Valley Commerce Bancorp (VCBP) 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                                TO

COMMISSION FILE NUMBER: 000-51949

VALLEY COMMERCE BANCORP

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

California	46-1981399
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

200 South Court Street

Visalia, California  93291

(Address of principal executive offices)

(559) 622-9000

(Issuer’s telephone number)

Indicated 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the 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

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

Yes  £   No  T

The number of shares outstanding of the issuer’s Common Stock was 2,608,317 as of November 14, 2009.

INDEX

PART I - FINANCIAL INFORMATION	3
ITEM 1 - FINANCIAL STATEMENTS	4
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF	20
OPERATONS
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	36
ITEM 4 – CONTROLS AND PROCEDURES	36
PART II - OTHER INFORMATION	37
ITEM 1 LEGAL PROCEEDINGS	37
ITEM 1A  RISK FACTORS	37
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	37
ITEM 3 DEFAULTS UPON SENIOR SECURITIES	37
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	38
ITEM 5 OTHER INFORMATION	38
ITEM 6 EXHIBITS	38
SIGNATURES	39
EXHIBIT INDEX	40

2

PART I

Forward-Looking Information

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

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

3

PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

VALLEY COMMERCE BANCORP

CONDENSED CONSOLIDATED BALANCE SHEET

(UNAUDITED)

	September 30, 2009		December 31, 2008
Assets
Cash and due from banks	$	48,310,943	$	8,755,867
Federal funds sold		-		13,390,000
Total cash and cash equivalents		48,310,943		22,145,867
Available-for-sale investment securities, at fair value		40,772,000		42,018,000
Loans, less allowance for loan losses of $5,071,390 at September 30, 2009 and
$3,244,454 at December 31, 2008 (Note 4)		235,134,758		226,696,838
Bank premises and equipment, net		7,552,559		3,974,845
Cash surrender value of bank-owned life insurance		6,286,369		6,421,863
Accrued interest receivable and other assets		5,577,986		4,841,565
Total assets	$	343,634,615	$	306,098,978
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing	$	66,706,560	$	77,405,517
Interest-bearing		228,148,379		179,917,916
Total deposits		294,854,939		257,323,433
Accrued interest payable and other liabilities		2,513,614		2,357,915
Short-term debt		-		8,000,000
Long-term debt		3,718,674		5,184,346
Junior subordinated deferrable interest debentures		3,093,000		3,093,000
Total liabilities		304,180,227		275,958,694
Commitments and contingencies (Note 6)
Shareholders’ equity:
Serial preferred stock - no par value; 10,000,000 shares authorized, issued and
outstanding – 7,700 shares class B and 385 shares class C at September 30, 2009
and none issued at December 31, 2008		7,725,550		-
Common stock - no par value; 30,000,000 shares authorized; issued and outstanding –
2,608,317 shares at September 30, 2009 and 2,597,149 shares at December 31,
2008		25,750,901		24,684,529
Retained earnings		5,572,072		5,359,535
Accumulated other comprehensive income, net of taxes (Note 9)		405,865		96,220
Total shareholders’ equity		39,454,388		30,140,284
Total liabilities and shareholders’ equity	$	343,634,615	$	306,098,978

See notes to unaudited condensed consolidated financial statements.

4

VALLEY COMMERCE BANCORP

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

		For the Three Months					For the Nine Months
		Ended September 30,					Ended September 30,
		2009			2008		2009			2008
Interest Income:
Interest and fees on loans		$	3,839,994		$	3,906,358	$	11,215,081		$	11,650,825
Interest on investment securities:
Taxable			332,501			295,626		955,986			1,012,564
Exempt from Federal income taxes			181,236			202,673		577,645			596,206
Interest on Federal funds sold			73			98,944		9,972			147,044
Interest on deposits in banks			12,620			-		12,701			-
Total interest income			4,366,424			4,503,601		12,771,385			13,406,639
Interest Expense:
Interest on deposits			909,716			1,318,806		2,847,745			3,701,771
Interest on short-term debt			-			51,958		27,934			245,684
Interest on long-term debt			47,092			70,506		163,648			234,393
Interest on junior subordinated deferrable interest debentures			30,485			48,096		101,327			155,718
Total interest expense			987,293			1,489,366		3,140,654			4,337,566
Net interest income before provision for loan losses			3,379,131			3,014,235		9,630,731			9,069,073
Provision for loan losses			600,000			400,000		2,000,000			1,200,000
Net interest income after provision for loan losses			2,779,131			2,614,235		7,630,731			7,869,073
Non-Interest Income:
Service charges			198,587			192,352		567,459			528,046
Gain on sale of available-for-sale investment securities, net			164,756			-		168,818			46,412
Gain on sale of other real estate			16,055			-		16,055			-
Mortgage loan brokerage fees			13,105			8,674		40,587			42,475
Earnings on cash surrender value of life insurance policies			72,560			68,408		214,578			201,027
Officer life insurance benefits			-			-		317,488			-
Other			43,095			42,255		147,412			174,442
Total non-interest income			508,158			311,689		1,472,397			992,402
Non-Interest Expense:	��
Salaries and employee benefits			1,200,590			1,265,201		3,663,388			3,821,499
Occupancy and equipment			387,371			334,931		1,169,813			934,215
Other			775,894			645,578		2,379,594			2,080,154
Total non-interest expense			2,363,855			2,245,710		7,212,795			6,835,868
Income before provision for income taxes			923,434			680,214		1,890,333			2,025,607
Provision for income taxes			303,000			202,000		391,000			594,000
Net income		$	620,434		$	478,214	$	1,499,333		$	1,431,607
Dividends accrued and discount accreted on preferred
shares			(96,251	)		-		(257,736	)		-
Net income available to common shareholders		$	524,183		$	478,214	$	1,241,597		$	1,431,607
Basic earnings per share (Notes 8)		$	0.20		$	0.18	$	0.48		$	0.55
Diluted earnings per share (Notes 8)		$	0.20		$	0.18	$	0.48		$	0.54

See notes to unaudited condensed consolidated financial statements.

5

VALLEY COMMERCE BANCORP

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	For the Nine Months
	Ended September 30,
	2009			2008
Cash Flows from Operating Activities:
Net income	$	1,499,333		$	1,431,607
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,000,000			1,200,000
Increase in deferred loan origination fees, net		112,843			69,943
Depreciation		507,982			339,685
Amortization of intangibles		-			7,718
Tax benefit from exercise of stock options		(7,718	)		-
Gain on sale of available-for-sale investment securities, net		(168,818	)		(46,412	)
Dividends on Federal Home Loan Bank stock		-			(69,100	)
Accretion of discounts on investment securities, net		(10,941	)		(19,501	)
Increase in cash surrender value of bank-owned life insurance		(209,856	)		(190,033	)
Officer life insurance benefits		(317,488	)		-
Stock-based compensation expense		46,702			45,836
Loss on disposition of premises and equipment		285			685
Gain on sale of other real estate		(16,055	)		-
Decrease in accrued interest receivable and other assets		(713,903	)		(919,419	)
(Decrease) increase in accrued interest payable and other liabilities		(114,378	)		177,670
Net cash provided by operating activities		2,607,988			2,028,679
Cash Flows from Investing Activities:
Proceeds from matured and called available-for-sale investment securities		2,864,361			9,500,000
Proceeds from sales of available-for-sale investment securities		7,371,531			4,546,412
Purchases of available-for-sale investment securities		(12,940,757	)		(2,958,048	)
Proceeds from principal repayments from available-for-sale
mortgage-backed securities		4,656,784			2,673,412
(Purchase) redemption of Federal Home Loan Bank Stock, net		(14,800	)		425,900
Net increase in loans		(11,830,797	)		(26,702,594	)
Purchase of premises and equipment		(4,086,031	)		(1,380,896	)
Proceeds from sale of equipment		50			2,250
Proceeds from bank owned life insurance		662,838			-
Proceeds from sale of other real estate		1,296,089			-
Net cash used in investing activities		(12,020,732	)		(13,893,564	)

Continued on next page.

6

VALLEY COMMERCE BANCORP

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(Continued)

	For the Nine Months
	Ended September 30,
	2009			2008
Cash Flows from Financing Activities:
Net increase in noninterest-bearing and interest-bearing deposits	$	23,402,634		$	2,835,440
Net increase in time deposits		14,128,872			40,271,096
Proceeds from exercised stock options		59,998			3,975
Benefit from exercise of stock options		7,718			-
Proceeds from issuance of preferred stock		7,674,217			-
Cash paid to repurchase common stock		-			(804,118	)
Cash dividends paid on preferred stock		(227,310	)		-
Decrease in short-term borrowings, net		(8,000,000	)		(13,804,000	)
Principal payments on long-term debt		(1,465,732	)		(2,657,801	)
Cash paid to repurchase fractional shares		(2,577	)		(3,489	)
Net cash provided by financing activities		35,577,820			25,841,103
Increase in cash and cash equivalents		26,165,076			13,976,218
Cash and Cash Equivalents at Beginning of Year		22,145,867			9,297,346
Cash and Cash Equivalents at End of Period	$	48,310,943		$	23,273,564
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense	$	3,293,280		$	4,333,367
Income taxes	$	865,000		$	1,435,000
Non-Cash Investing Activities:
Net change in unrealized loss on available-for-sale securities	$	526,160		$	(958,137	)
Non-cash Financing Activities:
Accrued dividends on preferred stock	$	53,621		$	-
Real estate owned acquired through foreclosure	$	1,280,034			-
Cumulative effect of adopting EITF 06-04	$	-		$	102,115

See notes to unaudited condensed consolidated financial statements.

