Valley Commerce Bancorp (VCBP) 10-Q 2010 Q3 Quarterly report

  UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

	(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                                TO

COMMISSION FILE NUMBER: 000-51949

VALLEY COMMERCE BANCORP

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

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

701 W. Main 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  x   No  o

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	o	Accelerated Filer	o
Non-Accelerated Filer	o	Smaller Reporting Company	x

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

Yes  o   No  x

The number of shares outstanding of the issuer’s Common Stock was 2,608,317 as of November 15, 2010.

INDEX

PART I - FINANCIAL INFORMATION	3
ITEM 1 - FINANCIAL STATEMENTS	4
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATONS	19
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 RESERVED	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, be coming 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 requirement s 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 di ffer 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, 2010		December 31, 2009
Assets
Cash and due from banks	$	39,781,906	$	39,077,786
Available-for-sale investment securities, at fair value		43,826,000		42,566,000
Loans, less allowance for loan losses of $6,447,951 at September 30, 2010 and $6,231,065 at December 31, 2009 (Note 4)		235,611,293		234,822,963
Bank premises and equipment, net		8,591,956		8,041,905
Cash surrender value of bank-owned life insurance		6,559,805		6,354,871
Accrued interest receivable and other assets		8,230,240		9,307,998
Total assets	$	342,601,200	$	340,171,523
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing	$	80,874,563	$	76,574,651
Interest-bearing		214,713,485		217,707,492
Total deposits		295,588,048		294,282,143
Accrued interest payable and other liabilities		2,786,917		2,265,842
Long-term debt		2,613,094		3,661,999
Junior subordinated deferrable interest debentures		3,093,000		3,093,000
Total liabilities		304,081,059		303,302,984
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, 2010 and  December 31, 2009		7,802,550		7,744,800
Common stock - no par value; 30,000,000 shares authorized; issued and outstanding – 2,608,317 shares at September 30, 2010 and December 31, 2009		25,989,029		25,953,290
Retained earnings		4,192,139		3,166,732
Accumulated other comprehensive income, net of taxes (Note 9)		536,423		3,717
Total shareholders’ equity		38,520,141		36,868,539
Total liabilities and shareholders’ equity	$	342,601,200	$	340,171,523

See notes to unaudited condensed consolidated financial statements.

4

VALLEY COMMERCE BANCORP

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
Interest Income:
Interest and fees on loans	$	3,723,991		$	3,839,994		$	11,124,244		$	11,215,081
Interest on investment securities:
Taxable		177,765			332,501			550,671			955,986
Exempt from Federal income taxes		158,853			181,236			474,136			577,645
Interest on Federal funds sold		-			73			-			9,972
Interest on deposits in banks		18,362			12,620			51,113			12,701
Total interest income		4,078,971			4,366,424			12,200,164			12,771,385
Interest Expense:
Interest on deposits		569,452			909,716			1,882,724			2,847,745
Interest on short-term debt		-			-			-			27,934
Interest on long-term debt		33,494			47,092			128,106			163,648
Interest on junior subordinated deferrable interest debentures		30,107			30,485			85,724			101,327
Total interest expense		633,053			987,293			2,096,554			3,140,654
Net interest income before provision for loan losses		3,445,918			3,379,131			10,103,610			9,630,731
Provision for Loan Losses		550,000			600,000			1,800,000			2,000,000
Net interest income after provision for loan losses		2,895,918			2,779,131			8,303,610			7,630,731
Non-Interest Income:
Service charges		197,486			198,587			584,884			567,459
Gain on sale of available-for-sale investment securities, net		10,523			164,756			10,523			168,818
Gain on sale of other real estate		-			16,055			-			16,055
Mortgage loan brokerage fees		23,464			13,105			31,385			40,587
Earnings on cash surrender value of life insurance policies		74,708			72,560			221,164			214,578
Gain from bank owned life insurance		-			-			-			317,488
Other		52,183			43,095			135,759			147,412
Total non-interest income		358,364			508,158			983,715			1,472,397
Non-Interest Expense:
Salaries and employee benefits		1,229,130			1,200,590			3,955,888			3,663,388
Occupancy and equipment		333,410			387,371			995,604			1,169,813
Other		699,441			775,894			2,380,771			2,379,594
Total non-interest expense		2,261,981			2,363,855			7,332,263			7,212,795
Income before provision for income taxes		992,301			923,434			1,955,062			1,890,333
Provision for Income Taxes		317,000			303,000			556,000			391,000
Net income	$	675,301		$	620,434		$	1,399,062		$	1,499,333
Dividends accrued and discount accreted on preferred Shares		(96,250	)		(96,251	)		(289,819	)		(257,736	)
Net income available to common shareholders	$	579,051		$	524,183		$	1,109,243		$	1,241,597
Basic earnings per share (Note 8)	$	0.22		$	0.20		$	0.43		$	0.48
Diluted earnings per share (Note 8)	$	0.22		$	0.20		$	0.43		$	0.48

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,
	2010			2009
Cash Flows from Operating Activities:
Net income	$	1,399,062		$	1,499,333
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,800,000			2,000,000
(Decrease) increase in deferred loan origination fees, net		(33,320	)		112,843
Depreciation		378,196			507,982
Tax benefit from exercise of stock options		-			(7,718	)
Deferred tax benefit		6,285			-
Gain on sale of available-for-sale investment securities, net		(10,523	)		(168,818	)
Amortization (accretion) of premiums (discounts) on investment securities, net		222,482			(10,941	)
Increase in cash surrender value of bank-owned life insurance		(204,934	)		(209,856	)
Gain from bank owned life insurance		-			(317,488	)
Stock-based compensation expense		35,739			46,702
Loss on disposition of premises and equipment		9,341			285
Gain on sale of other real estate		-			(16,055	)
Decrease (increase) in accrued interest receivable and other assets		1,313,173			(713,903	)
Increase (decrease) in accrued interest payable and other liabilities		148,588			(114,378	)
Net cash provided by operating activities		5,064,089			2,607,988
Cash Flows from Investing Activities:
Proceeds from matured and called available-for-sale investment securities		1,505,000			2,864,361
Proceeds from sales of available-for-sale investment securities		2,510,523			7,371,531
Purchases of available-for-sale investment securities		(9,515,957	)		(12,940,757	)
Proceeds from principal repayments from available-for-sale mortgage-backed securities		4,933,667			4,656,784
Purchase of Federal Home Loan Bank Stock, net		(241,700	)		(14,800	)
Net increase in loans		(2,555,010	)		(11,830,797	)
Purchase of premises and equipment		(937,588	)		(4,086,031	)
Proceeds from sale of equipment		-			50
Proceeds from bank owned life insurance		-			662,838
Proceeds from sale of other real estate		-			1,296,089
Net cash used in investing activities		(4,301,065	)		(12,020,732	)

Continued on next page.

