year-end assets was 10.35% and 9.65% at December 31, 2007 and 2006, respectively.  The increase in these ratios reflects 2007 earnings and capital received from the exercise of stock options partially offset by stock repurchased.

The Company issued a 5% stock dividend in 2007 and 2006.  The Company has not declared or paid cash dividends since inception.  Stock splits and dividends are not dilutive to capital ratios.

As discussed above, the Company commenced a stock repurchase program as of November 2007.

33

Liquidity Management

Liquidity is the ability to provide funds to meet customers’ loan and deposit 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.  Management measures the Company’s liquidity position monthly through the use of short-term and medium-term internal liquidity calculations.  These are monitored on an ongoing basis by the Board of Directors and the Company’s Asset Liability Management Committee.

Despite the Company’s successful history of establishing and retaining deposit relationships with business customers, the rising interest rate environment of the past few years has curtailed the availability of favorably priced deposits.  Accordingly, the Company has relied upon wholesale funding resources to supplement local deposit growth.  These include expansion of borrowing lines with FHLB and correspondent banks, and utilization of brokered time deposits.  At December 31, 2007, the Company had available credit of $26.2 million from the FHLB and $10.0 million from correspondent banks.

The Company’s off-balance sheet financing arrangements are primarily limited to commitments to extend credit and standby letters of credit, which totaled $53.5 million and $209,000, respectively, at December 31, 2007.  Management monitors these arrangements monthly 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.

As discussed above, the Company’s wholly-owned subsidiary, Valley Commerce Trust I, issued trust preferred securities for gross proceeds of $3.0 million on April 7, 2003.  Quarterly interest payments on these securities are considered in management’s normal evaluation of liquidity needs.  Although the trust preferred securities do not mature until April 7, 2033, Valley Commerce Trust I has the option to redeem the trust preferred securities on or at any time after April 7, 2008.   The securities may not be redeemed prior to this date without penalty.  The Company will carefully evaluate the impact on capital and liquidity if and when consideration is given to redemption of trust preferred securities.

The Company’s strategic objectives include expanding through opening of “de novo” branches and loan production offices and acquiring branch offices from other institutions.   The addition of branch offices is expected to involve significant cash outlays; e.g., for buildings, improvements, and equipment.

In 2005, the Company opened a loan production office in Tulare.  The Company also purchased land in Tulare which closed escrow in 2006 and will be used for construction of a full service branch office to be opened in 2008.  The Company’s planning efforts consider the impact of known and anticipated cash outlays so that sufficient liquidity is maintained for both capital and operational needs.

34

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The independent auditors’ report and financial statements listed below are included herein:

		Page
I.	Report of Independent Registered Public Accounting Firm	36
II.	Consolidated Balance Sheet as of December 31, 2007 and 2006	37
III.	Consolidated Statement of Income for the years ended December 31, 2007, 2006 and 2005	38
IV.	Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2007, 2006 and 2005	39
V.	Consolidated Statement of Cash Flows for the years ended December 31, 2007, 2006 and 2005	41
VI.	Notes to Consolidated Financial Statements	43

35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Shareholders and

   Board of Directors

Valley Commerce Bancorp

We have audited the accompanying consolidated balance sheet of Valley Commerce Bancorp and subsidiary (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2007.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Valley Commerce Bancorp and subsidiary as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

Sacramento, California

March 19, 2008

36

VALLEY COMMERCE BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

December 31, 2007 and 2006

	2007			2006
ASSETS
Cash and cash equivalents	$	9,297,346		$	13,265,547
Available-for-sale investment securities, at fair value (Notes 3 and 7)		56,615,000			55,298,000
Loans, less allowance for loan losses of $1,757,591 in 2007 and $1,745,582 in 2006 (Notes 4, 7, 9 and 13)		199,514,271			182,331,506
Bank premises and equipment, net (Note 5)		3,037,063			1,832,177
Cash surrender value of bank-owned life insurance (Note 14)		6,184,531			5,934,563
Accrued interest receivable and other assets (Note 12)		4,432,665			5,002,900
Total assets	$	279,080,876		$	263,664,693
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing	$	66,992,568		$	63,019,956
Interest bearing (Note 6)		148,393,500			144,556,213
Total deposits		215,386,068			207,576,169
Accrued interest payable and other liabilities		1,778,548			1,399,787
Short-term debt (Note 7)		21,804,000			17,600,000
Long-term debt (Note 7)		8,146,049			8,547,638
Junior subordinated deferrable interest debentures (Note 8)		3,093,000			3,093,000
Total liabilities		250,207,665			238,216,594
Commitments and contingencies (Note 9)
Shareholders' equity (Note 10):
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 – 2,396,435 shares in 2007 and 2,215,765 shares in 2006		23,511,066			20,683,720
Retained earnings		5,423,324			5,040,381
Accumulated other comprehensive loss, net of taxes (Notes 3 and 15)		(61,179	)		(276,002	)
Total shareholders' equity		28,873,211			25,448,099
Total liabilities and shareholders’ equity	$	279,080,876		$	263,664,693

The accompanying notes are an integral

part of these consolidated financial statements

37

VALLEY COMMERCE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

For the Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005
Interest income:
Interest and fees on loans	$	16,113,423		$	14,448,209		$	10,511,090
Interest on investment securities:
Taxable		1,581,892			1,444,707			1,459,998
Exempt from Federal income taxes		771,368			719,117			303,267
Interest on Federal funds sold		3,658			137,749			229,197
Total interest income		18,470,341			16,749,782			12,503,552
Interest expense:
Interest on deposits (Note 6)		5,802,852			4,306,344			2,028,091
Interest on short-term borrowings (Note 7)		695,062			610,911			52,523
Interest on long-term borrowings (Note 7)		362,665			380,212			393,303
Interest on junior subordinated deferrable interest debentures (Note 8)		270,690			263,310			208,787
Total interest expense		7,131,269			5,560,777			2,682,704
Net interest income before provision for loan losses		11,339,072			11,189,005			9,820,848
Provision for loan losses (Note 4)		-			-			368,768
Net interest income after provision for loan losses		11,339,072			11,189,005			9,452,080
Non-interest income:
Service charges		590,900			546,514			513,859
Loss on sale of available-for-sale investment securities, net (Note 3)		(1,145	)		(52,737	)		(48,494	)
Mortgage loan brokerage fees		76,636			125,085			136,183
Earnings on cash surrender value of lifepolicies (Note 14)		258,134			153,394			103,851
Other		230,140			223,693			182,347
Total non-interest income		1,154,665			995,949			887,746
Non-interest expense:
Salaries and employee benefits (Notes 4 and 14)		4,770,498			4,260,909			3,777,496
Occupancy and equipment (Notes 5 and 9)		1,073,196			890,337			756,664
Other (Note 11)		2,855,193			2,501,930			2,275,859
Total non-interest expense		8,698,887			7,653,176			6,810,019
Income before provision for income taxes		3,794,850			4,531,778			3,529,807
Provision for income taxes (Note 12)		1,134,000			1,576,000			1,367,000
Net income	$	2,660,850		$	2,955,778		$	2,162,807
Basic earnings per share (Note 10)	$	1.13		$	1.28		$	0.95
Diluted earnings per share (Note 10)	$	1.09		$	1.22		$	0.90

The accompanying notes are an integral

part of these consolidated financial statements.