7

VALLEY COMMERCE BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

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"), in a one bank holding company reorganization intended to provide 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 Tulare.  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.  The Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits.  The Bank is participating in the FDIC Transaction Account Guarantee Program which was extended through June 30, 2010.  Under the program, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account.  Coverage under the Transaction Account Guarantee Program is in addition to and separate from the coverage under the FDIC’s general deposit insurance rules.

2. BASIS OF PRESENTATION

The interim unaudited condensed consolidated financial statements of Valley Commerce Bancorp and subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These interim condensed consolidated financial statements include the accounts of Valley Commerce Bancorp and its wholly owned subsidiary Valley Business Bank (collectively, the “Company”). Valley Commerce Trust I, a wholly-owned subsidiary formed for the exclusive purpose of issuing trust preferred securities, is not consolidated into the Company's consolidated financial statements and, accordingly, is accounted for under the equity method.  The Company’s investment in the Trust is included in accrued interest receivable and other assets on the consolidated balance sheet.  All significant intercompany accounts and transactions have been eliminated in consolidation.  All adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of (the “Company’s”) consolidated financial position at September 30, 2009 and December 31, 2008, the results of its operations for the three- and nine-month periods ended September 30, 2009 and 2008, and its cash flows for the nine-month periods ended September 30, 2009 and 2008 have been included therein.  Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted, however, the Company believes that the disclosures made are adequate to make the information not misleading.  These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2008 Annual Report on Form 10-K.  The results of operations and cash flows for the interim periods presented are not necessarily indicative of the results for a full year.

The preparation of these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.  The Company evaluated subsequent events for potential recognition and/or disclosure through November 14, 2009, the date the consolidated financial statements were issued.

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

8

2. BASIS OF PRESENTATION (Continued)

On April 21, 2009 the Company declared a 5% stock dividend payable on June 25, 2009 for all shareholders of record on June 10, 2009.  All earnings per share and per share amounts have been retroactively adjusted to reflect the stock dividend.

3. AVAILABLE-FOR-SALE INVESTMENT SECURITIES

The amortized cost and estimated fair value of available-for-sale investment securities at the dates indicated consisted of the following:

	September 30, 2009
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government agencies	$	4,939,844	$	137,156	$	-		$	5,077,000
Mortgage-backed securities		19,805,561		634,700		(3,261	)		20,437,000
Municipal securities		15,336,935		202,173		(281,108	)		15,258,000
	$	40,082,340	$	974,029	$	(284,369	)	$	40,772,000

Net unrealized gains on available-for-sale investment securities totaling $689,660 were recorded, net of $283,795 in income taxes, as accumulated other comprehensive income within shareholders' equity at September 30, 2009.  Proceeds and realized gains from the sale of available-for-sale investment securities for the nine months ended September 30, 2009 totaled $7,371,531 and $168,818, respectively.

	December 31, 2008
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Treasury securities	$	247,220	$	32,780	$	-		$	280,000
U.S. Government agencies		6,752,730		225,270		-			6,978,000
Mortgage-backed securities		15,101,739		553,862		(1,601	)		15,654,000
Municipal securities		19,752,811		98,080		(744,891	)		19,106,000
	$	41,854,500	$	909,992	$	(746,492	)	$	42,018,000

Net unrealized gains on available-for-sale investment securities totaling $163,500 were recorded, net of $67,280 in income taxes, as accumulated other comprehensive income within shareholders' equity at December 31, 2008.  Proceeds and realized gains from the sale of available-for-sale investment securities for the year ended December 31, 2008 totaled $4,537,315 and $46,412, respectively.

9

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

Investment securities with unrealized losses at September 30, 2009 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:
Mortgage-backed
securities	$	2,074,000	$	(3,484	)		-	$	-		$	2,074,000	$	(3,484	)
Municipal securities		1,032,000		(104,675	)	$	2,855,000		(176,210	)		3,887,000		(280,885	)
��	$	3,106,000	$	(108,159	)	$	2,855,000	$	(176,210	)	$	5,961,000	$	(284,369	)

Investment securities with unrealized losses at December 31, 2008 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:
Mortgage-backed
securities	$	335,000	$	(1,601	)	$	-	$	-		$	335,000	$	(1,601	)
Municipal securities		12,252,000		(528,257	)		1,906,000		(216,634	)		14,158,000		(744,891	)
	$	12,587,000	$	(529,858	)	$	1,906,000	$	(216,634	)	$	14,493,000	$	(746,492	)

Mortgage-backed Obligations

At September 30, 2009, the Company held 52 mortgage-backed obligations of which three were in a loss position for less than twelve months and none were in a loss position for twelve months or more.  Management believes the unrealized losses on the Company's investments in mortgage obligations were caused primarily by limited market liquidity and perceived credit risk on the part of investors.  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 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 September 30, 2009.

Municipal Securities

At September 30, 2009, the Company held 48 obligations of states and political subdivision securities of which none were in a loss position for less than twelve months and thirteen 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 due to the continued dislocation of the securities market.  All of these securities have continued to pay as scheduled despite their impairment due to current market conditions.  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 September 30, 2009.

10

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

The amortized cost and estimated fair value of investment securities at September 30, 2009 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	$	1,932	$	2,000
After one year through five years		19,789		20,000
After five years through ten years		4,480,691		4,560,000
After ten years		15,774,367		15,753,000
		20,276,779		20,335,000
Investment securities not due at a single
maturity date:
Mortgage-backed securities		19,805,561		20,437,000
	$	40,082,340	$	40,772,000

At September 30, 2009 and December 31, 2008, all investment securities were pledged to secure either public deposits or borrowing arrangements.

4. LOANS

Outstanding loans are summarized below, in thousands:

	September 30, 2009			December 31, 2008
Commercial	$	52,030,576		$	58,324,986
Real estate – mortgage		152,757,468			129,267,195
Real estate – construction		28,485,798			35,113,099
Agricultural		5,243,523			4,010,551
Consumer		2,142,375			3,566,210
		240,659,740			230,282,041
Deferred loan fees,  net		(453,592	)		(340,749	)
Allowance for loan losses		(5,071,390	)		(3,244,454	)
	$	235,134,758		$	226,696,838

The Company’s lending activities are geographically concentrated in the South San Joaquin Valley, primarily in Tulane and Fresno counties. The Company offers both fixed and floating rate loans and obtains collateral in the form or real property, business assets, and deposit accounts, but looks to business and personal cash flows as the primary source of repayment.

5. BANK PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

	September 30, 2009			December 31, 2008
Furniture and equipment	$	2,854,799		$	2,805,728
Premises		2,095,490			2,094,517
Leasehold improvements		550,548			550,548
Construction in progress		3,184,658			5,957
Land		1,454,745			601,530
		10,140,240			6,058,280
Less accumulated depreciation and amortization		(2,587,681	)		(2,083,435	)
	$	7,552,559		$	3,974,845

During February of 2009, the Company purchased an office building in Visalia, California.  The Company plans to relocate its administrative office and Visalia branch to the new facility in December 2009.

11

6. COMMITMENTS AND CONTINGENCIES

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

In the normal course of business, the Company has various outstanding commitments to extend credit which are not reflected in the financial statements, including loan commitments of $46.0 million and $47.4 million and letters of credit of $85,000 and $337,000 at September 30, 2009 and December 31, 2008, respectively.

At September 30, 2009, consumer loan commitments, which are generally unsecured, represent approximately 5% of total commitments.  Agricultural loan commitments represent approximately 2% of total commitments and are generally secured by crops and/or real estate.  Commercial loan commitments represent approximately 74% of total commitments and are generally secured by various assets of the borrower.  Real estate loan commitments represent the remaining 19% of total commitments and are generally secured by property with a loan-to-value not to exceed 80%.  In addition, the majority of the Bank’s commitments have variable interest rates.  Total commitments do not necessarily represent future cash requirements.  Each loan commitment and the amount and type of collateral obtained, if any, are evaluated on an individual basis.  Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party.  These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature.  Credit risk is similar to that involved in extending loan commitments to customers and, accordingly, evaluation and collateral requirements similar to those for loan commitments are used.  The deferred liability related to the Company’s stand-by letters of credit was not significant at September 30, 2009 or December 31, 2008.

7. STOCK BASED COMPENSATION

The Company has two active share based compensation plans; the Valley Commerce Bancorp 2007 Equity Incentive Plan (“Incentive Plan”) for which 96,476 shares of common stock are reserved for issuance to employees and directors under incentive and non-statutory agreements and the Valley Commerce Bancorp Amended and Restated 1997 Stock Option Plan (“Prior Plan”) for which 151,438 shares of common stock are reserved for issuance, however, no further grants may be made under this plan as it expired in February 2007.  The Incentive Plan provides for awards of stock options, restricted stock awards, qualified performance-based awards and stock grants.  The purpose of the Incentive Plan is to promote the long-term success of the Company and the creation of shareholder value.  The Board of Directors believes that the availability 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.

During the nine-month periods ended September 30, 2009 and 2008, no options were granted by the Company to its officers or directors.  Compensation expense is recognized over the vesting period on a straight line accounting basis.  Compensation cost related to stock options recognized in operating results were $12,482 and $14,678 in the three month periods ended September 30, 2009 and 2008, respectively.  Compensation cost related to stock options recognized in operating results were $38,051 and $45,836 in the nine-month periods ended September 30, 2009 and 2008, respectively.

The tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are classified as cash flow from financing activities in the statement of cash flows.   The excess tax benefits for the three months ended September 30, 2009 and 2008 were $1,574 and $1,579, respectively.  The excess tax benefits for the nine months ended September 30, 2009 and 2008 were $4,716 and $5,270, respectively.

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7. STOCK BASED COMPENSATION (Continued)

The following table summarizes information about stock option activity for the nine months ended September 30, 2009:

	For the Nine Months Ended September 30, 2009
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Incentive:
Options outstanding at January 1, 2009		74,878		$	10.36
Options granted		-			-
Options exercised		-			-
Options cancelled		(522	)		13.15
Options outstanding at
September 30, 2009		74,356			10.34	5.59 years	$	45,706	(1)
Options vested or expected to vest
after September 30, 2009		51,538			9.09	3.84 years		31,807	(1)
Options exercisable at September 30, 2009		43,926			8.40	3.76 years		45,706	(1)
Nonstatutory:
Options outstanding at January 1, 2009		99,132		$	8.68
Options granted		-			-
Options exercised		(11,168	)		5.37
Options cancelled		-			-
Options outstanding at
September 30, 2009		87,964			9.10	3.29 years	$	84,105	(1)
Options vested or expected to vest
after September 30, 2009		85,647			8.89	3.29 years		84,105	(1)
Options exercisable at September 30, 2009		85,647			8.89	2.79 years		84,105	(1)

(1) 53,698 non-statutory options with a weighted average price of $11.36 and 47,803 incentive options with a weighted average price of $12.60 are excluded from intrinsic value from table above because the exercise price is greater than the stock price at September 30, 2009.

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for options that were in-the-money at September 30, 2009.  There were 11,168 options exercised and 362 options exercised during the nine months ended September 30, 2009 and 2008, respectively.  The total intrinsic value, which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise, of options exercised during the nine months ended September 30, 2009 and 2008 were $19,295 and $1,100.  During the nine months ended 2009 and 2008, the amount of cash received from the exercise of stock options was $59,998 and $3,975, respectively.  There were no options vested during the three months ended September 30, 2009 and 2008.  The total fair value of shares vested during the nine months ended September 30, 2009 and 2008 was $60,000 and $124,251, respectively.

Management estimates expected forfeitures and recognizes compensation costs only for those equity awards expected to vest.  As of September 30, 2009, there was $144,594 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan.  The cost is expected to be realized over a weighted average period of 1.52 years and will be adjusted for subsequent changes in estimated forfeitures.

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8. EARNINGS PER SHARE COMPUTATION

Basic earnings per share are computed by dividing income available to common shareholder by the weighted average common shares outstanding for the period.  Diluted earnings per share reflect the potential dilution that could occur if outstanding stock options were exercised.  Diluted earnings per share are computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period plus the dilutive effect of options.  Earnings per share computations have been adjusted to reflect the stock dividend payable to shareholders of record as of June 10, 2009.

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2009			2008		2009			2008
Net Income:
Net income	$	620,434		$	478,214	$	1,499,333		$	1,431,607
Dividends accrued and discounts
accreted on preferred shares		(96,251	)		-		(257,736	)		-
Net income allocated to common
shareholders	$	524,183		$	478,214	$	1,241,597		$	1,431,607
Earnings Per Share:
Basic earnings per share	$	0.20		$	0.18	$	0.48		$	0.55
Diluted earnings per share	$	0.20		$	0.18	$	0.48		$	0.54
Weighted Average Number of Shares Outstanding:
Basic shares		2,605,646			2,583,700		2,600,176			2,594,507
Diluted shares		2,619,492			2,626,545		2,610,051			2,647,829

There were 101,469 options excluded from the computation of diluted earnings per share for the three-and nine-month periods ended September 30, 2009, respectively, and 47,775 excluded from the computation of diluted earnings per share for the three-and nine-month periods ended September 30, 2008, respectively, as they were identified as anti-dilutive.

9. COMPREHENSIVE INCOME

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

	For the Three Months					For the Nine Months
	Ended					Ended
	September 30, 2009		September 30, 2008			September 30, 2009		September 30, 2008
Net income	$	620,434	$	478,214		$	1,499,333	$	1,431,607
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale		323,367		(364,293	)		309,645		(556,318	)
investment securities, net of tax
Total other comprehensive income	$	943,801	$	113,921		$	1,808,978	$	875,289

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10. INCOME TAXES

The Company files its income taxes on a consolidated basis with its subsidiaries.  The allocation of income tax expense 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 amounts of assets and liabilities and their tax bases.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  On the condensed consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

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 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 condensed consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits as a component of tax expense in the condensed consolidated statements of income. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the nine months ended September 30, 2009.

11. STOCK REPURCHASE

In 2007, the Board of Directors approved a plan to incrementally repurchase up to an aggregate of $3,000,000 of the Company’s common stock.  The program commenced in November of 2007 and, based on the October 2008 and October 2009 plan extensions approved by the Board of Directors, will continue until its expiration on November 30, 2010, subject to earlier termination at the Company’s discretion.  Beginning January 30, 2009, the Company was restricted from repurchasing its common stock due to its issuance of preferred stock to the United States Department of the Treasury in conjunction with the Company’s participation in the Capital Purchase Program (See Note 12). 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.  There were no shares repurchased during the nine month period ended September 30, 2009.  During the nine months ended September 30, 2008, the Company repurchased 53,032 shares for a total cost of $804,118 or an average price of $15.16 per share.  Since the plan adoption the Company has repurchased 80,472 shares for a total cost of $1,185,927 at an average price of $14.74 per share.

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12. PREFERRED STOCK

On January 30, 2009, the Company entered into a letter Agreement (the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued and sold (i) 7,700 shares of the Company’s Fixed Rate Cumulative Preferred Stock, Series B (the “Series B Preferred Stock”) and (ii) a warrant to purchase 385 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock Series C stock, (the “Warrant Preferred” or “Series C Preferred Stock”) for a combined purchase price of $7,700,000 and were recorded net of $20,793 in offering costs.  The Treasury exercised the Warrant immediately upon issuance.

The Series B Preferred Stock will Qualify as Tier 1 capital and will pay cumulative dividends quarterly at a rate of 5% per annum for the first five years, and 9% per annum thereafter.  The Warrant Preferred will pay cumulative dividends at a rate of 9% per annum until redemption.  The terms governing the Series B Preferred Stock and the Series C Preferred Stock provide that either series may be redeemed by the Company after three years; however, the Warrant Preferred may not be redeemed until after all the Series B Preferred stock has been redeemed, and prior to the end of three years, the Series B Preferred stock and the Warrant Preferred may be redeemed by the Company only with proceeds from the sale of Qualifying equity securities of the Company (a” Qualified Equity Offering”).  The American Recovery and Reinvestment Act of 2009, which was enacted on February 17, 2009 permits the Company to redeem the Series B Preferred stock and the Warrant Preferred without a Qualified Equity Offering, subject to the Company’s consultation with the Board of Governors of the Federal Reserve System.

The Series B Preferred Stock and the Warrant Preferred were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.  The Company has agreed to register the Series B Preferred Stock and the Warrant Preferred as soon as practicable (but not later than 30 days) after demand by the Untied States Department of the Treasury.  Neither the Series B Preferred Stock nor the Warrant Preferred will be subject to any contractual restrictions on transfer, except that Treasury and its transferees shall not effect any transfer of the Preferred which would require the Company to become subject to the periodic reporting requirements of Section 13 or 15(d) of the Exchange Act.

In the Purchase Agreement, the Company agreed that, until such time as Treasury ceases to own any debt or equity securities of the Company acquired pursuant to the Purchase Agreement, the Company will take all necessary action to ensure that its benefit plans with respect to its senior executive officers comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the “EESA”) as implemented by any guidance or regulation under the EESA that has been issued and is in effect as of the date of issuance of the Series B Preferred Stock and the Warrant, and has agreed to not adopt any benefit plans with respect to, or which covers, its senior executive officers that do not comply with the EESA, and the applicable executives have consented to the foregoing.  Furthermore, the Purchase Agreement allows Treasury to unilaterally amend the terms of the agreement.

With respect to dividends on the Company’s common stock, Treasury’s consent shall be required for any increase in common dividends per share until the third anniversary of the date of its investment unless prior to such third anniversary the Series B Preferred Stock and the Warrant Preferred is redeemed in whole or the Treasury has transferred all of the Senior Preferred Series B Preferred Stock and Warrant Preferred to third parties.  After the third anniversary and prior to the tenth anniversary, the Treasury’s consent shall be required for any increase in aggregate common dividends per share that no increase in common dividends may be made as a result of any dividend paid in common shares, any stock split or similar transaction.  From and after the tenth anniversary, the Company shall be prohibited from paying common dividends or repurchasing any equity securities or trust preferred securities until all equity securities held by the Treasury are redeemed in whole of the Treasury has transferred all of such equity securities to third parties.

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13. FAIR VALUE MEASUREMENT

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2009.  The table also indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to valuation methodology:

Investment securities: Where quoted prices are available in an active market, investment securities available-for-sale classified within level 1 of the hierarchy.  Level 1 includes investment securities available-for-sale that have quoted prices in an active market for identical assets.  If quoted market prices for identical securities are not available then fair value are estimated by independent sources using pricing models and/or quoted prices of investment securities with similar characteristics or discounted cash flows.  The Company has categorized all of its investment securities available-for-sale as level 2, since U.S. Agency MBS are mainly priced in this latter manner.