6

VALLEY COMMERCE BANCORP

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(Continued)

	For the Nine Months Ended September 30,
	2010			2009
Cash Flows from Financing Activities:
Net increase in noninterest-bearing and interest-bearing deposits	$	2,462,888		$	23,402,440
Net (decrease) increase in time deposits		(1,156,982	)		14,128,872
Proceeds from exercised stock options		-			59,998
Benefit from exercised stock options		-			7,718
Proceeds from issuance of preferred stock		-			7,674,217
Cash dividends paid on preferred stock		(315,905	)		(227,310	)
Decrease in short-term borrowings, net		-			(8,000,000	)
Principal payments on long-term debt		(1,048,905	)		(1,465,732	)
Cash paid to repurchase fractional shares		-			(2,577	)
Net cash (used in) provided by financing activities		(58,904	)		35,577,820
Increase in cash and cash equivalents		704,120			26,165,076
Cash and Cash Equivalents at Beginning of Year		39,077,786			22,145,867
Cash and Cash Equivalents at End of Period	$	39,781,906		$	48,310,943
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense	$	2,133,102		$	3,293,280
Income taxes	$	230,000		$	865,000
Non-Cash Investing Activities:
Net change in unrealized loss on available-for-sale securities	$	905,193		$	526,160
Non-Cash Financing Activities:
Accrued dividends on preferred stock	$	315,905		$	53,621
Real estate owned acquired through foreclosure	$	-		$	1,280,034

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 and operates branches in Visalia, Fresno, Woodlake, 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 December 31, 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 und er 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 (the “Bank”) (collectively, the “Company”). Valley Commerce Trust I, a wholly-owned subsidiary formed for the exclusive purpose of issuing trust preferred securities, is not consolidated into the Company's consolidated financial statements and, accordingly, is accounted for under the equity method.  The Company’s investment in the Trust is included in accrued interest receivable and other assets on the consolid ated balance sheet.  All significant intercompany accounts and transactions have been eliminated in consolidation.  All adjustments (consisting only of normal recurring adjustments) which, in the opinion of Management, are necessary for a fair presentation of Valley Commerce Bancorp’s consolidated financial position at September 30, 2010 and December 31, 2009, the results of its operations for the three and nine month periods ended September 30, 2010 and 2009, and its cash flows for the nine month periods ended September 30, 2010 and 2009 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 shou ld be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2009 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.

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

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, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government agencies		3,429,097	$	95,903	$	-		$	3,525,000
Mortgage-backed securities:
Agency MBS		9,449,875		334,525		(17,400	)		9,767,000
Agency SBA		15,189,223		227,636		(1,859	)		15,415,000
Municipal securities		14,846,295		372,820		(100,115	)		15,119,000
		42,914,490	$	1,030,884	$	(119,374	)	$	43,826,000

Net unrealized gains on available-for-sale investment securities totaling $911,510 were recorded, net of $375,087 in income taxes, as accumulated other comprehensive income within shareholders' equity at September 30, 2010.  Proceeds and gains from the sale of available-for-sale investment securities for the nine months ended September 30, 2010 totaled $2,510,523 and $10,523, respectively. Proceeds and gross 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. There were no sales of availble-for-sale investment securities during the nine months ended September 30, 2010 or 2009 which resulted in a realized loss.

	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government agencies	$	2,909,941	$	105,059	$	-			3,015,000
Mortgage-backed securities:
Agency MBS		8,985,716		295,386		(102	)		9,281,000
Agency SBA		15,326,055		27,173		(46,228	)		15,307,000
Municipal securities		15,337,971		48,855		(423,826	)		14,963,000
	$	42,559,683	$	476,473	$	(470,156	)	$	42,566,000

Net unrealized gains on available-for-sale investment securities totaling $6,317 were recorded, net of $2,600 in income taxes, as accumulated other comprehensive income within shareholders' equity at December 31, 2009.  Proceeds and realized gains from the sale of available-for-sale investment securities for the year ended December 31, 2009 totaled $13,559,130 and $416,248, respectively, of which $1,578,160 and $4,062, respectively, were attributable to the six-month period ended June 30, 2009.

9

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

Investment securities with unrealized losses at September 30, 2010 are summarized and classified according to the duration of the loss period as follows:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Debt securities:
Mortgage-backed
securities:
Agency MBS	$	2,099,000	$	(17,400	)	$	-	$	-		$	2,099,000	$	(17,400	)
Agency SBA		-		-			870,000		(1,859	)		870,000		(1,859	)
Municipal securities		486,000		(3,104	)		2,328,000		( 97,011	)		2,814,000		(100,115	)
	$	2,585,000	$	(20,504	)	$	3,198,000	$	(98,870	)	$	5,783,000	$	(119,374	)

Investment securities with unrealized losses at December 31, 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 Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Debt securities:
Mortgage-backed
securities:
Agency MBS	$	132,000	$	(102	)	$	-	$	-		$	132,000	$	(102	)
Agency SBA		9,567,000		(46,228	)		-		-			9,567,000		(46,228	)
Municipal securities		6,449,000		(179,802	)		2,789,000		( 244,024	)		9,238,000		(423,826	)
	$	16,148,000	$	(226,132	)	$	2,789,000	$	(244,024	)	$	18,937,000	$	(470,156	)

Mortgage-backed Securities

At September 30, 2010, the Company held 55 mortgage-backed obligations of which two were in a loss position for less than twelve months and one was 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 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, 2010.

Municipal Securities

At September 30, 2010, the Company held 46 obligations of states and political subdivision securities of which two were in a loss position for less than twelve months and eight 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.  Specifically, there has been no observable deterioration in the credit rating or financial performance of the underlying municipality.  In addition, the Company has the ability and intent to hold those investments until a recov ery of fair value, which may be maturity.  Therefore, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2010.

10

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

The amortized cost and estimated fair value of investment securities at September 30, 2010 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.

	Amortized Cost		Estimated Fair Value
Within one year	$	19,749	$	20,000
After one year through five years		2,046,239		2,070,000
After five years through ten years		3,319,157		3,370,000
After ten years		12,890,247		13,184,000
		18,275,392		18,644,000
Investment securities not due at a single
maturity date:
Mortgage-backed securities		24,639,098		25,182,000
	$	42,914,490	$	43,826,000

At September 30, 2010 and December 31, 2009, all investment securities were pledged to secure either public deposits or borrowing arrangements.

4. LOANS

Outstanding loans are summarized below, in thousands:

	September 30, 2010			December 31, 2009
Commercial	$	51,856,222		$	49,442,490
Real estate – mortgage		167,436,355			162,772,435
Real estate – construction		16,391,052			22,581,964
Agricultural		4,768,177			4,727,349
Consumer		1,980,916			1,936,588
		242,432,722			241,460,826
Deferred loan fees,  net		(373,478	)		(406,798	)
Allowance for loan losses		(6,447,951	)		(6,231,065	)
	$	235,611,293		$	234,822,963

Changes in the allowance for loan losses were as follows:

	September 30, 2010			December 31, 2009
Balance, beginning of year	$	6,231,065		$	3,244,454
Provision charged to operations		1,800,000			7,000,000
Losses charged to allowance		(1,592,753	)		(4,013,611	)
Recoveries		9,639			222
Balance, ending	$	6,447,951		$	6,231,065

The recorded investment in loans that were considered to be impaired totaled $10,167,811 and $12,485,248 of which $5,817,895 and $10,435,958 had a related allowance for loan losses of $1,647,700 and $2,652,000 at September 30, 2010 and December 31, 2009, respectively.  The average recorded investment in impaired loans for the nine and twelve month periods ended September 30, 2010 and December 31, 2009 was $11,912,000 and $10,103,000, respectively.  There was $87,529 in interest income recognized on a cash basis for impaired loans during the nine month period ended September 30, 2010 and none for the nine month period ended September 30, 2009.