38

VALLEY COMMERCE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

For the Years Ended December 31, 2007, 2006 and 2005

										Accumulated
										Other
										Compre-			Total			Total
	Common Stock									hensive			Share-			Compre-
							Retained			Loss			holders’			hensive
	Shares			Amount			Earnings			(Net of Taxes)			Equity			Income
Balance, January 1, 2005		1,788,258		$	14,451,969		$	1,959,281		$	(78,612	)	$	16,332,638
Comprehensive income (Note 15):
Net income								2,162,807						2,162,807		$	2,162,807
Other comprehensive loss, net of tax:
Net change in unrealized losses on available-for-sale investment securities											(466,509	)		(466,509	)		(466,509	)
Total comprehensive income																$	1,696,298
Proceeds from sale of stock (Note 10):		299,250			3,880,321									3,880,321
Balance, December 31, 2005		2,087,508			18,332,290			4,122,088			(545,121	)		21,909,257
Comprehensive income (Note 15):
Net income								2,955,778						2,955,778		$	2,955,778
Other comprehensive loss, net of tax:
Net change in unrealized losses on available-for-sale investment securities											269,119			269,119			269,119
Total comprehensive income																$	3,224,897
Stock dividend		104,123			2,032,481			(2,032,481	)
Cash paid for fractional shares								(5,004	)					(5,004	)
Stock options exercised and  related tax benefit		24,134			280,230									280,230
Stock-based compensation expense					38,719									38,719
Balance, December 31, 2006		2,215,765			20,683,720			5,040,381			(276,002	)		25,448,099
Comprehensive income (Note 15):
Net income								2,660,850						2,660,850		$	2,660,850
Other comprehensive income, net of tax:
Net change in unrealized losses on available-for-sale investment securities											214,823			214,823			214,823
Total comprehensive income																$	2,875,673
Stock dividend		110,603			2,158,974			(2,158,974	)
Cash paid for fractional shares								(5,392	)					(5,392	)
Stock repurchase		(27,440	)		(268,267	)		(113,541	)					(381,808	)
Stock options exercised and related tax benefit		97,507			892,229									892,229
Stock-based compensation expense					44,410									44,410
Balance, December 31, 2007		2,396,435		$	23,511,066		$	5,423,324		$	(61,179	)	$	28,873,211

(Continued)

39

VALLEY COMMERCE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(Continued)

For the Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005
Disclosure of reclassification amount, net of taxes (Note 15):
Unrealized holding gains (losses) arising during the year	$	214,054		$	235,394		$	(496,223	)
Less: reclassification adjustment for losses included in net income		(769	)		(33,725	)		(29,714	)
Net change in unrealized losses on available-for-sale investment securities	$	214,823		$	269,119		$	(466,509	)

The accompanying notes are an integral

part of these consolidated financial statements.

40

VALLEY COMMERCE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005
Cash flows from operating activities:
Net income	$	2,660,850		$	2,955,778		$	2,162,807
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		-			-			368,768
(Decrease) increase in deferred loan origination fees, net		(131,895	)		(199,771	)		176,033
Depreciation		315,365			242,116			194,531
Amortization of intangibles		62,538			62,538			62,538
Net loss on sale of available-for-sale investment securities, net		1,145			52,737			48,494
Dividends on Federal Home Loan Bank stock		(79,100	)		(54,900	)		(29,300	)
Accretion (amortization) of investment securities, net		(23,459	)		38,099			819,551
Loss on disposition of premises and equipment		16,470			-			8,208
Provision for deferred income taxes		(77,000	)		2,000			(251,000	)
Tax benefits on stock-based compensation		(335,893	)		(125,828	)		-
Increase in cash surrender value of bank owned life insurance		(249,968	)		(153,394	)		(103,851	)
Stock-based compensation expense		44,410			38,719			-
Decrease (increase) in accrued interest receivable and other assets		627,659			(354,558	)		(512,561	)
Increase in accrued interest payable and other liabilities		378,761			111,387			453,812
Net cash provided by operating activities		209,883			2,614,923			3,398,030
Cash flows from investing activities:
Proceeds from matured and called available-for-sale investment securities		7,615,000			1,658,100			4,500,000
Proceeds from sales of available-for-sale investment securities		1,533,619			2,731,795			3,951,507
Purchases of available-for-sale investment securities		(12,530,396	)		(11,082,486	)		(24,836,258	)
Proceeds from principal repayments from available-for-sale mortgage-backed securities		2,427,545			2,152,829			2,462,904
Net increase in loans		(17,050,870	)		(32,141,121	)		(35,701,170	)
Redemption (purchase) of Federal Home Loan Bank stock, net		246,400			(714,100	)		(405,000	)
Purchase of premises and equipment		(1,544,749	)		(850,977	)		(392,469	)
Proceeds from sale of premises and equipment		8,028			-			-
Premiums paid for life insurance policies		-			(3,000,000	)		-
Net cash used in investing activities		(19,295,423	)		(41,245,960	)		(50,420,486	)

(Continued)

41

VALLEY COMMERCE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(Continued)

For the Years Ended December 31, 2007, 2006 and 2005

	2007			2006			2005
Cash flows from financing activities:
Net increase (decrease) increase in noninterest bearing and interest-bearing deposits	$	14,956,957		$	(655,498	)	$	25,884,925
Net (decrease) increase in time deposits		(7,147,058	)		15,650,553			10,272,285
Proceeds from the issuance of stock		-			-			3,880,321
Proceeds from exercised stock options		556,336			154,402			-
Cash paid to repurchase common stock		(381,808	)		-			-
Tax benefits from stock-based compensation		335,893			125,828			-
Net increase in short-term borrowings		4,204,000			17,600,000			-
Payments on long-term advances		(401,589	)		(591,982	)		(182,852	)
Cash paid to repurchase fractional shares		(5,392	)		(5,004	)		-
Net cash provided by financing activities		12,117,339			32,278,299			39,854,679
Decrease in cash and cash equivalents		(3,968,201	)		(6,352,738	)		(7,167,777	)
Cash and cash equivalents at beginning of year		13,265,547			19,618,285			26,786,062
Cash and cash equivalents at end of year	$	9,297,346		$	13,265,547		$	19,618,285
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense	$	7,184,869		$	5,472,442		$	2,613,323
Income taxes	$	740,000		$	1,750,000		$	1,453,000
Non-cash investing activities:
Net decrease (increase) in unrealized loss on available-for-sale securities	$	340,454		$	458,074		$	(761,802	)

The accompanying notes are an integral

part of these consolidated financial statements.

42

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE BUSINESS OF VALLEY COMMERCE BANCORP

On February 2, 2002, Valley Commerce Bancorp (the "Company") was incorporated as a bank holding company for the purpose of acquiring Valley Business Bank (the "Bank"), formerly Bank of Visalia, in a one bank holding company reorganization.  The new corporate structure provides the Company and the Bank greater flexibility to expand and diversify.  The reorganization was completed on November 21, 2002, subsequent to which the Bank continued its operations as previously conducted, but as a wholly owned subsidiary of the Company.

The Bank commenced operations in 1996 under the name Bank of Visalia and changed its name during 2005 to Valley Business Bank.  The Bank operates branches in Visalia, Fresno, Woodlake and Tipton, and a loan production office in Tulare.  The Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits.  The Bank's primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and the accounts of its wholly-owned subsidiary, Valley Business Bank.  All significant intercompany balances and transactions have been eliminated.

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.  The junior subordinated debentures issued and guaranteed by the Company and held by the Trust are reflected as debt in the consolidated balance sheet.

The accounting and reporting policies of Valley Commerce Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.

Use of Estimates

The preparation of 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.

Segment Information

Management has determined that since all of the 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 customer accounts for more than 10 percent of revenues for the Company or the Bank.

43

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassifications

Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2007.

Stock Dividends

On May 15, 2007 and February 21, 2006 the Board of Directors declared a 5% stock dividend payable on June 20, 2007 and May 16, 2006, respectively, to shareholders of record on June 6, 2007 and April 28, 2006, respectively.  All per share and stock option data in the consolidated financial statements have been retroactively restated to reflect the stock dividend.

Cash and Cash Equivalents

For the purpose of the statement of cash flows, cash, due from banks and Federal funds sold are considered to be cash equivalents.  Generally, Federal funds are sold for one day periods.  Cash held with other federally insured institutions in excess of FDIC insured limits as of December 31, 2007 was $981,000.

Investment Securities

Investments are classified as available-for-sale.  Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders' equity.

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

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

44

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investment in Federal Home Loan Bank Stock

As a member of the Federal Home Loan Bank System, the Bank is required to maintain an investment in the capital stock of the Federal Home Loan Bank.  The investment is carried at cost.  At December 31, 2007, 2006, and 2005, Federal Home Loan Bank stock totaled $1,658,600, $1,825,900, and $1,056,900 respectively.  On the consolidated balance sheet, Federal Home Loan Bank stock is included in accrued interest receivable and other assets.

Loans

Loans are stated at principal balances outstanding.  Interest is accrued daily based upon outstanding loan balances.  However, when, in the opinion of management, loans are considered to be impaired and the future collectibility of interest and principal is in serious doubt, loans are placed on nonaccrual status and the accrual of interest income is suspended.  Any interest accrued but unpaid is charged against income.  Payments received are applied to reduce principal to the extent necessary to ensure collection.  Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectibility of principal is not in doubt, are applied first to earned but unpaid interest and then to principal.