Impaired loans: Impaired loans (loans which are not expected to repay all principal and interest amounts due in accordance with the original contractual tersm) are measured at an observable market price (if available) or at the fair value of the loan’s collateral (if collateral dependent). Fair value of the loan’s collateral is determined by appraisals or independent valuation which is then adjusted for the estimated costs related to liquidation of the collateral.  Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived form properties of similar type and/or locale. A significant portion of the Bank’s impaired loans are measured using the estimated fair market value of the collateral less the estimated costs to sell.  Therefore, the Company has categorized its impaired loans as level 2 and level 3.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurements
			at September 30, 2009, Using
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Fair Value		Identical Assets		Inputs		Inputs
	September 30, 2009		(Level 1)		(Level 2)		(Level 3)
Assets:
Available-for-sale investment securities	$	40,772,000	$	—	$	40,772,000	$	—

The fair value of securities available for sale equals quoted market price, if available.  If quoted market prices are not available, fair value is determined using quoted market prices for similar securities.  Changes in fair market value are recorded in other comprehensive income.

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13. FAIR VALUE MEASUREMENT (Continued)

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements
			at September 30, 2009, Using
	Fair Value September 30, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	8,512,000	$	—	$	546,000	$	7,966,000

Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses expense on the Condensed Consolidated Statement of Income.  Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had outstanding principal balances of $9,927,000 at September 30, 2009, with a valuation allowance of $1,415,000 at September 30, 2009.  The net increase in specific allocations of the allowance for loan losses, were $1,134,000 during the nine months ended September 30, 2009.

The Company did not change the methodology used to determine fair value for any financial instruments during 2009.  Accordingly, for any given class of financial instruments, the Company did not have any transfers between level 1, level 2, or level 3 during the nine month period ended September 30, 2009.

Fair Value of Financial Instruments

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

	September 30, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	48,310,943	$	48,310,943	$	22,145,867	$	22,145,867
Available-for-sale
investment securities		40,772,000		40,772,000		42,018,000		42,018,000
Loans, net		235,134,758		217,713,165		226,696,838		220,628,940
Cash surrender value of life
insurance policies		6,286,369		6,286,369		6,421,863		6,421,863
Accrued interest receivable		5,577,986		5,577,986		3,737,365		3,737,365
FHLB stock		1,119,000		1,119,000		1,104,200		1,104,200
Financial liabilities:
Deposits		294,854,939		295,212,381		257,323,433		256,576,304
Short-term debt		-		-		8,000,000		8,000,000
Long-term debt		3,718,614		4,420,705		5,184,346		4,976,558
Junior subordinated deferrable
interest debentures		3,093,000		866,000		3,093,000		866,000
Accrued interest payable		144,153		144,153		296,779		296,779
Off-balance-sheet financial
Instruments:
Commitments to extend credit		45,984,151		45,984,151		47,408,997		47,408,977
Standby letters of credit		85,225		85,225		337,330		337,330

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14. RECENT ACCOUNTING DEVELOPMENTS

FASB Accounting Standards Codification™ (ASC or Codification): In June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-01 (formerly Statement No. 168), “Topic 105 - Generally Accepted Accounting Principles - FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles.” The Codification is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP). The Codification does not change current
 GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place.  All existing accounting standard documents are superseded and all other accounting literature not included in the Codification is considered non-authoritative.  The Codification is effective for interim or annual reporting periods ending after September 15, 2009.

Measuring Liabilities at Fair Value:  In August 2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value”.  This ASU provides amendments for fair value measurements of liabilities.  It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques.  ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009.  Management is assessing the impact, if any, that         ASU 2009-05 will have on the Company’s financial condition, results of operations, and disclosures.

Accounting for Transfers of Financial Assets:  In June 2009, the FASB issued Statement No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140” (SFAS No. 166).  SFAS 166 amends the derecognition accounting and disclosure guidance relating to SFAS 140.  SFAS 166 eliminates the exemption from consolidation for QSPEs, it also requires a transferor to evaluate all existing QSPEs to determine whether it must be consolidated in accordance with SFAS 167.  SFAS 166 is effective as of the beginning of the first annual reporting period that begins after November 15, 2009.  Management is assessing the impact, if any, that SFAS 166 will have on the Company’s financial condition, results of operations, and disclosures.

FASB Amends Disclosures about Fair Value of Financial Instruments:  In April 2009, the FASB issued ASC 825 (formerly FASB Staff Position (FSP) 107-1 and APB 28-1), “Interim Disclosures about Fair Value of Financial Instruments.”  ASC 825 requires a public entity to provide disclosures about fair value of financial instruments in interim financial information.  ASC 825 is effective for interim and annual financial periods ending after June 15, 2009.  The Company adopted the provisions of ASC 825 on April 1, 2009 and the impact of the adoption is more fully discussed in Note 13 – Fair Value Measurement.

FASB Clarifies Other-Than-Temporary Impairment:  In April 2009, the FASB issued ASC 320 (formerly FSP FAS 115-2, FAS124-2 and EITF 99-20-2), “Recognition and Presentation of Other-Than-Temporary-Impairment.”  ASC 320 (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis.  Under ASC 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses.  The amount of impairment related to other factors is recognized in other comprehensive income.  ASC 320 is effective for interim and annual periods ending after June 15, 2009.  The Company adopted the provisions of ASC 320 on April 1, 2009.  Details related to the adoption of ASC 320 are more fully discussed in Note 3 – Investment Securities.  The provisions of ASC 320 did not have an impact on the Company’s financial condition and results of operations.

FASB Clarifies Application of Fair Value Accounting:  In April 2009, the FASB issued ASC 820 (formerly FSP FAS 157-4), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”  ASC 820 affirms the objective of fair value when a market is not active, clarifies and includes additional factors for determining whether there has been a significant decrease in market activity, eliminates the presumption that all transactions are distressed unless proven otherwise, and requires an entity to disclose a change in valuation technique.  ASC 820 is effective for interim and annual periods ending after June 15, 2009.  The Company adopted the provisions of ASC 820 on April 1, 2009.  The provisions of ASC 820 did not have a material impact on the Company’s financial condition and results of operations.

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

Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements contained herein that are not historical facts, such as statements regarding the company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations.  These statements are forward-looking in nature and involve a number of risks and uncertainties.  Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates, a decline in economic conditions at the international, national or local level on the Company’s results of operations, the Company’s ability to continue its internal growth at historical rates, the Company’s ability to maintain its net interest margins, and the quality of the Company’s earning assets; (3) changes in the regulatory environment; (4) fluctuations in the real estate market; (5) changes in business conditions and inflation; (6) changes in securities markets; and (7) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses. Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluation the business prospects of the Company.

When the Company uses in this Quarterly Report on Form 10-Q the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe” and similar expressions, the Company intends to identify forward-looking statements.  Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report on Form 10-Q.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.  The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements.  Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict.  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.

The Securities and Exchange Commission (SEC) maintains a web site which contains reports, proxy statements, and other information pertaining to registrants that file electronically with the SEC, including the Company.  The internet address is: www.sec.gov.  In addition, our periodic and current reports are available free of charge on our website at www.valleybusinessbank.net as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

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The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and related notes appearing in  Item 1, Financial Statements, in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in Valley Commerce Bancorp’s Annual Report filed on form 10-K for the year ended December 31, 2008.

Introduction

Overview

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

The Company earned net income of $620,000, or $0.20 per diluted share for the three months ended September 30, 2009, compared to $478,000 or $0.18 per diluted share for the three months ended September 30, 2008.  The Company earned net income of $1.5 million or $0.48 per diluted share, for the nine-month period ended September 30, 2009, compared to $1.4 million, or $0.54 per diluted share, for the nine-month period ended September 30, 2008.  The annualized return on average assets was 0.63% for the nine months ended September 30, 2009 and 0.65% for the same 2008 period.  The annualized return on average common shareholders’ equity for the nine months ended September 30, 2009 and 2008 was 5.34% and 6.55%, respectively.  Net income for the nine months ended September 30, 2009 slightly increased from the comparable period in the prior year  due to a $562,000 increase in net interest income, a $480,000 increase in non-interest income and a decrease in the provision for income taxes of $203,000 offset by an $800,000 increase in the provision for loan losses and $377,000 increase in non-interest expense.  While net income increased during the period, diluted earnings per share decreased due primarily to dividends paid and accrued on the Company’s preferred stock which reduced the amount of net income available to shareholders of common stock.

At September 30, 2009, the Company’s total assets were $343.6 million, representing an increase of $37.5 million or 12% compared to December 31, 2008, and an increase of $37.6 million or 12% compared to September 30, 2008.  Total loans, net of the allowance for loan losses, were $235.1 million at September 30, 2009, representing an increase of $8.4 million or 4% compared to December 31, 2008, and an increase of $10.2 million or 5% compared to September 30, 2008.  Loan volume growth in the 2009 period centered in new commercial mortgage loans.