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There was $5,885,929 and $7,451,439 in nonaccrual loans at September 30, 2010 and September 30, 2009, respectively.  There was $622,620 and $290,820 interest foregone on nonaccrual loans for the nine month periods ended September 30, 2010 and September 30, 2009, respectively. The Bank had four loans in the amount of $3,046,136 considered to be  troubled debt restructuring at September 30, 2010 compared to none at September 30, 2009.  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 repay ment.

5. BANK PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

	September 30, 2010			December 31, 2009
Furniture and equipment	$	2,962,544		$	2,955,097
Construction in progress, premises		-			4,567,346
Leasehold improvements		207,342			550,548
Premises		6,212,920			2,095,490
Land		1,461,379			605,060
		10,844,185			10,773,541
Less accumulated depreciation and amortization		(2,252,229	)		(2,731,636	)
	$	8,591,956		$	8,041,905

In February of 2009, the Company purchased an office building in Visalia, California and commenced refurbishing it to serve as the Company’s headquarters.  Upon completion of the refurbishment, the Company relocated its administrative office and Visalia branch to the new facility in November 2009 and January 2010, respectively.

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 $29.1 million and $35.4 million and letters of credit of $275,000 and $72,000 at September 30, 2010 and December 31, 2009, respectively.

At September 30, 2010, consumer loan commitments, which are generally unsecured, represent approximately 7% of total commitments.  Agricultural loan commitments represent approximately 5% of total commitments and are generally secured by crops and/or real estate.  Commercial loan commitments represent approximately 72% of total commitments and are generally secured by various assets of the borrower.  Real estate loan commitments represent the remaining 16% 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 ob tained, 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, 2010 or December 31, 2009.

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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 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, 2010 and 2009, no options were granted by the Company to its officers or directors.  Compensation expense is recognized over the vesting period on a straight line basis.  Compensation cost related to stock options recognized in operating results was $8,827 and $12,482 in the three month periods ended September 30, 2010 and 2009, respectively.  Compensation cost related to stock options recognized in operating results was $35,738 and $38,051 in the nine-month periods ended September 30, 2010 and 2009, 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 in the statement of cash flows.   The excess tax benefits for the three months ended September 30, 2010 and 2009 were $656 and $1,574, respectively.  The excess tax benefits for the nine months ended September 30, 2010 and 2009 were $3,274 and $4,716, respectively.

The following table summarizes information about stock option activity:

	For the Nine Months Ended September 30, 2010
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Incentive:
Options outstanding at January 1, 2010		74,357		$	10.34
Options granted		-			-
Options transferred to Nonstatutory		(12,803	)		9.49
Options exercised		-			-
Options cancelled		(2,207	)		13.15
Options outstanding at September 30, 2010		59,347			10.42	4.64 years	$	5,186	(1	)
Options vested or expected to vest after September 30, 2010		47,434			9.22	2.84 years	$	5,186	(1	)
Options exercisable at September 30, 2010		41,158			9.22	3.50 years	$	5,186	(1	)
Nonstatutory:
Options outstanding at January 1, 2010		87,964		$	9.10
Options granted		-			-
Options transferred from Incentive		12,803			9.49
Options exercised		-			-
Options cancelled		(12,103	)		5.37
Options outstanding at September 30, 2010		88,664			9.66	2.92 years	$	21,204	(1	)
Options vested or expected to vest after September 30, 2010		80,451			9.53	2.76 years		21,204	(1	)
Options exercisable at September 30, 2010		85,357			9.53	2.75 years		21,204	(1	)

(1) 60,168 non-statutory options with a weighted average price of $11.51 and 44,152 incentive options with a weighted average price of  $11.89 are excluded from intrinsic value from table above because the exercise price is greater than the stock price at September 30, 2010.

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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, 2010.  There were no options exercised during the nine months ended September 30, 2010 and 2009.  The total fair value of shares vested during the nine months ended September 30, 2010 and 2009 was $39,000 and $60,000, respectively.

Management estimates expected forfeitures and recognizes compensation costs only for those equity awards expected to vest.  As of September 30, 2010, there was $74,749 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 1.09 years and will be adjusted for subsequent changes in estimated forfeitures.

8. EARNINGS PER SHARE COMPUTATION

Basic earnings per share are computed by dividing income available to common shareholders 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.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
Net Income:
Net income	$	675,301		$	620,434		$	1,399,062		$	1,499,333
Dividends accrued and discounts
accreted on preferred shares		(96,250	)		(96,251	)		(289,819	)		(257,736	)
Net income allocated to common
shareholders	$	579,051		$	524,183		$	1,109,243		$	1,241,597
Earnings Per Share:
Basic earnings per share	$	0.22		$	0.20		$	0.43		$	0.48
Diluted earnings per share	$	0.22		$	0.20		$	0.43		$	0.48
Weighted Average Number of Shares Outstanding:
Basic shares		2,608,317			2,605,646			2,608,317			2,600,176
Diluted shares		2,612,143			2,619,492			2,612,205			2,610,051

There were 104,320 and 92,217 options excluded from the computation of diluted earnings per share for the three and nine month periods ended September 30, 2010, respectively, and 101,469 excluded from the computation of diluted earnings per share for the three and nine month periods ended September 30, 2009, respectively, as they were identified as anti-dilutive.

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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 Ended					For the Nine Months Ended
	September 30, 2010		September 30, 2009			September 30, 2010		September 30, 2009
Net income	$	675,301	$	620,434		$	1,399,062	$	1,499,333
Other comprehensive income:
Unrealized holding gain on available-for-sale
investment securities, net of tax		273,029		323,367	��		532,707		309,645
Total other comprehensive income	$	948,330	$	943,801		$	1,931,769	$	1,808,978

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, 2010.

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 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 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 Compan y’s participation in the Capital Purchase Program (See Note 12).  There were no shares repurchased during the nine month period ended September 30, 2010.  Since the plan adoption the Company has repurchased 90,508 shares for a total cost of $1,202,845 at an average price of $13.29 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 original terms governing the Series B Preferred Stock and the Series C Preferred Stock provided 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 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 prohi bited 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 or 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, 2010.  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 t he 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 include 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.

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 are summarized below:

				Fair Value Measurements, Using
(in thousands)				Quoted Prices in Active Markets for Identical Assets			Other Observable Inputs			Significant Unobservable Inputs
	Fair Value			(Level 1)			(Level 2)			(Level 3)
Assets:
Available-for-sale investment securities at:
September 30, 2010		$	43,826,000		$	—		$	43,826,000		$	—
December 31, 2009		$	42,566,000		$	—		$	42,566,000		$	—

The fair value of securities available for sale equals quoted market price, if available.  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.  Changes in fair value are recorded in other comprehensive income.