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

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

The Company may acquire loans through a business combination or a purchase for which differences may exist between the contractual cash flows and the cash flows expected to be collected due, at least in part, to credit quality.  When the Company acquires such loans, the yield that may be accreted (accretable yield) is limited to the excess of the Company's estimate of undiscounted cash flows expected to be collected over the Company's initial investment in the loan.  The excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment to yield, loss, or a valuation allowance.  Subsequent increases in cash flows expected to be collected generally are recognized prospectively through adjustment of the loan's yield over its remaining life.  Decreases in cash flows expected to be collected are recognized as an impairment.  The Company may not "carry over" or create a valuation allowance in the initial accounting for loans acquired under these circumstances.  At December 31, 2007 and 2006, there were no loans being accounted for under this policy.

45

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses

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

Classified loans and loans determined to be impaired are evaluated by management for specific risk of loss. In addition, reserve factors are assigned to currently performing loans based on historical loss rates for each identified loan type adjusted to reflect current economic and market conditions.

The allowance is established through a provision for loan losses which is charged to expense.  Management 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 management’s judgment, changes are warranted.

Allowance for Losses Related to Undisbursed Loan Commitments

The Company maintains a separate allowance for losses related to undisbursed loan commitments.  Management estimates the amount of probable losses by applying a loss reserve factor to the unused portion of undisbursed lines of credit.  The allowance totaled $40,000 at December 31, 2007 and 2006, respectively and is included in accrued interest payable and other liabilities in the consolidated balance sheet.

Other Real Estate

Other real estate includes real estate acquired in full or partial settlement of loan obligations.  When property is acquired, any excess of the Bank's recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property is charged against the allowance for loan losses.  Subsequent gains or losses on sales or writedowns resulting from impairment are recorded in other income or expenses as incurred.  The Company did not hold other real estate as of December 31, 2007 and 2006.

Bank Premises and Equipment

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

Intangible Assets

Intangible assets consist of core deposit intangibles related to branch acquisitions and are amortized using the straight-line method over ten years.  The Bank periodically evaluates whether events and circumstances have occurred that may affect the estimated useful life or the remaining balance of the core deposit intangibles resulting in impairment of the intangible asset.  Amortization expense totaled $62,538 for each of the years in the three-year period ended December 31, 2007.  The core deposit intangibles totaled $7,718 and $70,256 at December 31, 2007 and 2006, respectively.

46

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

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

Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

Accounting for Uncertainty in Income Taxes

On January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).  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 standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return.  In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The provisions of FIN 48 have been applied to all tax positions of the Company as of January 1, 2007.  Only tax positions that met the more-likely-than-not recognition threshold on January 1, 2007 were recognized or continue to be recognized upon adoption.  The Company previously recognized income tax positions based on management's estimate of whether it was reasonably possible that a liability had been incurred for unrecognized income tax benefits by applying FASB Statement No. 5, Accounting for Contingencies.  The adoption of FIN 48 did not have a material impact on the Company's financial position, results of operations or cash flows.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statement of income.

47

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Share

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

Stock-Based Compensation

At December 31, 2007, the Company had two stock-based compensation plans, the Valley Commerce Bancorp Amended and Restated 1997 Stock Option Plan and the Valley Commerce Bancorp 2007 Equity Incentive Plan, which are more fully described in Note 10.  Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share Based Payment (“SFAS 123(R)”), using the modified prospective application transition method, which requires recognizing expense for options granted prior to the adoption date equal to the fair value of the unvested amounts over their remaining vesting period based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 Accounting for Stock Based Compensation and compensation cost for all share based payments granted subsequent to January 1, 2006 based on the grant date fair values estimated in accordance with the provisions of SFAS 123(R). The Company applied the alternative transition method in calculating its pool of excess tax benefits available to absorb future tax deficiencies as provided by FSP FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. During the year ended December 31, 2006, 10,500 options were awarded. Prior periods have not been restated to reflect the results of operations in 2005 as if the Company had recorded compensation expense based on the fair value of the options granted as prescribed by SFAS No. 123.

Prior to January 1, 2006, the Company accounted for the stock-based compensation plan under the recognition and measurement principles of Accounting Practice Bulletin Opinion No. 25, (“APB 25”) Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based compensation expense was reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant.

During the years ended December 31, 2007 and 2006, the Company recorded expenses of $44,410 and $38,719, respectively as a result of adopting SFAS 123(R).  The Company’s net income for years ended December 31, 2007 and 2006 was $31,402 and $31,510, respectively, lower than if management had continued to account for share-based compensation under APB 25.  For the years ended December 31, 2007 and 2006 basic and diluted earnings per did not change as a result of the adoption of SFAS 123(R).

As of December 31, 2007, there was $292,766 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under Incentive and Stock Option Plans described more fully in Note 10. That cost is expected to be recognized over a weighted average period of 2.8 years.

In accordance with SFAS 123 (R), beginning in 2006 the Company has presented excess tax benefits from the exercise of stock-based compensation awards as a financing activity in the consolidated statement of cash flows.

48

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The following table illustrates the pro forma effect on consolidated net income and earnings per share in 2005 as if the Company had recorded compensation expense based on the fair value of the options granted as prescribed by SFAS No. 123:

	For the Year
	Ended December 31, 2005
(In Thousands)
Net income as reported	$	2,162,807
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects		(29,000	)
Pro forma net income	$	2,133,807
Basic earnings per share - as reported	$	0.95
Basic earnings per share - pro forma	$	0.94
Diluted earnings per share - as reported	$	0.90
Diluted earnings per share - pro forma	$	0.89

The Company determines the fair value of the options previously granted on the date of grant using a Black-Scholes option pricing model that uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options.  The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant. The Company also makes assumptions regarding estimated forfeitures that will impact the total compensation expenses recognized under the Plans.

The fair value of each option is estimated on the date of grant using the following assumptions.

There were 38,500 stock options granted in 2007 and 10,500 in 2006.  There were no stock options granted in 2005. The fair value of each option granted in 2007 and 2006 was estimated on the date of grant using an option-pricing model with the following assumptions:

	2007			2006
Weighted average fair value of options granted	$	7.42		$	7.99
Dividend yield		N/A			N/A
Expected volatility		28.22	%		11.27	%
Risk-free interest rate		3.49	%		5.11	%
Expected option life	7.5 years			7.5 years

49

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impact of New Financial Accounting Standards

Fair Value Measurements

In September 2006, the FASB issued Statement No. 157 (“SFAS 157”), Fair Value Measurements.  SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.  In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.  In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  The provisions should be applied prospectively, except for certain specifically identified financial instruments.  The Company adopted SFAS 157 on January 1, 2008 and management does not believe its adoption will have a material impact on the Company’s financial position, results of operations or cash flows.

Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued Statement No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.  This standard permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates.  The entity 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: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments.  The provisions of SFAS 159 are effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  The Company adopted SFAS 159 on January 1, 2008 and management did not elect the fair value option for any of its financial instruments.

Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements

In September 2006, the FASB ratified the consensuses reached by the Task Force on Issue No. 06-4 (“EITF 06-4”), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.  A question arose when an employer enters into an endorsement split-dollar life insurance arrangement related to whether the employer should recognize a liability for the future benefits or premiums to be provided to the employee.  EITF 06-4 indicates that an employer should recognize a liability for future benefits and that a liability for the benefit obligation has not been settled through the purchase of an endorsement type policy.  An entity should apply the provisions of EITF 06-4 either through a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or a change in accounting principle through retrospective application to all prior periods.  The provisions of EITF 06-4 are effective for fiscal years beginning after December 15, 2007.  The Company adopted EITF 06-04 on January 1, 2008 and management determined that a liability of approximately $102,000 will be recorded as of January 1, 2008, with a corresponding reduction as a cumulative-effect adjustment to retained earnings.

50

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impact of New Financial Accounting Standards (Continued)

Accounting for Business Combinations

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations “SFAS No. 141(R)”).  SFAS No. 141(R), among other things, establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The Company is required to adopt SFAS No. 141(R) for all business combinations for which the acquisition date is on or after January 1, 2009.  Earlier adoption is prohibited.  This standard will change the accounting treatment for business combinations on a prospective basis.