Total deposits were $294.9 million at September 30, 2009, representing an increase of $37.5 million or 15% compared to December 31, 2008, and an increase of $36.4 million or 14% compared to September 30, 2008.  During the first nine months of 2009, time deposits, including brokered time deposits, increased by $14.1 million or 1.5%.  The amount of brokered time deposits at September 30, 2009, December 31, 2008, and September 30, 2008 were $29.2 million, $15.9 million, and $19.1 million, respectively.  The Company’s long term growth strategy is based on acquiring core deposits in its local market rather than relying heavily on brokered time deposits or other wholesale funding sources.  The Company is presently utilizing brokered deposits to lessen any impact that would be caused by a rising interest rate scenario on its net interest margin.

At September 30, 2009, the Company’s leverage ratio was 12.5% while its Tier 1 risk-based capital ratio and total risk-based capital ratio were 15.3% and 16.6%, respectively.  At December 31, 2008, the Company’s leverage ratio was 10.9% while its Tier 1 risk-based capital ratio and total risk-based capital ratio were 12.7% and 14.0%, respectively.  The leverage, Tier 1 risk-based capital and total risk-based capital ratios at September 30, 2008 were 10.6%, 12.6% and 13.7%, respectively.  The Company’s capital ratios increased between September 30, 2009 and the prior periods as a result of the issuance of preferred stock to the United States Department of Treasury on January 30, 2009, as well as net income earned by the Company during the period.  The Company issued and sold 7,700 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B and a warrant to purchase 385 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred stock, Series C for a combined price of $7.7 million.  The Treasury exercised the warrant immediately upon issuance.

21

Results of Operations for the Nine Months Ended September 30, 2009 and 2008

Net Interest Income

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

	Average balances and weighted average yields and costs
	Nine Months ended September 30,
	2009							2008
			Interest		Average					Interest		Average
	Average		income/		yield/			Average		income/		yield/
(dollars in thousands)	Balance		Expense		Cost			Balance		Expense		Cost
ASSETS
Due from banks	$	6,251	$	13		0.28	%	$	-	$	-	$	-
Federal funds sold		5,872		9		0.20	%		9,988		147		1.97	%
Available-for-sale investment securities:
Taxable		26,600		956		4.81	%		27,452		1,013		4.93	%
Exempt from Federal income taxes (1)		18,517		578		6.32	%		19,560		596		6.17	%
Total securities (1)		45,117		1,534		5.43	%		47,012		1,609		5.44	%
Loans (2) (3)		238,571		11,215		6.29	%		216,323		11,651		7.19	%
Total interest-earning assets (1)		295,811		12,771		6.03	%		273,323		13,407		6.70	%
Noninterest-earning assets, net of allowance for loan losses		23,718							20,215
Total assets	$	319,529						$	293,538
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Other interest bearing	$	108,342	$	989		1.22	%	$	91,492	$	1,300		1.90	%
Time deposits less than $100,000		24,792		451		2.43	%		22,551		609		3.61	%
Time deposits $100,000 or more		68,826		1,407		2.73	%		60,838		1,793		3.94	%
Total interest-bearing deposits		201,960		2,847		1.88	%		174,881		3,702		2.83	%
Short-term debt		2,640		16		0.81	%		11,889		246		2.76	%
Long-term debt		4,371		176		5.38	%		6,635		234		4.71	%
Junior subordinated deferrable interest debentures		3,093		101		4.37	%		3,093		156		6.74	%
Total interest-bearing liabilities		212,064		3,140		1.98	%		196,498		4,338		2.95	%
Noninterest-bearing deposits		67,247							65,856
Other liabilities		2,245							1,975
Total liabilities		281,556							264,329
Shareholders’ equity		37,973							29,209
Total liabilities and shareholders’ equity	$	319,529						$	293,538
Net interest income and margin (1)			$	9,631		4.58	%			$	9,069		4.58	%

(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. There was $103,000 interest income reversed on nonaccrual loans.  Interest income reversed upon the transfer of loans to nonaccrual status totaled $36 and $8 for 2009 and 2008, respectively.

(3) Interest income on loans includes amortized loan fees, net of costs, of $469 and $454 for 2009 and 2008, respectively.

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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 nine-month periods ended September 30, 2009 and 2008.

Changes in net interest income due to changes in volumes and rates

	Nine months ended September 30, 2009 vs. September 30, 2008
	due to change in:
	Average			Average
	Volume			Rate (1)			Total
(In thousands)
Increase (decrease) in interest income:
Due from banks	$	-		$	13		$	13
Federal funds sold		(61	)		(77	)		(138	)
Investment securities
Taxable		(31	)		(26	)		(57	)
Exempt from Federal income taxes		(48	)		30			(18	)
Total securities		(79	)		4			(75	)
Loans		1,197			(1,633	)		(436	)
Total interest income		1,057			(1,693	)		(636	)
(Decrease) increase in interest expense:
Other interest bearing deposits		239			(550	)		(311	)
Time deposits less than $100,000		60			(218	)		(158	)
Time deposits $100,000 or more		235			(621	)		(386	)
Total interest-bearing deposits		534			(1,389	)		(855	)
Short-term debt		(191	)		(39	)		(230	)
Long-term debt		(80	)		22			(58	)
Junior subordinated deferrable interest debentures		-			(55	)		(55	)
Total interest expense		263			(1,461	)		(1,198	)
Increase in net interest income	$	800		$	(238	)	$	562

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

Net interest income before the provision for loan losses was $9.6 million for the nine-month period ended September 30, 2009 compared to $9.1 million for the same period of 2008, an increase of $562,000 or 6%.  Growth in average interest-earning assets and interest-bearing liabilities caused the Company’s net interest income to increase by $794,000 and changes in interest rates on these same accounts caused net interest income to decrease by $232,000.

The increase in net interest income was caused by reduced cost of funds and increases in the loan volume offset by declining yields on loans.  Despite a $22.2 million or 10% increase in average loans, the Company’s interest income from loans decreased by $436,000 due to the average yield decreasing from 7.19% in the 2008 period to 6.29% in the 2009 period, a change of 90 basis points.  This primarily reflected the impact of Federal Fund rate decreases totaling 175 basis points occurring between October 2008 to September 30, 2009 and the resulting impact on the variable rate portion of the Company’s loan portfolio.  At September 30, 2009, approximately 70% of the Company’s loan portfolio was comprised of variable rate loans, of which 40% were at the floor rate.  In addition, there was a greater volume of nonaccrual loans in the 2009 period.  There was also a decrease in investment income as average available-for-sale investment securities decreased by $1.9 million or 4%, due primarily to called, matured and sold securities.

Total interest income for the nine-month periods ended September 30, 2009 and 2008 was $12.8 million and $13.4 million, respectively, a decrease of $635,000 or 5%, which resulted primarily from falling interest rates, but offset by an increase in the balance of average interest-earning assets during the period.

The average rate paid on interest-bearing liabilities was 1.98% in the 2009 period compared to 2.95% in the 2008 period, a reduction of 97 basis points.  Average total interest-bearing liabilities in the 2009 period increased by $15.6 million or 8% compared to the 2008 period.  This included an increase in average other interest bearing deposits of $16.9 million or 18%, and an increase of $10.2 million or 12% in average time deposits.  These increases were offset by an $11.5 million or 62% decrease in the Company’s combined short-term and long-term debt.

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The Company’s net interest margin (the quotient of net interest income divided by total interest-earning assets) on a taxable equivalent basis remained flat at 4.58% during the nine month periods ended September 30, 2009 and 2008 as the increase in net interest income was offset by the increase in interest-earning assets.  This was attributable both to loan growth and to management’s efforts to mitigate the impact of falling interest rates.  These efforts included utilizing rate floors on variable priced loans and lowering of deposit rates.

Provision for Loan Losses

The provision for loan losses, which is included in operations to support management’s estimate of 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.  A $2.0 million loan loss provision was recorded during the nine months ended September 30, 2009 compared to a $1.2 million provision for loan losses for the nine-month period ended September 30, 2008.  Management determined the provision for loan losses for the period ended September 30, 2009 after consideration of current economic conditions in the Bank’s primary markets and changes in the volume of impaired loans.  See the sections below titled “Allowance for Loan Losses.”

Non-Interest Income

Non-interest income for the nine-month periods ended September 30, 2009 and 2008 totaled $1.5 million and $992,000, respectively, an increase of $480,000 or 48%.  The components of non-interest income during each period were as follows:

Non-interest income
	Nine Months ended September 30,
(in thousands)	2009		2008		Increase (Decrease)
Service charges	$	567	$	528	$	39
Gain on sale of available-for-sale investment securities		169		46		123
Gain on sale of other real estate		16		-		16
Mortgage loan brokerage fees		41		42		(1	)
Earnings on cash surrender value of life insurance policies		215		201		14
Officer life insurance benefits		317		-		317
Other		147		175		(28	)
Total non-interest income	$	1,472	$	992	$	480

Service charges increased by $39,000 due to a $65,000 increase in account analysis charges offset by a $23,000 decrease in non-sufficient funds and overdraft charges.  Non-interest income also increased by $317,000 due to nonrecurring officer life insurance benefits.  Within the other category, the Federal Home Loan Bank (“FHLB”) dividend income decreased $63,000 due to the cessation of FHLB dividends in the 2009 period.  This was offset by rental income of $33,000 from an office building purchased to house the Company’s Visalia branch and administrative offices.

Non-Interest Expense

Non-interest expense was $7.2 million for the nine-month period ended September 30, 2009 compared to $6.8 million for the nine-month period ended September 30, 2008, an increase of $377,000 or 6%.  Assessment and insurance expense increased by $287,000 or 153% as Federal Deposit Insurance Corporation assessments increased due to higher premiums and an industry-wide special assessment cost the Company $141,000.  Occupancy and equipment expense increased by $236,000 primarily due to expenses related to the planned relocation of the Visalia offices to a larger facility in the latter part of 2009.  Data processing costs increased by $38,000 due primarily to the increased usage of electronic banking products by customers and branch operations staff.