The Company had no liabilities measured at fair value as of September 30, 2010 or December 31, 2009.

Assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2010 and December 31, 2009 are summarized below:

			Fair Value Measurements, Using
(in thousands)			Quoted Prices in Active Markets for Identical Assets			Other Observable Inputs			Significant Unobservable Inputs			Total Gain
	Fair Value		(Level 1)			(Level 2)			(Level 3)			(Losses)
Assets:
Impaired loans at:
September 30, 2010	$	8,435,000		$	—		$	599,000		$	7,836,000		$	(562,000	)
December 31, 2009	$	7,784,000		$	—		$	—		$	7,784,000		$	(2,227,000	)

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Impaired loans (loans which are not expected to repay all principal and interest amounts due in accordance with the original contractual terms) are measured for impairment using an observable market price (if available), the present value of future cash-flows, 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 also result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or local.  A sig nificant 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.  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 with specific reserves or which had been charged down to their fair value, had carrying amounts of $10,168,000 and $10,436,000 with a valuation allowance of $1,648,000 and $2,652,000 at September 30, 2010 and December 31, 2009, respectively.

The Company did not change the methodology used to determine fair value during 2010 for any asset or liability measured at fair value on a nonrecurring basis.  Accordingly, for any given class of financial instruments, the Company transferred $599,000 out of Level 3 and to Level 2 during the nine month period ended September 30, 2010 as a result of validation of appraisal information.  There were no transfers between Level 1, Level 2, or Level 3 fair value measurements during the nine months ended September 30, 2009.

Fair Value of Financial Instruments

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

	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	39,781,906	$	39,781,906	$	33,077,786	$	39,077,786
Available-for-sale
investment securities		43,826,000		43,826,000		42,566,000		42,566,000
Loans, net		235,611,293		234,201,799		234,822,963		232,495,909
Cash surrender value of life
insurance policies		6,559,805		6,559,805		6,354,871		6,354,871
Accrued interest receivable		1,113,928		1,113,928		1,241,412		1,241,412
FHLB stock		1,360,700		1,360,700		1,119,000		1,119,000
Financial liabilities:
Deposits		295,588,048		296,676,462		294,282,143		294,833,469
Long-term debt		2,613,094		3,002,269		3,661,999		2,974,335
Junior subordinated deferrable
interest debentures		3,093,000		804,180		3,093,000		959,000
Accrued interest payable		103,441		103,441		139,988		139,988

14. RECENT ACCOUNTING DEVELOPMENTS

Accounting for Transfers of Financial Asset, In June 2009, the FASB issued ASC Topic 860 (previously SFAS No. 166), Accounting for Transfers of Financial Assets, an amendment of SFAS No. 140.  This standard amends the derecognition accounting and disclosure guidance included in previously issued standards.  This standard eliminates the exemption from consolidation for qualifying special-purpose entities (SPEs) and also requires a transferor to evaluate all existing qualifying SPEs to determine whether they must be consolidated in accordance with ASC Topic 810.  This standard also provides more stringent requirements for derecognition of a portion of a financial asset and establishes new condition for reporting the transfer of a portion of a financial as set as a sale.  This standard is effective as of the beginning of the first

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annual reporting period that begins after November 15, 2009.  Management adopted the provisions of this standard on January 1, 2010 without a material impact on the Company’s financial condition or results of operations.

Transfers and Servicing, In December 2009, the FASB issued Accounting Standards Update (ASU) NO. 2009-16, Transfers and Servicing (ASC Topic 860): Accounting for transfers of Financial Assets, which updates the derecognition guidance in ASC Topic 860 for previously issued SFAS No. 166.  This update reflects the Board’s response to issues entities have encountered when applying ASC 860, including: (1) requires that all arrangements made in connection with a transfer of financial assets be considered in the derecognition analysis, (2) clarifies when a transferred asset is considered legally isolated from the transferor, (3) modifies the requirements related to a transferee’s ability to freely pledge or exchange transferred financial assets, and (4) provides guida nce on when a portion of a financial asset can be derecognized.  This update is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009.  Management adopted the provisions of this standard on January 1, 2010 without a material impact on the Company’s financial condition or results of operations.

Fair Value Measurements and Disclosures, In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that at description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements.  The Company adopted these provisions of the ASU in preparing the Consolidated Financial Statements for the period ended March 31, 2010.  The adoption of these provisions for th is ASU, which was subsequently codified into Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s statements of income and condition.

This ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number as currently permitted.  This provision on the ASU is effective for the Company’s reporting period ending March 31, 2011.  As this provision amends only the disclosure requirements for fair value measurements, the adoption will have no impact on the Company’s statements of income and condition.

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables.  This update is also intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses.  This ASU is effective for interim and annual reporting periods ending after December 15, 2010.  This ASU will require enhanced disclosures about financing receivables and the allowance for credit losses beginning with the Company’s December 31, 2010 Form 10-K.

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 Company̵ 7;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.

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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.

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, 2009.

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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 $675,000 or $0.22 per diluted share for the three months ended September 30, 2010, compared to $620,000 or $0.20 per diluted share for the three months ended September 30, 2009.  The Company earned net income of $1.4 million or $0.43 per diluted share, for the nine-month period ended September 30, 2010, compared to $1.5 million, or $0.48 per diluted share, for the nine-month period ended September 30, 2009.  The annualized return on average assets was 0.54% for the nine months ended September 30, 2010 and 0.63% for the same period of 2009.  The annualized return on average common shareholders’ equity for the nine month periods ended September 30, 2010 and 2009 was 4.96% and 5.28%, respectively.  The decrease in earnings for the nine month period was due to decr eased non-interest income related to gains on the sales of investment securities and life insurance.

At September 30, 2010, the Company’s total assets were $342.6 million, which was $2.4 million or 0.7% greater than total assets at December 31, 2009, and a decrease of $1.0 million or 0.3% compared to September 30, 2009.  Total loans were $235.6 million at September 30, 2010, an increase of $788,000 or 0.3% compared to December 31, 2009, and an increase of $477,000 or 0.2% compared to September 30, 2009.  Loan growth during the 2010 period centered in new commercial mortgage loans and draws made on existing commercial lines of credit which were offset by payments received on construction loans.

Total deposits were $295.6 million at September 30, 2010, which was an increase of $1.3 million or 0.4 % from December 31, 2009, and an increase of $733,000 million or 0.3% compared to September 30, 2009.  The amount of brokered time deposits included in total deposits at September 30, 2010, December 31, 2009, and September 30, 2009 were $17.2 million, $17.9 million and $29.2 million, respectively.  The Company’s ongoing marketing efforts include strategies to attract depositors from failed or acquired banks in overlapping market areas.

At September 30, 2010, the Company’s leverage ratio was 11.8% while its Tier 1 risk-based capital ratio and total risk-based capital ratio were 15.8% and 17.1%, respectively.  At December 31, 2009, the Company’s leverage ratio was 11.4% while its Tier 1 risk-based capital ratio and total risk-based capital ratio were 14.8% and 16.0%, respectively.  The leverage, Tier 1 risk-based capital and total risk-based capital ratios at September 30, 2009 were 12.5%, 15.3% and 16.6%, respectively.  The Company’s capital ratios increased during the nine months ended September 30, 2010 primarily as a result of net income earned during the period.  The Company’s leverage capital ratio decreased between September 30, 2010 and September 30, 2009 due to a combination of asset growth and subst antial loan loss provisioning recorded during the fourth quarter of 2009.