3. AVAILABLE-FOR-SALE INVESTMENT SECURITIES

The amortized cost and estimated fair value of available-for-sale investment securities at December 31, 2007 and 2006 consisted of the following:

	2007
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Treasury and Government agencies	$	17,544,088	$	80,246	$	(70,334	)	$	17,554,000
Mortgage-backed securities		16,853,448		191,633		(85,081	)		16,960,000
Municipal securities		19,303,490		41,984		(226,474	)		19,119,000
Corporate debt securities		3,005,110		651		(23,761	)		2,982,000
	$	56,706,136	$	314,514	$	(405,650	)	$	56,615,000

Net unrealized losses on available-for-sale investment securities totaling $91,136 were recorded, net of $29,957 in tax benefits, as accumulated other comprehensive loss within shareholders' equity at December 31, 2007.  Proceeds and realized losses from the sale of available-for-sale investment securities for the year ended December 31, 2007 totaled $1,508,855 and $1,145, respectively.

	2006
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government agencies	$	20,324,780	$	6,276	$	(282,056	)	$	20,049,000
Mortgage-backed securities		12,422,446		65,105		(250,551	)		12,237,000
Municipal securities		18,949,602		141,331		(34,933	)		19,056,000
Corporate debt securities		4,032,762		-		(76,762	)		3,956,000
	$	55,729,590	$	212,712	$	(644,302	)	$	55,298,000

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VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

3. AVAILABLE-FOR-SALE INVESTMENT SECURITIES (Continued)

Net unrealized losses on available-for-sale investment securities totaling $431,590 were recorded, net of $155,588 in tax benefits, as accumulated other comprehensive loss within shareholders' equity at December 31, 2006.  Proceeds and realized losses from the sale of available-for-sale investment securities for the year ended December 31, 2006 totaled $3,907,737 and $52,737, respectively. Proceeds and realized gains from the sale of available-for-sale investment securities for the year ended December 31, 2005 totaled $3,951,507 and $48,494, respectively.

Investment securities with unrealized losses at December 31, 2007 are summarized and classified according to the duration of the loss period as follows:

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Debt securities:
U.S. Treasury and Government agencies	$	1,489,000	$	(3,015	)	$	8,741,000	$	(67,306	)	$	10,230,000	$	(70,321	)
Mortgage-backed securities		992,000		(598	)		5,687,000		(84,449	)		6,679,000		(85,047	)
Municipal securities		12,384,000		(212,787	)		1,035,000		(13,450	)		13,419,000		(226,237	)
Corporate debt		-		-			2,478,000		(23,761	)		2,478,000		(23,761	)
Securities	$	14,865,000	$	(216,400	)	$	17,941,000	$	188,966		$	32,806,000	$	(405,366	)

Investment securities with unrealized losses at December 31, 2006 are summarized and classified according to the duration of the loss period as follows:

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Debt securities:
U.S. Government Agencies	$	364,000	$	(4,459	)	$	18,689,000	$	(277,597	)	$	19,053,000	$	(282,056	)
Mortgage-backed Securities		1,357,000		(3,795	)		7,529,000		(246,806	)	��	8,886,000		(250,601	)
Municipal securities		4,004,000		(14,759	)		2,341,000		(20,174	)		6,345,000		(34,933	)
Corporate debt		-		-			3,956,000		(76,762	)		3,956,000		(76,762	)
Securities	$	5,725,000	$	(23,013	)	$	32,515,000	$	(621,339	)	$	38,240,000	$	(644,352	)

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VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

3. AVAILABLE-FOR-SALE INVESTMENT SECURITIES (Continued)

U.S. Treasury and Government Agencies

At December 31, 2007, the Company held 31 U.S. Treasury and Government agency securities of which 3 were in a loss position for less than twelve months and 18 were in a loss position and had been in a loss position for twelve months or more.  Management believes the unrealized losses on the Company's investments in direct obligations of the U.S. Treasury Government Agencies were caused by interest rate increases.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2007.

Mortgage-backed Obligations

At December 31, 2007, the Company held 45 mortgage-backed obligations of which 1 was in a loss position for less than twelve months and 27 were in a loss position and had been in a loss position for twelve months or more.  Management believes the unrealized losses on the Company's investments in mortgage obligations were caused by interest rate increases.  The contractual cash flows of these investments are guaranteed by an agency of the U.S. government.  Accordingly, it is expected that the securities will not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2007.

Obligations of States and Political Subdivision

At December 31, 2007, the Company held 60 obligations of states and political subdivision securities of which 37 were in a loss position for less than twelve months and 3 were in a loss position and had been in a loss position for twelve months or more.  Management believes the unrealized losses on the Company's investments in obligations of states and political subdivision securities were primarily caused by interest rate increases.  Because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2007.

Corporate Debt Securities

At December 31, 2007, the Company held 6 corporate debt securities of which 5 were in a loss position and had been in a loss position for twelve months or more.  Management believes the unrealized losses on the Company's investments in corporate debt securities were caused primarily by interest rate increases.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2007.

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VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

3. AVAILABLE-FOR-SALE INVESTMENT SECURITIES (Continued)

The amortized cost and estimated fair value of investment securities at December 31, 2007 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

			Estimated
	Amortized		Fair
	Cost		Value
Within one year	$	10,489,277	$	10,416,000
After one year through five years		5,076,526		5,091,000
After five years through ten years		7,390,928		7,453,000
After ten years		16,895,957		16,695,000
		39,852,688		39,655,000
Investment securities not due at a single maturity date:
Mortgage-backed securities		16,853,448		16,960,000
	$	56,706,136	$	56,615,000

At December 31, 2007 and 2006, all investment securities were pledged to secure either public deposits or borrowing arrangements.

54

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Outstanding loans are summarized below:

	December 31,
	2007			2006
Commercial	$	41,823,876		$	41,103,607
Real estate - mortgage		106,872,707			92,639,046
Real estate – construction		44,896,223			44,272,460
Agricultural		4,987,839			4,693,307
Consumer and other		2,994,997			1,804,343
		201,575,642			184,512,763
Deferred loan fees, net		(303,780	)		(435,675	)
Allowance for loan losses		(1,757,591	)		(1,745,582	)
	$	199,514,271		$	182,331,506

Certain loans were pledged to secure borrowing arrangements (see Note 7).

Changes in the allowance for loan losses were as follows:

	Year Ended December 31,
	2007		2006			2005
Balance, beginning of year	$	1,745,582	$	1,766,115		$	1,400,818
Provision charged to operations		-		-			368,768
Losses charged to allowance		-		(20,833	)		(3,471	)
Recoveries		12,009		300			-
Balance, end of year	$	1,757,591	$	1,745,582		$	1,766,115

At December 31, 2007 and 2006, there were no loans considered to be impaired.  The average recorded investment in impaired loans for the years ended December 31, 2006 and 2005 was $8,680 and $26,476, respectively. Interest income recognized by the Company on a cash basis during the years ended December 31, 2007, 2006, and 2005 was not considered significant.

At December 31, 2007 and 2006, there were no nonaccrual loans.  There was no interest foregone on nonaccrual loans for the years ended December 31, 2007, 2006, and 2005.

Salaries and employee benefits totaling $687,155, $551,154 and $221,278 have been deferred as loan origination costs during the years ended December 31, 2007, 2006 and 2005, respectively.

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VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

5. PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

	December 31,
	2007			2006
Furniture and equipment		2,334,786			1,836,403
Construction in progress		756,617			53,889
Premises		614,477			614,477
Leasehold improvements		522,057			303,286
Land		452,320			452,320
		4,680,257			3,260,375
Less accumulated depreciation and amortization		(1,643,194	)		(1,428,198	)
		3,037,063			1,832,177

Depreciation and amortization included in occupancy and equipment expense totaled $315,365, $242,116 and $194,531 for the years ended December 31, 2007, 2006 and 2005, respectively.