Professional and legal costs increased by $95,000 in the 2009 period due to legal costs related to compensation and other issues and to the timing of audit fee payments.  Salary and benefits decreased by $158,000 due to wage and salary restrictions imposed by management.  The other category also decreased by $24,000 mostly due to lower employee hiring expenses.

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The following table describes the components of non-interest expense for the nine-month periods ended September 30, 2009 and 2008:

Non-interest expense
	Nine Months ended September 30,
(in thousands)	2009		2008		Increase (Decrease)
Salaries and employee benefits	$	3,663	$	3,821	$	(158	)
Occupancy and equipment		1,170		934		236
Other real estate owned		14		-		14
Data processing		428		390		38
Operations		363		389		(26	)
Professional and legal		372		277		95
Advertising and business development		164		209		(45	)
Telephone and postal		160		163		(3	)
Supplies		113		142		(29	)
Assessment and insurance		475		188		287
Amortization expense		-		8		(8	)
Other expenses		291		315		(24	)
Total non-interest expense	$	7,213	$	6,836	$	377

Provision for Income Taxes

The provision for income taxes for the nine-month periods ended September 30, 2009 and 2008 was $391,000 and $594,000, respectively.  The effective tax rates for these periods were 20.68%, and 29.32%, respectively.  The decrease in the effective tax rate was primarily due to increases in tax exempt income received in the 2009 period, including officer life insurance benefits.

25

Results of Operations for the Three Months Ended September 30, 2009

Net Interest Income

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

Average balances and weighted average yields and costs
	Three Months ended September 30,
	2009							2008
			Interest		Average					Interest		Average
	Average		income/		yield/			Average		income/		yield/
(dollars in thousands)	Balance		Expense		Cost			Balance		Expense		Cost
ASSETS
Due from banks	$	18,550	$	13		0.28	%	$	-	$	-		-
Federal funds sold		1,563		-		-			20,291		99		1.94	%
Available-for-sale investment securities:
Taxable		28,612		332		4.60	%		23,340		295		5.03	%
Exempt from Federal income taxes (1)		17,375		181		6.26	%		19,742		203		6.20	%
Total securities (1)		45,987		513		5.23	%		43,082		498		5.56	%
Loans (2) (3)		243,947		3,840		6.25	%		224,164		3,907		6.93	%
Total interest-earning assets (1)		310,047		4,366		5.71	%		287,537		4,504		6.38	%
Noninterest-earning assets, net of allowance for loan losses		25,497							19,872
Total assets	$	335,544						$	307,409
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Other interest bearing	$	118,133	$	305		1.02	%	$	91,362	$	409		1.78	%
Time deposits less than $100,000		24,659		124		2.00	%		28,759		245		3.39	%
Time deposits $100,000 or more		77,486		481		2.46	%		74,167		665		3.57	%
Total interest-bearing deposits		220,278		910		1.64	%		194,288		1,319		2.70	%
Short-term debt		-		-		-			8,000		52		2.59	%
Long-term debt		3,742		47		4.98	%		5,511		70		5.05	%
Junior subordinated deferrable interest debentures		3,093		30		3.85	%		3,093		48		6.17	%
Total interest-bearing liabilities		227,113		987		1.72	%		210,892		1,489		2.81	%
Noninterest bearing deposits		67,722							65,754
Other liabilities		1,639							1,603
Total liabilities		296,474							278,249
Shareholders’ equity		39,070							29,160
Total liabilities and shareholders’ equity	$	335,544						$	307,409
Net interest income and margin (1)			$	3,379		4.44	%			$	3,015		4.32	%

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

(2) Nonaccrual loans are included in total loans.  Interest income is included on nonaccrual loans only to the extent cash payments have been received. There was $20,000 interest income reversed on nonaccrual loans.  Interest income reversed upon the transfer of loans to nonaccrual status totaled $20 and $8 for 2009 and 2008, respectively.

(3) Interest income on loans includes amortized loan fees, net of costs, of $162 and $150 for 2009 and 2008, respectively.

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The following table sets forth a summary of the changes in interest income and interest expense from changes in average earning assets and interest-bearing liabilities (volume) and changes in average interest rates for the three-month periods ended September 30, 2009 and 2008.

Changes in net interest income due to changes in volumes and rates
	Three months ended September 30, 2009 vs. September 30, 2008.
	Increase (decrease) due to change in:
	Average			Average
	Volume			Rate (1)			Total
(In thousands)
Increase (decrease) in interest income:
Due from banks	$	-		$	13		$	13
Federal funds sold		(92	)		(7	)		(99	)
Investment securities
Taxable		67			(30	)		37
Exempt from Federal income taxes		(37	)		15			(22	)
Total securities		30			(15	)		15
Loans		346			(413	)		(67	)
Total interest income		284			(422	)		(138	)
(Decrease) increase in interest expense:
Other interest-bearing deposits		120			(224	)		(104	)
Time deposits less than $100,000		(35	)		(86	)		(121	)
Time deposits $100,000 or more		30			(214	)		(184	)
Total interest-bearing deposits		115			(524	)		(409	)
Short-term debt		(52	)		-			(52	)
Long-term debt		(23	)		-			(23	)
Junior subordinated deferrable interest debentures		-			(18	)		(18	)
Total interest expense		40			(542	)		(502	)
Increase in net interest income	$	244		$	120		$	364

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

Net interest income before the provision for loan losses was $3.4 million for the three-month period ended September 30, 2009 compared to $3.0 million for the same period of 2008, an increase of $365,000 or 12%.  Growth in average interest-earning assets and interest-bearing liabilities caused the Company’s net interest income to increase by $244,000, and changes in interest rates on these same accounts caused net interest income to increase by $120,000.

The increase in net interest income was caused by reduced cost of funds and increases in average loan volume offset by declining yields on loans.  Despite a $19.8 million or 9% increase in average loans, the Company’s interest income from loans decreased by $67,000 due to the average yield decreasing from 6.93% in the 2008 period to 6.25% in the 2009 period, a change of 68 basis points.  This primarily reflected the impact of Federal Fund rate decreases totaling 175 basis points occurring between October 2008 to September 30, 2009 and the resulting impact on the variable priced portion of the Company’s loan portfolio.  At September 30, 2009, approximately 70% of the Company’s loan portfolio was comprised of variable rate loans of which 40% were at the floor rate.  In addition, there was a greater volume of nonaccrual loans in the 2009 period.

Total interest income for the three-month periods ended September 30, 2009 and 2008 was $4.4 million and $4.5 million, respectively, a decrease of $138,000 or 3% which resulted from falling interest rates offset by increases in the average balance of securities and loans.  This decrease was more than offset by reduced funding costs that was also attributable to falling interest rates.

The average rate paid on interest-bearing liabilities was 1.72% in the 2009 period compared to 2.81% in the 2008 period, a reduction of 109 basis points.  Average total interest-bearing liabilities in the 2009 period increased by $16.2 million or 8% compared to the 2008 period.  This included an increase in average other interest bearing deposits of $26.8 million or 29%, which was offset by a decrease of $781,000 million or 1% in average time deposits and a $9.8 million or 72% decrease in the Company’s combined short-term and long-term debt.

27

The Company’s net interest margin on a taxable equivalent basis increased 12 basis points from 4.32% to 4.44% during the three month period ended September 30, 2009.  The Company maintained a fairly steady net interest margin despite Fed Funds rate decreases totaling 175 basis points during the period October 2008 to September 2009 and increased volume of nonaccrual loans.  This was attributable both to loan growth and to management’s efforts to mitigate the impact of falling interest rates.  These efforts included utilizing rate floors on variable priced loans and aggressively lowering deposit rates.

Provision for Loan Losses

The provision for loan losses, which is included in operations to support management’s estimate of the required level of the allowance for loan losses, is based on the credit experience and management’s ongoing evaluation of loan portfolio risk and economic conditions.  A $600,000 million loan loss provision was recorded during the three months ended September 30, 2009 compared to a $400,000 provision for loan losses for the three-month period ended September 30, 2008.  Management determined the provision for loan losses, for the period ended September 30, 2009 after careful consideration of current economic conditions in the Bank’s primary markets and changes in the volume of impaired loans.  See the sections below titled “Allowance for Loan Losses.”

Non-Interest Income

Non-interest income for the three-month periods ended September 30, 2009 and 2008 totaled $508,000 and $312,000, respectively, an increase of $196,000 or 3%.  The components of non-interest income during each period were as follows:

Non-interest income
	Three Months ended September 30,
(in thousands)	2009		2008		Increase (Decrease)
Service charges	$	198	$	192	$	6
Gain on sale of available-for-sale investment securities		165		-		165
Gain on sale of other real estate		16		-		16
Mortgage loan brokerage fees		13		8		5
Earnings on cash surrender value of life insurance policies		73		68		5
Other		43		44		(1	)
Total non-interest income	$	508	$	312	$	196

Service charges increased by $6,000 due to a $19,000 increase in account analysis charges offset by a $10,000 decrease in non-sufficient funds and overdraft charges.  Non-interest income also increased by $165,000 due to income from gains on sale of available-for-sale investment securities and $16,000 from gain on sale of other real estate resulting from the sale of two foreclosed properties.  Mortgage loan brokerage fees increased by $5,000 despite falling real estate values that hindered financing opportunities.