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Results of Operations for the Nine Months Ended September 30, 2010 and 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 nine-month periods indicated:

	Average balances and weighted average yields and costs
	Nine Months ended September 30,
	2010							2009
(dollars in thousands)	Average Balance		Interest income/ Expense		Average yield/ Cost			Average Balance		Interest income/ Expense		Average yield/ Cost
ASSETS
Due from banks	$	28,065	$	51		0.24	%	$	6,251	$	13		0.28	%
Federal funds sold		-		-		-	%		5,872		9		0.20	%
Available-for-sale investment securities:
Taxable		27,843		551		2.65	%		26,600		956		4.81	%
Exempt from Federal income taxes (1)		15,288		474		6.28	%		18,517		578		6.32	%
Total securities (1)		43,131		1,025		3.93	%		45,117		1,534		5.43	%
Loans (2) (3)		243,792		11,124		6.10	%		238,571		11,215		6.29	%
Total interest-earning assets (1)		314,988		12,200		5.28	%		295,811		12,771		6.03	%
Noninterest-earning assets, net of allowance for loan losses		30,020							23,718
Total assets	$	345,008						$	319,529
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Other interest bearing	$	122,754	$	549		0.60	%	$	108,342	$	989		1.22	%
Time deposits less than $100,000		24,964		276		1.48	%		24,792		451		2.43	%
Time deposits $100,000 or more		72,448		1,057		1.95	%		68,826		1,407		2.73	%
Total interest-bearing deposits		220,166		1,882		1.14	%		201,960		2,847		1.88	%
Short-term debt		-		-		-	%		2,640		16		0.81	%
Long-term debt		3,245		128		5.27	%		4,371		176		5.38	%
Junior subordinated deferrable interest debentures		3,093		86		3.72	%		3,093		101		4.37	%
Total interest-bearing liabilities		226,504		2,096		1.24	%		212,064		3,140		1.98	%
Noninterest-bearing deposits		77,917							67,247
Other liabilities		2,901							2,245
Total liabilities		307,322							281,556
Shareholders’ equity		37,686							37,973
Total liabilities and shareholders’ equity	$	345,008						$	319,529
Net interest income and margin (1)			$	10,104		4.39	%			$	9,631		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 $88 interest received on nonaccrual loans for the period ended September 30, 2010 and $36 for September 30, 2009.  There was $22 and $103 interest income reversed on nonaccrual loans for 2010 and 2009, respectively.

(3) Interest income on loans includes amortized loan fees, net of costs, of $427 and $469 for 2010 and 2009, 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, 2010 and 2009.

Changes in net interest income due to changes in volumes and rates
	Nine months ended September 30, 2010 vs. September 30, 2009
	due to change in:
	Average Volume			Average Rate (1)			Total
(In thousands)
Increase (decrease) in interest income:
Due from banks	$	45		$	(7	)	$	38
Federal funds sold		(9	)		-			(9	)
Investment securities
Taxable		45			(450	)		(405	)
Exempt from Federal income taxes		(153	)		49			(104	)
Total securities		(108	)		(401	)		(509	)
Loans		245			(336	)		(91	)
Total interest income	$	173		$	(744	)	$	(571	)
Increase (decrease) in interest expense:
Other interest bearing deposits		132			(572	)		(440	)
Time deposits less than $100,000		3			(178	)		(175	)
Time deposits $100,000 or more		74			(424	)		(350	)
Total interest-bearing deposits		209			(1,174	)		(965	)
Short-term debt		(16	)		-			(16	)
Long-term debt		(45	)		(3	)		(48	)
Junior subordinated deferrable interest debentures		-			(15	)		(15	)
Total interest expense		148			(1,192	)		(1,044	)
Increase in net interest income	$	25		$	448		$	473

(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 $10.1 million for the nine-month period ended September 30, 2010 compared to $9.6 million for the same period of 2009, an increase of $473,000 or 5%.  Growth in average interest-earning assets and interest-bearing liabilities caused the Company’s net interest income to increase by $25,000, while changes in interest rates on these same accounts caused net interest income to increase by $448,000.

The increase in net interest income was primarily due to declining cost of funds.  The average rate paid on interest-bearing liabilities was 1.24% in the 2010 period compared to 1.98% in the 2009 period, a reduction of 74 basis points.  Average total interest-bearing liabilities in the 2010 period increased by $14.4 million or 7% compared to the 2009 period.  This included an increase in average other interest bearing deposits of $14.4 million or 13%, and an increase of $3.8 million or 4% in average time deposits.  The increase in deposits was due to local deposit growth.  These increases were offset by a $3.8 million or 54% decrease in the Company’s combined short-term and long-term debt.

The increase in net interest income from the decline in the cost of funds was offset by declining yields on interest-earning assets.  Total interest income for the nine-month periods ended September 30, 2010 and 2009 was $12.2 million and $12.8 million, respectively, a decrease of $571,000 or 4%.

The Company’s interest income from loans decreased by $91,000 as the impact of average yield on loans decreasing from 6.29% in the 2009 period to 6.10% in the 2010 period, a change of 19 basis points, was only partially offset by a $5.2 million or 2% increase in average loans.  The decrease in average loan yield was primarily due to normal repricing in a declining rate environment.  At September 30, 2010, approximately 69% of the Company’s loan portfolio was comprised of variable rate loans of which 46% were at their floor rate.

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The yield on investment securities decreased from 5.43% in the 2009 period to 3.93% in the 2010 period which caused interest income from investment securities to decrease by $509,000.  This resulted from the Company’s repositioning of its investment portfolio into shorter duration and consequently lower-yielding securities in anticipation of a rising interest rate environment.

The Company’s net interest margin on a taxable equivalent basis decreased 19 basis points from 4.58% in the nine-month period ended September 30, 2009 to 4.39% in the nine-month period ended September 30, 2010.  The decline resulted from average yields on interest-earning assets declining by more than the decrease in cost of funds on interest-bearing liabilities.  In addition, management’s effort to mitigate the impact of loan and deposit repricings following a period of falling interest rates contributed to the stability.  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 credit experience and management’s ongoing evaluation of loan portfolio risk and economic conditions.  A $1.8 million loan loss provision was recorded during the nine months ended September 30, 2010 compared to a $2.0 million provision for loan losses for the nine-month period ended September 30, 2009.  Management determined the provision for loan losses for the period ended September 30, 2010 after consideration of current economic conditions in the Bank’s primary markets and changes in the volume and valuation 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, 2010 and 2009 totaled $984,000 and $1.5 million, respectively, a decrease of $488,000 or 33%.  The components of non-interest income during each period were as follows:

Non-interest income
	Nine Months ended September 30,
(in thousands)	2010		2009		Increase (Decrease)
Service charges	$	585	$	567	$	18
Gain on sale of available-for-sale investment securities		11		169		(158	)
Gain on sale of other real estate		-		16		(16	)
Mortgage loan brokerage fees		31		41		(10	)
Earnings on cash surrender value of life insurance policies		221		215		6
Gain from bank owned life insurance		-		317		(317	)
Other		136		147		(11	)
Total non-interest income	$	984	$	1,472	$	(488	)

Non-interest income decreased in the 2010 period due mainly to a nonrecurring gain from bank owned life insurance in the 2009 period of $317,000 and a gain on sale of investment securities of $169,000, in the 2009 period which was $158,000 more than the $11,000 gain in 2010.  Mortgage loan brokerage fees decreased by $10,000 due primarily to falling real estate values that hindered refinancing opportunities and to more restrictive conditions in the secondary mortgage market.  Within the other category, there was nonrecurring rental income of $33,000 in the 2009 period related to the Company’s purchase of an office building in 2009.  These decreases were offset by an increase in service charges of $18,000 due to a $6,000 increase in account analysis charges and an $11,000 increase in non-sufficient funds and overdraft charges that were attributable to higher deposit levels.

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Non-Interest Expense

For the nine months ended September 30, 2010, non-interest expense totaled $7.3 million, an increase of $119,000 or 2% from the $7.2 million recorded during the first nine months of 2009.  The increase resulted primarily from a $168,000 or 31% decrease in deferred loan origination costs, included in salaries and benefits, resulting from a less active lending environment.  Other employee-related costs increased by $124,000 or 3% due primarily to full-time equivalent employees increasing from 78.08 at September 30, 2009 to 80.21 at September 30, 2010 due mainly to the hire of senior officers.  Assessment and insurance expense increased by $84,000 or 18% due to FDIC deposit insurance costs related primarily to higher deposit volume.  In addition, data processing costs increased by $45,000 or 11% d ue to the implementation of new technology-oriented products such as mobile banking.  These increases were offset by a $174,000 or 15% decrease in occupancy and equipment costs related to the relocation of the Visalia branch and Administrative offices from multiple leased facilities to a single location owned facility, and a $107,000 or 29% decrease in operational expenses due to reduced correspondent bank charges resulting from a change in service providers.

The following table describes the components of non-interest expense for the nine-month periods ended September 30, 2010 and 2009:

Non-interest expense
	Nine Months ended September 30,
(in thousands)	2010		2009		Increase (Decrease)
Salaries and employee benefits	$	3,955	$	3,663	$	292
Occupancy and equipment		996		1,170		(174	)
Other real estate owned		-		14		(14	)
Data processing		473		428		45
Operations		256		363		(107	)
Professional and legal		314		372		(58	)
Advertising and business development		153		164		(11	)
Telephone and postal		166		160		6
Supplies		145		113		32
Assessment and insurance		559		475		84
Other expenses		315		291		24
Total non-interest expense	$	7,332	$	7,213	$	119

Provision for Income Taxes

The provisions for income taxes for the nine-month periods ended September 30, 2010 and 2009 was $556,000 and $391,000, respectively.  The effective tax rates for these periods were 28.4%, and 20.7%, respectively.  The increase in the effective tax rate was primarily due to the tax exempt officer life insurance income that was received in the 2009 period.

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Results of Operations for the Three Months Ended September 30, 2010

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,
	2010							2009
			Interest		Average					Interest		Average
	Average		income/		yield/			Average		income/		yield/
(dollars in thousands)	Balance		Expense		Cost			Balance		Expense		Cost
ASSETS
Due from banks	$	29,966	$	18		0.24	%	$	18,550	$	13		0.28	%
Federal funds sold		-		-		-	%		1,563		-		-	%
Available-for-sale investment securities:
Taxable		28,214		178		2.50	%		28,612		332		4.60	%
Exempt from Federal income taxes (1)		15,182		159		6.30	%		17,375		181		6.26	%
Total securities (1)		43,396		337		3.83	%		45,987		513		5.23	%
Loans (2) (3)		247,926		3,724		5.96	%		243,947		3,840		6.25	%
Total interest-earning assets (1)		321,288		4,079		5.14	%		310,047		4,366		5.71	%
Noninterest-earning assets, net of allowance for loan losses		27,155							25,497
Total assets	$	348,443						$	335,544
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Other interest bearing	$	124,213	$	171		0.55	%	$	118,133	$	305		1.02	%
Time deposits less than $100,000		23,774		77		1.28	%		24,659		124		2.00	%
Time deposits $100,000 or more		72,166		322		1.77	%		77,486		481		2.46	%
Total interest-bearing deposits		220,153		570		1.03	%		220,278		910		1.64	%
Long-term debt		2,633		33		4.97	%		3,742		47		4.98	%
Junior subordinated deferrable interest debentures		3,093		30		3.85	%		3,093		30		3.85	%
Total interest-bearing liabilities		225,879		633		1.11	%		227,113		987		1.72	%
Noninterest bearing deposits		80,962							67,722
Other liabilities		3,219							1,639
Total liabilities		310,060							296,474
Shareholders’ equity		38,383							39,070
Total liabilities and shareholders’ equity	$	348,443						$	335,544
Net interest income and margin (1)			$	3,446		4.36	%			$	3,379		4.44	%

(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 no interest received on nonaccrual loans for the period ended September 30, 2010 or September 30, 2009. There was $22 and $20 interest reversed on nonaccrual loans for the periods ended September 30, 2010 and 2009, respectively.

(3) Interest income on loans includes amortized loan fees, net of costs, of $143 and $162 for 2010 and 2009, 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, 2010 and 2009.

Changes in net interest income due to changes in volumes and rates
	Three months ended September 30, 2010 vs. September 30, 2009 due to change in:
	Average Volume			Average Rate (1)			Total
(In thousands)
Increase (decrease) in interest income:
Due from banks	$	9		$	(4	)	$	5
Investment securities
Taxable		(5	)		(149	)		(154	)
Exempt from Federal income taxes		(35	)		13			(22	)
Total securities		(40	)		(136	)		(176	)
Loans		63			(179	)		(116	)
Total interest income		32			(319	)		(287	)
Increase (decrease) in interest expense:
Other interest-bearing deposits		16			(150	)		(134	)
Time deposits less than $100,000		(4	)		(43	)		(47	)
Time deposits $100,000 or more		(33	)		(126	)		(159	)
Total interest-bearing deposits		(21	)		(319	)		(340	)
Long-term debt		(14	)		-			(14	)
Junior subordinated deferrable interest debentures		-			-			-
Total interest expense		(35	)		(319	)		(354	)
Increase in net interest income	$	67		$	-		$	67

(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 $3.45 million for the three-month period ended September 30, 2010 compared to $3.38 million for the same period of 2009, an increase of $67,000 or 2%.  Growth in average interest-earning assets and a slight decrease in interest-bearing liabilities caused the Company’s net interest income to increase by $67,000, while changes in interest rates on these same accounts caused no change in net interest income.