6. INTEREST-BEARING DEPOSITS

Interest-bearing deposits consisted of the following:

	December 31,
	2007		2006
Savings	$	8,355,350	$	8,575,919
Money market		48,844,837		40,000,066
NOW accounts		29,076,881		26,716,738
Time, $100,000 or more		44,013,799		47,871,287
Other time		18,102,633		21,392,203
	$	148,393,500	$	144,556,213

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VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

6. INTEREST-BEARING DEPOSITS (Continued)

Aggregate annual maturities of time deposits are as follows:

Year Ending
December 31,
2008	$	60,394,542
2009		1,461,654
2010		260,236
	$	62,116,432

Interest expense recognized on interest-bearing deposits consisted of the following:

	Year Ended December 31,
	2007		2006		2005
Savings	$	68,879	$	95,780	$	67,109
Money market		1,545,160		1,175,225		376,226
NOW accounts		767,979		723,834		385,852
Time, $100,000 or more		2,453,317		1,491,363		738,638
Other time		967,517		820,142		460,266
	$	5,802,852	$	4,306,344	$	2,028,091

7. BORROWING ARRANGEMENTS

Lines of Credit

The Bank had unsecured lines of credit with two correspondent banks which, in the aggregate, amounted to $13,000,000 at December 31, 2007 and 2006.  There were no borrowings outstanding under either of these borrowing arrangements as of December 31, 2007 and 2006.

Federal Home Loan Bank Advances

At December 31, 2007 and 2006 the Bank could borrow up to 49% of pledged real estate mortgage loans from the Federal Home Loan Bank of San Francisco (FHLB).  As of December 31, 2007 and 2006, the Bank had pledged loans with total carrying values of $56,102,000 and $55,260,000, respectively.  At December 31, 2007 borrowings were comprised of $21,804,000 in short-term (one day) adjustable rate debt with an interest rate of 3.25%, and $8,146,049 of long-term fixed rate debt with a weighted average interest rate and maturity of 4.38% and 2.2 years, respectively. At December 31, 2006, the Company had $17,600,000 in short-term (one) day adjustable rate debt with an interest rate of 5.25% and long-term debt totaling $8,547,638 with a weighted average interest rate and maturity of 4.33% and 3.1 years, respectively.

57

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

7. BORROWING ARRANGEMENTS (Continued)

Federal Home Loan Bank Advances (continued)

As of December 31, 2007 and 2006, outstanding long-term advances from the Federal Home Loan Bank (FHLB) consisted of the following:

2007						2006
Amount		Rate			Maturity Date	Amount		Rate			Maturity Date
						$	200,000		2.27	%	March 26, 2007
$	900,000		3.08	%	March 6, 2008		900,000		3.08	%	March 6, 2008
	1,600,000		2.67	%	May 27,2008		1,600,000		2.67	%	May 27, 2008
	250,000		3.71	%	October 22, 2008		250,000		3.71	%	October 22, 2008
	900,000		3.94	%	April 27, 2009		900,000		3.94	%	April 27, 2009
	400,000		4.51	%	May 12, 2009		400,000		4.51	%	May 12, 2009
	953,614		7.41	%	June 22, 2010		978,361		7.41	%	June 22, 2010
	100,000		5.09	%	May 12, 2011		100,000		5.09	%	May 12, 2011
	792,435		4.01	%	December 6, 2011		969,277		4.01	%	December 6, 2011
	1,250,000		4.44	%	December 6, 2011		1,250,000		4.44	%	December 6, 2011
	1,000,000		6.02	%	January 2, 2012		1,000,000		6.02	%	January 2, 2012
$	8,146,049					$	8,547,638

Future principal payments of outstanding FHLB advances are as follows:

Year Ending
December 31,
2008	$	2,961,702
2009		1,522,346
2010		1,100,351
2011		1,561,650
2012		1,000,000
	$	8,146,049

58

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

8. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES

Valley Commerce Trust I is a Delaware business trust formed by the Company with capital of $93,000 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company.  During the second quarter of 2003, Valley Commerce Trust I (the "Trust") issued 3,000 Floating Rate Capital Trust Pass-Through Securities ("Trust Preferred Securities"), with a liquidation value of $1,000 per security, for gross proceeds of $3,000,000.  The entire proceeds of the issuance were invested by the Trust in $3,093,000 of Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities.  The Subordinated Debentures represent the sole assets of the Trust. The Subordinated Debentures mature on April 7, 2033, bear a current interest rate of 8.54% (based on 3-month LIBOR plus 3.30%), with repricing and payments due quarterly.  The Subordinated Debentures are redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Board of Governors, on any January 7, April 7, July 7 or October 7 on or after April 7, 2008.  The redemption price is par plus accrued interest, except in the case of redemption under a special event which is defined in the debenture.  The Trust Preferred Securities are subject to mandatory redemption to the extent of any early redemption of the junior subordinated debentures and upon maturity of the junior subordinated debentures on April 7, 2033.

Holders of the Trust Preferred Securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security at an initial rate per annum of 4.59%.  For each successive period beginning on January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the 3-month LIBOR plus 3.30% provided, however, that prior to July 7, 2008, such annual rate does not exceed 12.50%.  As of December 31, 2007, the rate was 8.54%.  The Trust has the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the junior subordinated debentures.  The Trust Preferred Securities were sold and issued in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended.  The Company has guaranteed, on a subordinated basis, distributions and other payments due on the Trust Preferred Securities.

The unamortized deferred costs related to the junior subordinated debentures, which are included in other assets on the consolidated balance sheet, at December 31, 2007 and 2006 were $3,000 and $21,000, respectively, and the amortization for each of the three years ended December 31, 2007 was $18,000.

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VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

9. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its Fresno and Visalia branch offices, its Tulare loan production office, and its administrative office under noncancelable operating leases which expire in September 2017, November 2009, January 2008, and June 2008, respectively.  The Visalia branch office lease contains two options to renew the lease for five year periods.  Future minimum lease payments are as follows:

Year Ending
December 31,
2008	$	275,949
2009		218,142
2010		94,942
2011		94,942
2012		99,828
Thereafter		543,820
	$	1,327,623

Rental expense included in occupancy and equipment expense totaled $309,657, $293,504, and $250,968 for the years ended December 31, 2007, 2006 and 2005, respectively.

Federal Reserve Requirements

Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of their reservable deposits.  The Company had no reservable deposits.

Financial Instruments With Off-Balance-Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and letters of credit.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet.

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

60

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

9. COMMITMENTS AND CONTINGENCIES (Continued)

Financial Instruments With Off-Balance-Sheet Risk (Continued)

The following financial instruments represent off-balance-sheet credit risk:

	December 31,
	2007		2006
Commitments to extend credit	$	53,452,752	$	44,128,000
Standby letters of credit	$	209,463	$	1,169,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Bank evaluates each customer's creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower.  Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

Standby 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 the Company’s stand-by-letters of credit, which represents the fees received for issuing the guarantee, was not considered significant at December 31, 2007 or 2006.  The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used.

At December 31, 2007, consumer loan commitments represent approximately 4% of total commitments and are generally unsecured.  Commercial loan commitments represent approximately 73% 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%.

Significant Concentrations of Credit Risk

The Company grants real estate mortgage, real estate construction, commercial, agricultural and consumer loans to customers throughout the cities of Visalia, Tulare, Fresno, Woodlake and Tipton, California.

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

61

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

9. COMMITMENTS AND CONTINGENCIES (Continued)

Contingencies

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

10. SHAREHOLDERS' EQUITY

Dividend Restrictions

The Company's ability to pay cash dividends is dependent on dividends paid to it by the Bank and limited by California corporation law.  Under California law, the holders of common stock of the Company are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available, subject to certain restrictions.  The California general corporation law prohibits the Company from paying dividends on its common stock unless: (i) its retained earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend or (ii) immediately after giving effect to the dividend, the sum of the Company's assets (exclusive of goodwill and deferred charges) would be at least equal to 125% of its liabilities (not including deferred taxes, deferred income and other deferred liabilities) and the current assets of the Company would be at least equal to its current liabilities, or, if the average of its earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of its interest expense for the two preceding fiscal years, at least equal to 125% of its current liabilities.

Dividends from the Bank to the Company are restricted under California law to the lesser of the Bank's retained earnings or the Bank's net income for the latest three fiscal years, less dividends previously declared during that period, or, with the approval of the Department of Financial Institutions, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year.  As of December 31, 2007, the maximum amount available for dividend distribution under this restriction was approximately $8,866,000.  In addition, the Company's ability to pay dividends is subject to certain covenants contained in the indentures relating to the Trust Preferred Securities issued by the business trust (see Note 8).