Non-Interest Expense

Non-interest expense was $2.4 million for the three-month periods ended September 30, 2009 compared to $2.2 million for the three month period ended September 30, 2008, an increase of $118,000 or 5%. Assessment and insurance expense increased by $76,000 or 115% as Federal Deposit Insurance Corporation assessments increased due to higher premiums. Occupancy and equipment expense increased by $53,000 primarily due to expenses related to the planned relocation of the Visalia offices to a larger facility in the latter part of 2009.  Data processing costs increased by $23,000 due primarily to the increased usage of electronic banking products by customers and branch operations staff.  The other category also increased by $25,000 mostly due to costs related to education and training.

Professional and legal costs increased by $55,000 in the 2009 period due to legal costs related to compensation and other issues and to the timing of audit fee payments.  Salary and benefits decreased by $65,000 due to wage and salary restrictions imposed by management.

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The following table describes the components of non-interest expense for the three-month periods ended September 30, 2009 and 2008:

Non-interest expense
	Three Months ended June 30,
(in thousands)	2009		2008		Increase (Decrease)
Salaries and employee benefits	$	1,200	$	1,265	$	(65	)
Occupancy and equipment		388		335		53
Other real estate owned		3		-		3
Data processing		153		130		23
Operations		121		134		(13	)
Professional and legal		138		83		55
Advertising and business development		43		71		(28	)
Telephone and postal		54		54		-
Supplies		38		49		(11	)
Assessment and insurance		142		66		76
Other expenses		84		59		25
Total non-interest expense	$	2,364	$	2,246	$	118

Provision for Income Taxes

The provision for income taxes for the three-month periods ended September 30, 2009 and 2008 was $303,000 and $202,000, respectively.  The effective tax rates for these periods were 32.70%, and 29.70%, respectively. The increase in effective tax rate was primarily due to a disproportionate increase in taxable revenues and reduced revenues from tax exempt sources.

Financial Condition

Fair Value

The Company determines the fair values of financial instruments according to the guidance for fair value measurements and related disclosures.  The guidance establishes a hierarchical disclosure framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value.  The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario.  Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value.  Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value.  Observable pricing scenarios are impacted by a number of factors, including the type of financial instruments, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.  See Note 13 of the Notes to Condensed Consolidated Financial Statements for additional information about the financial instruments carried at fair value.

Investment Securities

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

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

Market value of securities available for sale
	September 30, 2009
(in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair  Value
U.S. government agencies	$	4,940	$	137	$	-		$	5,077
Mortgage-backed securities		19,805		635		(3	)		20,437
Municipal securities		15,337		202		(281	)		15,258
Total	$	40,083	$	974	$	(284	)	$	40,772

	December 31, 2008
(in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair Value
U.S. Treasury securities	$	247	$	33	$	-		$	280
U.S. government agencies		6,753		225		-			6,978
Mortgage-backed securities		15,102		554		(2	)		15,654
Municipal securities		19,753		98		(745	)		19,106
Total	$	41,855	$	910	$	(747	)	$	42,018

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 considers declines in the fair value of individual securities to be temporary.

At September 30, 2009, the Company had a total of 48 municipal securities with a remaining principal balance of $15,336,000 and a net unrealized loss of approximately $79,000. Thirteen of these securities account for $281,000 of the gross unrealized loss at September 30, 2009.  The Company continues to perform extensive analyses on these securities as well as all municipal securities.  By analyzing the specific securities, the Company has determined that there is no impairment and as such, is not taking any action to write-down these securities.  These investment securities continue to demonstrate cash flows as expected and the credit support component of these securities has increased from the origination date.  As of September 30, 2009, management does not believe the loss in market value of these securities is other than temporary.  We have also evaluated the credit ratings of our other investment securities and, based on our evaluation, management does not consider any investments to be other-than-temporarily-impaired.  However, no assurance can be made that the credit quality of certain securities will not deteriorate in the future which may necessitate future loss provisions.

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Loans

The Company’s lending activities are geographically concentrated in the South San Joaquin Valley, primarily in Tulare and Fresno counties.  The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets, and deposit accounts, but looks to business and personal cash flows as the primary source of repayment.

The following table sets forth the breakdown of loans outstanding by type at the dates indicated by amount and percentage of the portfolio:

(dollars in  thousands)	September 30, 2009					December 31, 2008
Commercial	$	52,031		22	%	$	58,325		25	%
Real estate – mortgage (1)		152,757		63			129,267		56
Real estate – construction		28,486		12			35,113		15
Agricultural		5,244		2			4,011		2
Consumer and other		2,142		1			3,566		2
Subtotal		240,660		100	%		230,282		100	%
Deferred loan fees, net		(454	)				(341	)
Allowance for loan losses		(5,071	)				(3,244	)
Total loans, net	$	235,135				$	226,697

(1) Consists primarily of commercial mortgage loans.

During the nine months ended September 30, 2009, loan growth occurred in the category of real estate – mortgage and was offset by declines in the balances of real estate - construction.  The growth consisted primarily of loans to local business owners, most of whom have other loan and deposit relationships with the Company.

Nonperforming Assets

There was $7.5 million in nonperforming assets at September 30, 2009 which represented 3.17% of total loans.  Non-performing assets at September 30, 2009 were comprised of ten nonaccrual loans for which management has established specific loss reserves of $692,000.  This compared to $3.0 million in non-performing assets at September 30, 2008 which represented 1.31% of total loans, and $4.9 million in non-performing assets at December 31, 2008, which represented 2.2% of total loans.  Non-performing assets increased during 2009 primarily due to one large commercial real estate relationship that was transferred to nonaccrual status during the second quarter of 2009.  Income earned on this relationship during 2009 was reversed in the amount of $83,000.  There was also $20,000 of interest income reversed for two additional loans placed in nonaccrual status during 2009.

The Company had no real estate acquired through foreclosure at September 30, 2009 or December 31, 2008.  At June 30, 2009, the Company had other real estate owned of $810,000 consisting of two properties acquired through foreclosure during the second quarter.  These properties were sold during the third quarter for an aggregate gain of $16,000.

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, 2008.  At December 31, 2008, the recorded investment in loans that were considered to be impaired totaled $4.9 million.  The specific allowance for loan losses for impaired loans at December 31, 2008 totaled $425,000.  At September 30, 2009, the recorded investment in loans that were considered to be impaired totaled $10.6 million.  The specific allowance for loan losses for impaired loans at September 30, 2009 totaled $1.4 million.  Most of the $2.0 million provision for loan losses for the three and nine months ended September 30, 2009 is related to the $1.0 increase in specific reserves.

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Allowance for Loan Losses

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

The allowance for loan losses totaled $5.1 million or 2.11% of total loans at September 30, 2009.  This compared to $2.84 million or 1.25% of total loans at September 30, 2008 and $3.2 million or 1.41% at December 31, 2008.  Management determined the allowance for loan losses after careful consideration of current economic conditions, including a significant decline in real estate values in the Bank’s primary market.  The Company recorded $173,000 in net charge-offs during the nine months ended September 30, 2009 compared to net recoveries of $20,000 during the nine months ended September 30, 2008 and net charge-offs of $114,000 during the twelve months ended December 31, 2008.  The 2009 charge-offs pertained to the acquisition through foreclosure of two properties, one residential real estate and the other commercial real estate.

Management determined the allowance for loan losses at September 30, 2009 based on its assessment of probable loan losses; however, no prediction of the ultimate level of loans charged off in future years can be made with any certainty.

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

Changes in allowance for loan losses
	Nine Months ended			Nine Months ended			Year ended
	September 30, 2009			September 30, 2008			December 31, 2008
(dollars in thousands)
Balance, beginning	$	3,244		$	1,758		$	1,758
Provision for  loan losses		2,000			1,200			1,600
Charge-offs-real estate		(173	)		-			(5	)
Charge-offs-commercial		-			(125	)		(125	)
Charge-offs-other		-			(12	)		(12	)
Recoveries		-			20			28
Balance, ending	$	5,071		$	2,841		$	3,244
Net charge-offs to average loans outstanding (annualized)		.10	%		.07	%		0.05	%
Average loans outstanding	$	238,571		$	216,323		$	219,431
Ending allowance to total loans outstanding		2.11	%		1.25	%		1.41	%

Premises and Equipment

During February of 2009, the Company purchased an 18,700 square foot building in Visalia, California for $3.8 million.  The Company plans to relocate its administrative office and Visalia branch to the new facility.

Deposits

Total deposits were $294.9 million at September 30, 2009, a $37.5 million or 15% increase from the December 31, 2008 total of $257.3 million.  Interest-bearing and time deposits increased by $34.1 million or 39% and $14.1 million or 15%, respectively during the nine month period ended September 30, 2009.  Brokered deposits included in time deposits at September 30, 2009 and December 31, 2008 were $29.2 million and $15.9 million, respectively.  All other deposits were acquired locally.  The Company presently utilizes brokered deposits to lessen any negative impact that would be casued by a rising rate scenario on its net interest margin.  Most of the brokered deposits on the balance sheet at September 30,

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2009 were obtained in mid-2009, have maturities ranging from 3 to 5 years and are callable after 6 months.  Non-interest bearing deposits decreased by $10.7 million or 14%, during the nine-month period ended September 30, 2009, which reflected a normal seasonal pattern.