The average rate paid on interest-bearing liabilities was 1.11% in the 2010 period compared to 1.72% in the 2009 period, a reduction of 61 basis points.  Average total interest-bearing liabilities in the 2010 period decreased by $1.2 million or .5% compared to the 2009 period.  This included an increase in average other interest bearing deposits of $6.1 million or 5%, offset by decreases of $6.2 million or 6% in average time deposits and a $1.1 million or 30% decrease in the Company’s combined short-term and long-term debt.

Total interest income for the three-month periods ended September 30, 2010 and 2009 was $4.1 million and $4.4 million a $287,000 decrease or 7%.  The average yield on earning assets decreased from 5.71% in the 2009 period to 5.14% in the 2010, a decrease of 57 basis points.  The impact of the yield decrease was partly offset by a $11.2 million or 4% increase in average interest-earning assets.

The Company’s interest income from loans decreased by $116,000 due to a 29 basis point decrease in average yield and $22,000 of income reversed on a loan that was transferred to nonaccrual status. The yield on investment securities decreased from 5.23% in the 2009 period to 3.83% in the 2010 period which caused interest income from investment securities to decrease by $176,000.  This resulted from the Company’s repositioning of its investment portfolio into shorter duration and consequently lower-yielding securities in anticipation of a rising interest rate environment.

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The Company’s net interest margin on a taxable equivalent basis decreased 8 basis points from 4.44% in the three-month period ended September 30, 2009 to 4.36% in the three-month period ended September 30, 2010.  The slight decline in net interest margin related to shifts in the mix of assets and liabilities.  In addition, management’s effort to mitigate the impact of loan and deposit repricings following a period of falling interest rates contributed to the stability.  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 credit experience and management’s ongoing evaluation of loan portfolio risk and economic conditions.  There was a $550,000 loan loss provision recorded during the three months ended September 30, 2010 compared to a $600,000 provision for loan losses for the three-month period ended September 30, 2009.  Management determined the provision for loan losses for the period ended September 30, 2010 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, 2010 and 2009 totaled $358,000 and $508,000, respectively, a decrease of $150,000 or 30%.  The components of non-interest income during each period were as follows:

Non-interest income
	Three Months ended September 30,
(in thousands)	2010		2009		Increase (Decrease)
Service charges	$	197	$	198	$	(1	)
Gain on sale of available-for-sale investment securities,      net		11		165		(154	)
Gain on sale of other real estate		-		16		(16	)
Mortgage loan brokerage fees		23		13		10
Earnings on cash surrender value of life insurance policies		75		73		2
Other		52		43		9
Total non-interest income	$	358	$	508	$	(150	)

Non-interest income decreased in the 2010 period due mainly to greater gain from sale of investment securities and gain on sale of other real estate in the 2009 period.  These were offset by an increase in mortgage loan brokerage fees of $10,000 due to greater incidence of mortgage loan underwriting.

Non-Interest Expense

For the three months ended September 30, 2010, non-interest expense totaled $2.3 million compared to the $2.4 million recorded during the third quarter of 2009, a decrease of $102,000 or 4.3%.  The overall decrease in 2010 was caused by an $82,000 or 59% decrease in professional and legal costs due to the timing of audit fee payments and decreased attorney usage, a reduction of $55,000 or 14% decrease in occupancy and equipment costs related to the relocation of the Visalia branch and Administrative offices from multiple leased facilities to a single location owned facility, and to a reduction of $43,000 or 3% operating expenses due to reduced correspondent bank charges resulting from a change in service providers.

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The following table describes the components of non-interest expense for the three-month periods ended September 30, 2010 and 2009:

Non-interest expense
	Three Months ended September 30,
(in thousands)	2010		2009		Increase (Decrease)
Salaries and employee benefits	$	1,228	$	1,200	$	28
Occupancy and equipment		333		388		(55	)
Other real estate owned		-		3		(3	)
Data processing		159		153		6
Operations		78		121		(43	)
Professional and legal		56		138		(82	)
Advertising and business development		40		43		(3	)
Telephone and postal		58		54		4
Supplies		48		38		10
Assessment and insurance		152		142		10
Other expenses		110		84		26
Total non-interest expense	$	2,262	$	2,364	$	(102	)

Provision for Income Taxes

The provision for income taxes for the three-month periods ended September 30, 2010 and 2009 was $317,000 and $303,000, respectively.  The effective tax rates for these periods were 31.9%, and 32.7%, respectively. The increase in the effective tax rate was primarily due to tax exempt income comprising a lower percentage of income in the 2010 period.

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Financial Condition

Investment Securities

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

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, 2010
(in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair  Value
U.S. government agencies	$	3,429	$	96	$	-		$	3,525
Mortgage-backed securities:
Agency MBS		9,450		335		(17	)		9,768
SBA MBS		15,189		228		(2	)		15,415
Municipal securities		14,846		372		(100	)		15,118
Total	$	42,914	$	1,031	$	(119	)	$	43,826

	December 31, 2009
(in thousands)	Amortized Cost		Unrealized Gain		Unrealized Loss			Fair  Value
U.S. government agencies	$	2,910	$	105	$	-		$	3,015
Mortgage-backed securities:
Agency MBS		8,986		295		-			9,281
SBA MBS		15,326		27		(46	)		15,307
Municipal securities		15,338		49		(424	)		14,963
Total	$	42,560	$	476	$	(470	)	$	42,566

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.

By analyzing the specific securities, management has determined that as of September 30, 2010, there is no other-than-temporary impairment and as such, is not taking any action to write-down these securities.  Management also evaluated the credit ratings of the Company’s other investment securities and does not consider any of the other 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 write-downs.

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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, 2010					December 31, 2009
Commercial	$	51,856		21	%	$	49,443		21	%
Real estate – mortgage (1)		167,436		69			162,772		67
Real estate – construction		16,391		7			22,582		9
Agricultural		4,768		2			4,727		2
Consumer and other		1,981		1			1,937		1
Subtotal		242,432		100	%		241,461		100	%
Deferred loan fees, net		(373	)				(407	)
Allowance for loan losses		(6,448	)				(6,231	)
Total loans, net	$	235,611				$	234,823
(1) Consists primarily of commercial mortgage loans.

During the nine months ended September 30, 2010, loan growth occurred in the category of real estate – mortgage and commercial.  The growth consisted primarily of loans to local business owners, most of whom have other loan and deposit relationships with the Company, and to local higher education institutions.

Nonperforming Assets

There was $5.9 million in nonperforming loans at September 30, 2010 which represented 2.43% of total loans.  Non-performing loans at September 30, 2010 were comprised of five customer relationships in nonaccrual status for which management has established specific loss reserves of 307,000.  This compared to $7.5 million in non-performing loans at September 30, 2009 which represented 3.17% of total loans, and $7.4 million in non-performing loans at December 31, 2009, which represented 3.05% of total loans.  Non-performing loans decreased during 2010 primarily due to successful collection efforts and charge-offs of $1.6 million.  There was $623,000 and $291,000 in foregone interest on nonaccrual loans for the nine months ended September 30, 2010 and 2009, respectively, and $435,000 for the twelve-mont h period ended December 31, 2009.

The Company had four troubled debt restructures in the amount of $3.0 million at September 30, 2010 compared to none in prior  period.  There was no real estate acquired through foreclosure at September 30, 2010 or December 31, 2009.