62

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

10.           SHAREHOLDERS' EQUITY (Continued)

Earnings Per Share

A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows:

			Weighted
			Average
			Number of
	Net		Shares		Per Share
For the Year Ended	Income		Outstanding		Amount
December 31, 2007
Basic earnings per share		2,660,850		2,358,353	$	1.13
Effect of dilutive stock options				90,536
Diluted earnings per share		2,660,850		2,449,889	$	1.09
December 31, 2006
Basic earnings per share		2,955,778		2,312,140		1.28
Effect of dilutive stock options				116,940
Diluted earnings per share		2,955,778		2,429,080		1.22
December 31, 2005
Basic earnings per share		2,162,807		2,274,093		0.95
Effect of dilutive stock options				133,510
Diluted earnings per share		2,162,807		2,407,603		0.90

Shares of common stock issuable under stock options for which the exercise prices are greater than the average market prices are not included in the computation of diluted earnings per share due to their antidilutive effect.  There were 10,500 options excluded form the computation of diluted earnings per share for the year ended December 31, 2007.  There were no options excluded from the computation of diluted earnings per share for the years ended December 31, 2006 and 2005.

63

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

10. SHAREHOLDERS' EQUITY (Continued)

Stock-Based Compensation

The Company has two active share base compensation plans. 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 Incentive Plan, 122,007 shares of common stock are reserved for issuance to employees and directors under incentive and nonstatutory agreements. During the year ended December 31, 2007 a total of 38,500 options were granted under the Incentive Plan. On February 17, 2007 the Valley Commerce Bancorp Amended and Restated 1997 Stock Option Plan (“Prior Plan”) expired. Under the Prior Plan, 137, 359 shares of common stock are reserved for issuance. Subsequent to the 10,500 options granted during the year ended December 31, 2006, there were no additional options granted under the Prior Plan and no further grants may be made under this plan. The purpose of the plans 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.

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.  Payment in full for the option price must be made in cash or with Company common stock previously acquired by the optionee and held by the optionee for a period of at least six months.  The plans do not provide for the settlement of awards in cash and new shares are issued upon option exercise.  The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant.  Upon grant, options vest ratably over a one to five year period.  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.  A total of 38,500 options were granted under the Incentive Plan and 137,359 options were granted under the Prior Plan.

A summary of the activity within the Plans follows:

	For the Year Ended December 31, 2007
						Weighted
				Weighted		Average
				Average		Remaining
				Exercise		Contractual	Aggregate
	Shares			Price		Term	Intrinsic Value
Incentive:
Options outstanding at January 1, 2006		37,515		$	8.20
Options granted		-			-
Options exercised		(1,619	)		7.76
Options cancelled		-			-
Options outstanding at December 31, 2006		35,896			8.20
Options granted		38,500			14.50
Options exercised		(1,914	)		6.79
Options cancelled		(608	)		11.52
Options outstanding at December 31, 2007		71,874			11.58	7.55 years	$	427,984
Options vested or expected to vest at December 31, 2007		70,707			11.60	6.00 years	$	820,084	(1)
Options exercisable at December 31, 2007		29,662			7.79	5.33 years	$	289,011	(1)
Nonstatutory:
Options outstanding at January 1, 2006		213,937		$	7.47

64

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Options granted	10,500		18.58
Options exercised	(23,726	)	6.03
Options cancelled	(1,042	)	7.07
Options outstanding at December 31, 2006	199,669		7.47
Options granted	-		-
Options exercised	(95,684	)	5.68
Options cancelled	-		-
Options outstanding at December 31, 2007	103,985		9.10	5.48 years	$	887,080
Options vested or expected to vest at December 31, 2007	103,227		8.04	6.83 years	$	517,143
Options exercisable at December 31, 2007	93,517		8.36	5.48 years	$	862,022

(1) 10,500 options at an average price are excluded from intrinsic value 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 December 31, 2007.  There were 97,507 and 24,345 options exercised during the years ended December 31, 2007 and 2006, respectively.  There were 25,345 options exercised during the year ended December 31, 2006.  The total intrinsic value of options exercised during the years ended December 31, 2007, 2006, and 2005 was $1,152,962, $331,737, and $0, respectively.  The total fair value of shares vested during the years ended December 31, 2007, 2006, and 2005 was $219,283, $295,328, and $265,229, respectively. Cash received from option exercise for the years ended December 31, 2007 and 2006 was $556,335 and $154,402, respectively.  The total tax benefit of the non-qualified options exercised in 2007 and 2006 was $335,894 and $125,828, respectively.

There were 38,500 incentive stock options granted in 2007 and 10,500 non-statutory options granted in 2006.  The Company bases the fair value of the options granted on the date of grant using a Black-Scholes option pricing model that uses assumptions based on expected option life and the level of estimated forfeitures, expected stock volatility, risk free interest rate, and dividend yield.  The Company uses historical data to estimate expected option life.  Stock volatility is based on the historical volatility of the Company’s stock.  The risk-free rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of grant.

Regulatory Capital

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets.  Each of these components is defined in the regulations.  Management believes that the Company and the Bank met all their capital adequacy requirements as of December 31, 2007 and 2006.

65

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

10. SHAREHOLDERS' EQUITY (Continued)

Regulatory Capital (Continued)

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

	December 31,
	2007					2006
	Amount		Ratio			Amount		Ratio
Leverage Ratio
Valley Commerce Bancorp and Subsidiary	$	31,927,000		11.5	%	$	28,654,000		11.1	%
Minimum regulatory requirement	$	11,101,000		4.0	%	$	10,346,000		4.0	%
Valley Business Bank	$	31,538,000		11.4	%	$	28,336,000		11.0	%
Minimum requirement for "Well-Capitalized" institution	$	13,871,000		5.0	%	$	12,926,000		5.0	%
Minimum regulatory requirement	$	11,097,000		4.0	%	$	10,341,000		4.0	%
Tier 1 Risk-Based Capital Ratio
Valley Commerce Bancorp and Subsidiary	$	31,927,000		13.8	%	$	28,654,000		13.5	%
Minimum regulatory requirement	$	9,233,000		4.0	%	$	8,500,000		4.0	%
Valley Business Bank	$	31,538,000		13.7	%	$	28,336,000		13.4	%
Minimum requirement for "Well-Capitalized" institution	$	13,844,000		6.0	%	$	12,738,000		6.0	%
Minimum regulatory requirement	$	9,230,000		4.0	%	$	8,492,000		4.0	%
Total Risk-Based Capital Ratio
Valley Commerce Bancorp and Subsidiary	$	33,684,000		14.6	%	$	30,399,000		14.3	%
Minimum regulatory requirement	$	18,465,000		8.0	%	$	17,000,000		8.0	%
Valley Business Bank	$	33,296,000		14.4	%	$	30,081,000		14.2	%
Minimum requirement for "Well-Capitalized" institution	$	23,074,000		10.0	%	$	21,230,000		10.0	%
Minimum regulatory requirement	$	18,459,000		8.0	%	$	16,984,000		8.0	%

66

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

10. SHAREHOLDERS' EQUITY (Continued)

Stock Repurchase

On November 13, 2007 the Company announced that its Board of Directors authorized a common stock repurchase plan.  The plan calls for the repurchase up to an aggregate of $3,000,000 of the Company’s common stock.  The repurchases will be made from time to time by the Company in the open market or privately negotiated transactions as conditions allow and all shares repurchased under this plan will be returned to authorized but unissued shares.  The number, price and timing of the repurchases shall be at the Company’s sole discretion and the plan may be re-evaluated depending on market conditions, liquidity needs or other factors.  The Board, based on such re-evaluations, may suspend, terminate, modify or cancel the plan at any time without notice.  During 2007 the Company repurchased 27,440 shares at an average price of $13.91 for a total cost of $381,808.