Total deposits at September 30, 2009 and December 31, 2008 are summarized in the following table:

Deposit Portfolio
(dollars in thousands)	September 30, 2009				December 31, 2008
Non-interest bearing	$	66,707	23	%	$	77,406	30	%
Interest bearing		121,839	41	%		87,737	34	%
Time deposits		77,109	26	%		76,280	30	%
Brokered deposits		29,100	10	%		15,900	6	%
Total Deposits	$	294,855	100	%	$	257,323	100	%

Federal Home Loan Bank Borrowings

The Company has utilized short-term borrowings from the FHLB to fund asset growth during periods when market conditions for growing the deposit base were unfavorable. At September 30, 2009, the Company had outstanding long-term fixed rate debt from the Federal Home Loan Bank totaling $3.7 million and no short-term debt.  At December 31, 2008, the Company had $8.0 in short-term adjustable rate debt and long-term fixed rate debt totaling $5.2 million.  At September 30, 2009, the weighted average rate on long-term borrowings was 5.38%.  The remaining principal balance of long-term debt is scheduled to mature at various dates ending in January 2012.

Junior Subordinated Deferrable Interest Debentures

Junior subordinated deferrable interest debentures were issued in connection with the Company’s issuance of trust preferred securities for gross proceeds of $3.0 million in the second quarter of 2003.  The $3.1 million of junior subordinated deferrable interest debentures at September 30, 2009 was unchanged from December 31, 2008.  The rate of interest paid on these debentures was 4.37% at September 30, 2009 compared to 7.08% at December 31, 2008.

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Capital Resources

The Company’s shareholders’ equity was $39.5 million at September 30, 2009 and $30.1 million at December 31, 2008.  The increase resulted from net income of $1.5 million for the nine months ended September 30, 2009 and the issuance of $7.7 million of preferred stock to the U.S. Treasury.

On January 30, 2009, the Company entered into a Letter Agreement (the “Purchase Agreement”) with the United States Department of the Treasury (“Treasury”), pursuant to which the Company issued and sold (i) 7,700 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”) and (ii) a warrant to purchase 385 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series C stock, (the “Warrant Preferred” or “Series C Preferred Stock”) for a combined purchase price of $7.7 million.  The Treasury exercised the Warrant immediately upon issuance.

The Series B Preferred Stock will qualify as Tier 1 capital and will pay cumulative dividends quarterly at a rate of 5% per annum for the first five years, and 9% per annum thereafter.  The Warrant Preferred will pay cumulative dividends at a rate of 9% per annum until redemption.  The terms governing the Series B Preferred  Stock and the Series C Preferred Stock provide that either series may be redeemed by the Company after three years; however, the Warrant Preferred may not be redeemed until after all the Series B Preferred Stock has been redeemed, and prior to the end of three years, the Series B Preferred Stock and the Warrant Preferred may be redeemed by the Company only with proceeds from the sale of qualifying equity securities of the Company (a “Qualified Equity Offering”).  The American Recovery and Reinvestment Act of 2009, which was enacted on February 17, 2009, permits the Company to redeem the series B Preferred Stock and the Warrant Preferred without a Qualified Equity Offering, subject to the Company’s consultation with the Board of Governors of the Federal Reserve System.

The Series B Preferred stock and the Warrant Preferred were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.  The Company has agreed to register the Series B Preferred Stock and the Warrant Preferred as soon as practicable (but not later than 30 days) after demand by the United States department of the Treasury.  Neither the Series B Preferred Stock nor the Warrant Preferred will be subject to any contractual restrictions on transfer, except that Treasury and its transferees shall not effect any transfer of the Preferred which would require the company to become subject to the periodic reporting requirements of Section 13 or 15(d) of the Exchange Act.

In the Purchase Agreement, the Company agreed that, until such time as Treasury ceases to own any debt or equity securities of the Company acquired pursuant to the Purchase Agreement, the Company will take all necessary action to ensure that its benefit plans with respect to its senior executive officers comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the “EESA”) as implemented by any guidance or regulation under the EESA that has been issued and is in effect as of the date of the date of issuance of the Series B Preferred Stock and the Warrant, and has agreed to not adopt any benefit plans with respect to, or which covers, its senior executive officers that do not comply with the EESA, and the applicable executives have consented to the foregoing.  Furthermore, the Purchase Agreement allows Treasury to unilaterally amend the terms of the agreement.

With respect to dividends on the Company’s common stock, Treasury’s consent shall be required for any increase in common dividends per share until the third anniversary of the date of its investment unless prior to such third anniversary the Series B Preferred Stock and the Warrant Preferred is redeemed in whole or the Treasury has transferred all of the Senior Preferred Series B Preferred stock and Warrant Preferred to third parties.  After the third anniversary and prior to the tenth anniversary, the Treasury’s consent shall be required for any increase in aggregate common dividends per share that no increase in common dividends may be made as a result of any dividend paid in common shares, any stock split or similar transactions.  From and after the tenth anniversary, the Company shall be prohibited from paying common dividends or repurchasing any equity securities or trust preferred securities until all equity securities held by the Treasury are redeemed in whole ore the Treasury has transferred all of such equity securities to third parties.

Management considers capital needs as part of its strategic planning process.  The ability to obtain capital is dependent upon the capital markets as well as the Company’s performance.  Management regularly evaluates sources of capital and the timing required to meet its strategic objectives.

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The following table summarizes the Company’s risk-based capital ratios as of September 30, 2009 and December 31, 2008:

Capital and capital adequacy ratios
	September 30, 2009						December 31, 2008
(dollars in thousands)	Amount			Ratio			Amount			Ratio
Leverage Ratio
Valley Commerce Bancorp
and Subsidiary		$	42,049		12.5	%		$	33,044		10.9	%
Minimum regulatory requirement		$	13,422		4.0	%		$	12,150		4.0	%
Valley Business Bank		$	42,045		12.5	%		$	32,751		10.8	%
Minimum requirement for “Well-
Capitalized” institution		$	16,777		5.0	%		$	15,181		5.0	%
Minimum regulatory requirement		$	13,417		4.0	%		$	12,145		4.0	%
Tier 1 Risk-Based Capital Ratio
Valley Commerce Bancorp
and Subsidiary		$	42,049		15.6	%		$	33,044		12.7	%
Minimum regulatory requirement		$	10,817		4.0	%		$	10,367		4.0	%
Valley Business Bank		$	42,045		15.6	%		$	32,751		12.6	%
Minimum requirement for “Well-
Capitalized” institution		$	16,220		6.0	%		$	15,545		6.0	%
Minimum regulatory requirement		$	10,813		4.0	%		$	10,363		4.0	%
Total Risk-Based Capital Ratio
Valley Commerce Bancorp
and Subsidiary		$	45,450		16.8	%		$	36,284		14.0	%
Minimum regulatory requirement		$	21,633		8.0	%		$	20,734		8.0	%
Valley Business Bank		$	45,444		16.8	%		$	35,990		13.9	%
Minimum requirement for “Well-
Capitalized” institution		$	27,033		10.0	%		$	25,909		10.0	%
Minimum regulatory requirement		$	21,627		8.0	%		$	20,728		8.0	%

At September 30, 2009 and December 31, 2008, 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.

Trust preferred securities are included in Tier 1 Capital subject to regulatory limitation.  At September 30, 2009 and December 31, 2008, $3.0 million of trust securities was included in Tier 1 Capital.

The Company commenced a stock repurchase program in November 2007.  The program is subject to restrictions contained in the Securities Purchase Agreement between the Company and the United States Treasury under which the Company issued $7.7 million of preferred stock to the Treasury on January 30, 2009.  The Purchase Agreement contains provisions that restrict the Company’s ability to repurchase Valley Commerce Bancorp common stock.  Under the Purchase Agreement, prior to January 30, 2012, unless the Company has redeemed the Preferred shares, or the Treasury has transferred the Preferred shares to a third party, the consent of the Treasury will be required for the Company to redeem purchase or acquire any shares of Common Stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Purchase Agreement.

The amount of preferred stock issued to the Treasury represents approximately 3% of the Company’s risk adjusted assets as of December 31, 2008.  The preferred stock serves as Tier 1 capital.  Accordingly, the impact to the Company’s risk-based capital ratios at September 30, 2009 is an increase of approximately 300 basis points.

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Liquidity

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.

The Company has a successful history of establishing and retaining deposit relationships with business customers and periodically utilizes collateralized borrowing lines and wholesale funding resources to supplement local deposit growth.  These include borrowing lines with FHLB, FRB, and correspondent banks, and utilization of brokered time deposits.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4 – CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

(b) CHANGES IN INTERNAL CONTROLS

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

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

ITEM 1A – RISK FACTORS

In addition to the other information set forth in this report, the factors discussed in Part I, “Item 1A – Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 could materially affect its business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known or currently deemed to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.

ITEM 2 – CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5 – OTHER INFORMATION

None.

ITEM 6 – EXHIBITS

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

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SIGNATURES

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

	VALLEY COMMERCE BANCORP
Date: November 14, 2009	By:	/s/ Donald A. Gilles
		Donald A. Gilles
		President and Chief Executive Officer
Date: November 14, 2009	By:	/s/Roy O. Estridge
		Roy O. Estridge, Chief Financial Officer

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Exhibit Index

31.1 Rule 13a-14(a)/15d-14(a) Certification

31.2 Rule 13a-14(a)/15d-14(a) Certification

32.1 Section 1350 Certifications

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