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.  At September 30, 2010, the recorded investment in loans that were considered to be impaired totaled $10.2 million. Impaired loans with specific reserves and the specific allowance for loan losses for those impaired loans at September 30, 2010 totaled $1.3 million and $1.6 million, respectively.  At December 31, 2009, the recorded investment in loans that were considered to be impaired totaled $12.5 million.  Impaired loans with specific reserves and the specific allowance for loan losses for those impaired loans at December 31, 2009 totaled $2.7 million, respectively.

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.

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The allowance for loan losses totaled $6.4 million or 2.66% of total loans at September 30, 2010.  This compared to $5.1 million or 2.11% of total loans at September 30, 2009 and $6.2 million or 2.58% at December 31, 2009.  The Company recorded $1.6 million of charge-offs and $10,000 in recoveries during the nine months ended September 30, 2010 compared to  charge-offs of $173,000 and no recoveries during the same period of 2009.

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

The 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, 2010			September 30, 2009			December 31, 2009
(dollars in thousands)
Balance, beginning	$	6,231		$	3,244		$	3,244
Provision for  loan losses		1,800			2,000			7,000
Charge-offs-real estate		(1,530	)		(173	)		-
Charge-offs-commercial		(34	)		-			(4,013	)
Charge-offs-other		(29	)		-			-
Recoveries		10			-			-
Balance, ending	$	6,448		$	5,071		$	6,231
Net charge-offs to average loans outstanding		0.65	%		0.10	%		1.67	%
Average loans outstanding	$	243,792		$	238,571		$	239,428
Ending allowance to total loans outstanding		2.66	%		2.11	%		2.58	%

Premises and Equipment

(dollars in thousands)	September 30, 2010			December 31, 2009
Furniture and equipment	$	2,963		$	2,955
Construction in progress		-			4,567
Premises		6,213			2,095
Leasehold improvements		207			551
Land		1,461			606
		10,844			10,774
Less accumulated depreciation and amortization		(2,252	)		(2,732	)
Total	$	8,592		$	8,042

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Depreciation and amortization expense included in occupancy and equipment expense totaled $378,000 and $665,000 for the nine-month period ended September 30, 2010 and year ended December 31, 2009.  Depreciation for the 2009 period reflected accelerated write-off of tenant improvements at the leased Visalia Branch and Administrative offices.

In February 2009, the Company purchased an 18,700 square foot office building to house both the Visalia Branch and Administrative Offices.  These two offices were housed in leased facilities with a combined square footage of 13,672 prior to being relocated to the new building commencing in late 2009.  The move was completed in January 2010 with the relocation of the Visalia branch.  Monthly rent expense of approximately $24,000 was replaced with monthly depreciation of approximately $10,000 on the structure as modified and remodeled for bank use.

Deposits

Total deposits were $295.6 million at September 30, 2010, a $1.3 million or 0.4% increase from the December 31, 2009 total of $294.3 million.  Interest-bearing deposits decreased by $1.8 million or 1.5% and non-interest bearing deposits increased by $4.3 million or 6%, during the nine month period ended September 30, 2010.  Brokered deposits decreased by $673,000 or 4% during the nine month period ended September 30, 2010. Brokered deposits included in time deposits at September 30, 2010 and December 31, 2009 were $17.2 million and $17.9 million, respectively.  All other deposits were acquired locally.

Total deposits at September 30, 2010 and December 31, 2009 are summarized in the following table:

Deposit Portfolio
(dollars in thousands)	September 30, 2010				December 31, 2009
Non-interest bearing	$	80,874	27	%	$	76,575	26	%
Interest bearing		119,562	41			121,398	41
Brokered deposits		17,176	6			17,849	6
Time deposits		77,976	26			78,460	27
Total	$	295,588	100	%	$	294,282	100	%

Federal Home Loan Bank Borrowings

At September 30, 2010, the Company had outstanding long-term fixed rate debt from the Federal Home Loan Bank totaling $2.6 million.  At December 31, 2009, the Company had long-term fixed rate debt totaling $3.7 million.  The decrease was due to principal reductions at scheduled payment and maturity dates.  There was no short-term debt outstanding at either date.  At September 30, 2010, the weighted average rate on long-term borrowings was 5.27%.  The remaining principal balance of long-term debt is scheduled to mature at various dates with final payment to occur in January 2012.

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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 third quarter of 2003.  The $3.1 million of junior subordinated deferrable interest debentures at September 30, 2010 was unchanged from December 31, 2009.  The rate of interest paid on these debentures was 3.72% at September 30, 2010 compared to 4.20% at December 31, 2009.

Capital Resources

Total shareholders’ equity was $38.5 million at September 30, 2010 and $36.9 million at December 31, 2009.  The increase resulted from net income of $1.4 million for the nine months ended September 30, 2010.

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 terms and conditions pertaining to the issuance of the Series B and C Preferred stock are described in Note 12 to the condensed consolid ated financial statements.

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.

The following table summarizes the Company’s risk-based capital ratios as of September 30, 2010 and December 31, 2009:

Capital and capital adequacy ratios
	September 30, 2010			December 31, 2009
(dollars in thousands)	Amount		Ratio	Amount		Ratio
Leverage Ratio
Valley Commerce Bancorp and Subsidiary	$	40,984	11.8%	$	39,865	11.4%
Minimum regulatory requirement	$	13,938	4.0%	$	13,982	4.0%
Valley Business Bank	$	40,807	11.7%	$	39,845	11.4%
Minimum requirement for “Well- Capitalized” institution	$	17,422	5.0%	$	17,472	5.0%
Minimum regulatory requirement	$	13,933	4.0%	$	13,977	4.0%
Tier 1 Risk-Based Capital Ratio
Valley Commerce Bancorp and Subsidiary	$	40,984	15.8%	$	39,865	14.8%
Minimum regulatory requirement	$	10,365	4.0%	$	10,804	4.0%
Valley Business Bank	$	40,807	15.8%	$	39,845	14.8%
Minimum requirement for “Well- Capitalized” institution	$	15,542	6.0%	$	16,201	6.0%
Minimum regulatory requirement	$	10,361	4.0%	$	10,801	4.0%
Total Risk-Based Capital Ratio
Valley Commerce Bancorp and Subsidiary	$	44,584	17.1%	$	43,277	16.0%
Minimum regulatory requirement	$	20,730	8.0%	$	21,608	8.0%
Valley Business Bank	$	44,406	17.0%	$	43,256	16.0%
Minimum requirement for “Well- Capitalized” institution	$	25,904	10.0%	$	27,002	10.0%
Minimum regulatory requirement	$	20,723	8.0%	$	21,601	8.0%

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At September 30, 2010 and December 31, 2009, 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, 2010 and December 31, 2009, $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 and serves as Tier 1 capital.  Accordingly, the impact to the Company’s risk-based capital ratios at September 30, 2010 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, 2009 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 – RESERVED

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 15, 2010	By:	/s/ Allan W. Stone
		Allan W. Stone, President and Chief Executive Officer
Date: November 15, 2010	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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