11. OTHER EXPENSES

Other expenses consisted of the following:

	Year Ended December 31,
	2007		2006		2005
Data processing	$	494,863	$	459,981	$	422,158
Operations		479,803		454,229		414,485
Professional and legal		507,920		330,101		310,928
Promotional		304,774		268,374		258,360
Telephone and postal		213,401		205,804		171,117
Assessment and insurance		197,225		114,270		124,506
Supplies		187,834		180,384		236,859
Amortization expense		62,538		62,538		62,538
Other expenses		406,835		426,249		274,908
	$	2,855,193	$	2,501,930	$	2,275,859

67

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

12. INCOME TAXES

The provision for income taxes for the years ended December 31, 2007 and 2006 consisted of the following:

	Federal			State			Total
2007
Current	$	809,000		$	402,000		$	1,211,000
Deferred		(40,000	)		(37,000	)		(77,000	)
Provision for income taxes	$	769,000		$	365,000		$	1,134,000
2006
Current	$	1,107,000		$	467,000		$	1,574,000
Deferred		(6,000	)		8,000			2,000
Provision for income taxes	$	1,101,000		$	475,000		$	1,576,000
2005
Current	$	1,188,000		$	403,000		$	1,591,000
Deferred		(195,000	)		(56,000	)		(251,000	)
Provision for income taxes	$	993,000		$	347,000		$	1,340,000

68

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

12. INCOME TAXES (Continued)

Deferred tax assets (liabilities) consisted of the following:

	December 31,
	2007			2006
Deferred tax assets:
Allowance for loan losses	$	740,000		$	740,000
Unrealized loss on available-for-sale investment securities		30,000			156,000
Deferred compensation		499,000			356,000
Intangible assets		92,000			82,000
Future benefit of state income tax deduction		20,000			73,000
Total deferred tax assets		1,381,000			1,407,000
Deferred tax liabilities:
Bank premises and equipment		(34,000	)		(74,000	)
Loan costs		(261,000	)		(197,000	)
Other		(35,000	)		(36,000	)
Total deferred tax liabilities		(330,000	)		(307,000	)
Net deferred tax assets	$	1,051,000		$	1,100,000

Management believes that it is more likely than not that it will realize the above deferred tax assets in future periods; therefore, no valuation allowance has been provided against its deferred tax assets.

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

	Year Ended December 31,
	2007			2006			2005
	Rate			Rate			Rate
Federal income tax expense, at statutory rate		34.0	%		34.0	%		34.0	%
State franchise tax, net of Federal tax effect		7.2	%		7.2	%		7.2	%
Interest on obligations of states and political subdivisions		(6.0	)%		(4.8	)%		(2.7	)%
Net increase in cash surrender value of bank-owned life insurance		(2.2	)%		(1.2	)%		(1.0	)%
Other		(3.1	)%		(0.4	)%		1.2	%
Total income tax expense		29.9	%		34.8	%		38.7	%

69

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

12. INCOME TAXES (Continued)

The Company and its subsidiary file income tax returns in the U.S. federal and California jurisdictions.  There are currently no pending U.S. federal, state, and local income tax or non-U.S. income tax examinations by tax authorities.

With few exceptions, the Company is no longer subject to tax examinations by U.S. Federal taxing authorities for years ended before December 31, 2004, and by state and local taxing authorities for years ended before December 31, 2003.

The unrecognized tax benefits and the interest and penalties accrued by the Company as of December 31, 2007 were not significant.

13. RELATED PARTY TRANSACTIONS

During the normal course of business, the Company enters into transactions with related parties, including executive officers and directors.  These transactions include borrowings from the Company with substantially the same terms, including rates and collateral, as loans to unrelated parties.  The following is a summary of the aggregate activity involving related party borrowers during 2007:

Balance, January 1, 2007	$	4,359,782
Disbursements		7,952,031
Amounts repaid		(3,855,377	)
Balance, December 31, 2007	$	8,456,436
Undisbursed commitments to related parties, December 31, 2007	$	4,065,350

14. EMPLOYEE BENEFIT PLANS

Employee Retirement Plan

The Company adopted the Valley Business Bank 401(k) Profit Sharing Plan, effective January 1, 1997.  All employees that work 30 or more hours per week with more than 3 months of service are eligible to participate in the plan.  Eligible employees may elect to make tax deferred contributions of their salary up to the maximum amount allowed by law.  The Company matched 70% of the employees’ contributions, applicable to contributions of up to 6% of the employees’ annual salary beginning in April 2006.  Prior to that the Company had matched 50% of the employees’ contributions, applicable to contributions of up to 6% of the employees annual salary.  Company contributions vest at a rate of 20% annually.  Bank contributions for the years ended December 31, 2007, 2006, and 2005 totaled $112,583, $89,493, and $47,211 respectively.

70

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

14. EMPLOYEE BENEFIT PLANS (continued)

Salary Continuation and Retirement Plans

Salary continuation plans are in place for three executives. Under these plans, the executives will receive monthly payments after retirement until death.  These benefits are substantially equivalent to those available under split-dollar life insurance policies purchased by the Bank on the lives of the executives.  In addition, the estimated present value of these future benefits is accrued over the period from the effective dates of the plans until the participants' expected retirement dates.  The expense recognized under these plans for the years ended December 31, 2007, 2006, and 2005 totaled $229,774, $184,807, and $195,232, respectively. Income earned on these policies, net of expenses, totaled $111,813, $108,034, and $103,851 for the years ended December 31, 2007, 2006 and 2005, respectively.

In connection with these agreements, the Bank purchased single premium life insurance policies with cash surrender values totaling $6,184,531 and $5,934,563 at December 31, 2007 and 2006, respectively.  Income earned on these policies, net of expenses, totaled $249,968, $153,394 and $103,851 for the years ended December 31, 2007, 2006 and 2005, respectively.  Income earned on these policies is not subject to Federal and State income tax.

15. COMPREHENSIVE INCOME

Comprehensive income is reported in addition to net income for all periods presented.  Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income (loss) that historically has not been recognized in the calculation of net income.  The unrealized gains and losses on the Company's available-for-sale investment securities are included in other comprehensive income (loss).  Total comprehensive income and the components of accumulated other comprehensive income (loss) are presented in the consolidated statement of changes in shareholders’ equity.

At December 31, 2007, 2006 and 2005, the Company held securities classified as available-for-sale which had unrealized losses as follows:

				Tax
	Before			Benefit			After
	Tax			(Expense)			Tax
For the Year Ended December 31, 2007
Other comprehensive loss:
Unrealized holding losses	$	339,309		$	(125,255	)	$	214,054
Reclassification adjustment for losses included in net income		(1,145	)		376			(769	)
Total other comprehensive loss	$	340,454		$	(125,631	)	$	214,823

71

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

15. COMPREHENSIVE INCOME (continued)

				Tax
	Before			Benefit			After
	Tax			(Expense)			Tax
For the Year Ended December 31, 2006
Other comprehensive loss:
Unrealized holding losses	$	405,337		$	(169,943	)	$	235,394
Reclassification adjustment for losses included in net income		(52,737	)		19,012			(33,725	)
Total other comprehensive loss	$	458,074		$	(188,955	)	$	269,119
For the Year Ended December 31, 2005
Other comprehensive loss:
Unrealized holding losses	$	(810,296	)	$	314,073		$	(496,223	)
Reclassification adjustment for gains included in net income		(48,494	)		18,780			(29,714	)
Total other comprehensive loss	$	(761,802	)	$	295,293		$	(466,509	)

16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

The following methods and assumptions were used by management to estimate the fair value of its financial instruments at December 31, 2007 and 2006:

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

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

72

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Loans:  For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values.  The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness.  The carrying amount of accrued interest receivable approximates its fair value.

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

Federal Home Loan Bank stock:  For Federal Home Loan Bank stock, cost approximates fair value.

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

Long-term debt:  The fair values of fixed-rate borrowings are estimated by discounting their future cash flows using rates at each reporting date for similar instruments.  The fair values of variable rate borrowings are based on carrying value.

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

Commitments to extend credit:  Commitments to extend credit are primarily for variable rate loans and standby letters of credit.  For these commitments, there is no difference between the committed amounts and their fair values.  Commitments to fund fixed rate loans and standby letters of credit are at rates which approximate fair value at each reporting date.  The fair value of the commitments at each reporting date were not significant and not included in the accompanying table.

	December 31, 2007				December 31, 2006
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	9,297,346	$	9,297,346	$	13,265,547	$	13,265,547
Available-for-sale investment securities		56,615,000		56,615,000		55,298,000		55,298,000
Loans, net		199,514,271		192,838,151		182,331,506		184,830,865
Cash surrender value of life insurance policies		6,184,531		6,184,531		5,934,563		5,934,563
Accrued interest receivable		2,774,065		2,774,065		1,437,161		1,437,161
FHLB stock		1,658,600		1,658,600		1,825,900		1,825,900
Financial liabilities:
Deposits		215,386,068		214,836,974		207,576,169		207,667,710
Short-term debt		21,804,000		21,804,000		17,600,000		17,600,000
Long-term debt		8,146,049		7,977,153		8,547,638		8,215,627

73

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

Junior subordinated deferrable interest debentures	3,093,000	3,093,000	3,093,000	3,093,000
Accrued interest payable	231,342	209,463	231,342	284,942

74

VALLEY COMMERCE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

17. PARENT ONLY FINANCIAL STATEMENTS

CONDENSED BALANCE SHEET
December 31, 2007 and 2006
	2007			2006
ASSETS
Cash and due from banks	$	378,772		$	113,078
Investment in bank subsidiary		31,484,801			28,129,997
Other assets		214,957			402,302
	$	32,078,530		$	28,645,377
LIABILITIES AND
SHAREHOLDERS' EQUITY
Other liabilities	$	112,319		$	104,278
Junior subordinated debentures due to subsidiary grantor trust		3,093,000			3,093,000
Total liabilities		3,205,319			3,197,278
Shareholders' equity:
Common stock		23,511,066			20,683,720
Retained earnings		5,423,324			5,040,381
Accumulated other comprehensive loss,net of taxes		(61,179	)		(276,002	)
Total shareholders' equity		28,873,211			25,448,099
	$	32,078,530		$	28,645,377

75

17. PARENT ONLY FINANCIAL STATEMENTS (Continued)

STATEMENT OF INCOME
For the Years Ended December 31, 2007, 2006 and 2005
	2007			2006			2005
Income:
Earnings from investment in Valley Commerce Trust I	$	8,139		$	7,917		$	6,279
Expenses:
Interest on junior subordinated deferrable interest debentures		270,690			263,310			208,787
Other expenses		531,689			390,647			292,941
Total expenses		802,379			653,957			501,728
Loss before equity in undistributed income of subsidiary		(794,240	)		(646,040	)		(495,449	)
Equity in undistributed income of subsidiary		3,128,090			3,335,818			2,454,256
Income before income taxes		2,333,850			2,689,778			1,958,807
Income tax benefit		327,000			266,000			204,000
Net income	$	2,660,850		$	2,955,778		$	2,162,807

76

17. PARENT ONLY FINANCIAL STATEMENTS (Continued)

STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2007, 2006 and 2005
	2007			2006			2005
Cash flows from operating activities:
Net income	$	2,660,850		$	2,955,778		$	2,162,807
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed net income of subsidiary		(3,128,090	)		(3,335,818	)		(2,454,256	)
Stock-based compensation expense		32,519			18,847			-
Tax benefits on stock-based compensation		(335,893	)		(125,828	)		-
Decrease in other assets		523,238			77,182			10,536
Increase (decrease) in other liabilities		8,041			(4,007	)		(67,128	)
Net cash used in operating activities		(239,335	)		(413,846	)		(348,041	)
Cash flows from investing activities:
Investment I bank subsidiary		-			-			(7,500,000	)
Cash flows from financing activities:
Cash paid for fractional shares		(5,392	)		(5,004	)		-
Proceeds from the exercise of stock options		556,336			154,402			-
Tax benefits from stock-based compensation		335,893			125,828			-
Cash paid to repurchase common stock		(381,808	)		-			-
Net proceeds from sale of common stock		-			-			3,880,321
Net cash provided by financing activities		505,029			275,226			3,880,321
Increase (decrease) in cash and cash equivalents		265,694			(138,620	)		(3,967,720	)
Cash and cash equivalents at beginning of year		113,078			251,698			4,219,418
Cash and cash equivalents at end of year	$	378,772		$	113,078		$	251,698

77

ITEM 9 – CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There is no information required to be disclosed under this Item.

ITEM 9A – CONTROLS AND PROCEDURES

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

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Valley Commerce Bancorp and its subsidiary (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s management, including the chief executive officer and chief financial officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, presented in conformity with accounting principles generally accepted in the United States of America. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control -Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2007, the Company’s internal control over financial reporting was effective based on those criteria.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Disclosure controls and procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of December 31, 2007, of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 15d-15 of the Exchange Act.  Based upon that evaluation, the Company’s principal executive and financial officers concluded that the Company’s disclosure controls and procedures were effective, as of December 31, 2007, in timely providing them with material information relating to the Company, as required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in internal controls

There was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 15d-15 that occurred during the year ended December 31, 2007 that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B – OTHER INFORMATION

There is no information required to be disclosed under this Item.

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PART III

ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

For information concerning directors and executive officers of the Company, see “ELECTION OF DIRECTORS OF THE COMPANY” in the definitive Proxy Statement for the Company’s 2008 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A (the Proxy Statement), which section of the Proxy Statement is incorporated herein by reference.

ITEM 11 – EXECUTIVE COMPENSATION

The information required by Items 11 can be found in Valley Commerce Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein.

ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS

The information required by Items 12 can be found in Valley Commerce Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Items 13 can be found in Valley Commerce Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Items 14 can be found in Valley Commerce Bancorp’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities Exchange Act of 1934, and is by this reference incorporated herein.

ITEM 15. EXHIBITS

Exhibits required to be filed are listed on the “Exhibit Index” attached hereto, which is incorporated herein by reference.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

VALLEY COMMERCE BANCORP
By:	/s/ Donald A. Gilles
	Donald A. Gilles
	President and Chief Executive Officer
By:	/s/ Roy O. Estridge
	Roy O. Estridge
	Executive Vice President and Chief Financial Officer
Date:	March 19, 2008

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Donald A. Gilles or Roy O. Estridge as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Donald A. Gilles
Donald A. Gilles	Director and Chief Executive Officer (Principal Executive Officer)	March 18, 2008
/s/ Roy O. Estridge
Roy O. Estridge	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	March 18, 2008
/s/ David B. Day
David B. Day	Director	March 18, 2008
/s/ Walter A. Dwelle
Walter A. Dwelle	Chairman and Director	March 18, 2008
/s/ Thomas A. Gaebe
Thomas A. Gaebe	Director	March 18, 2008
/s/ Philip R. Hammond, Jr.
Philip R. Hammond, Jr.	Director	March 18, 2008
/s/ Russell F. Hurley
Russell F. Hurley	Vice Chairman and Director	March 18, 2008
/s/ Fred P. LoBue, Jr.
Fred P. LoBue, Jr.	Secretary and Director	March 18, 2008
/s/ Kenneth H. Macklin
Kenneth H. Macklin	Director	March 18, 2008
/s/ Barry R. Smith
Barry R. Smith	Director	March 18, 2008

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EXHIBIT INDEX

Exhibit	Description of Document
3.1	Articles of Incorporation of the Company, as amended (1)
3.2	Bylaws of the Company (1)
4.3	Specimen Stock Certificate (2)
10.1	Valley Commerce Bancorp Amended and Restated 1997 Stock Option Plan (1,3)
10.2	Lease of premises at 200 South Court Street, Visalia (1)
10.3	Executive Supplemental Compensation Agreement with Donald A. Gilles  (1,3)
10.4	Executive Supplemental Compensation Agreement with Roy O. Estridge (1,3)
10.5	Executive Supplemental Compensation Agreement with Allan W. Stone (1,3)
10.6	Valley Commerce Bancorp Amended and Restated 1997 Stock Option Plan (1,3)
10.7	Valley Commerce Bancorp 2007 Equity Incentive Plan (4)
10.8	Indenture between Valley Commerce Bancorp and Wells Fargo Bank National Association as Trustee, Junior Subordinated Debt Securities Due April 7, 2033 (1)
10.9	Junior Subordinated Debt Security Due 2003 of Valley Commerce Bancorp (1)
10.10	Guaranty Agreement of Valley Commerce Bancorp in favor of Wells Fargo Bank National Association as Trustee (1)
21	Subsidiaries of the Company (1)
24	Powers of Attorney (included on signature pages)
31	Rule 13a-14(a)/15d-14(a) Certifications
32	Section 1350 Certifications

_______________________________________

(1) Incorporated by reference to the same-numbered exhibit to the Company’s Registration Statement on Form SB-2, filed September 9, 2004.

(2) Incorporated by reference to the same-numbered exhibit to the Company’s Registration Statement on Form SB-2/A, filed October 27, 2004.

(3) Management contract or compensatory plan or arrangement.

(4) Incorporated by reference to the Company’s definitive proxy statement for its 2007 annual meeting of shareholders, filed on April 5, 2007

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