UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-QSB

COMMISSION FILE NUMBER: 000—31977

CENTRAL VALLEY COMMUNITY BANCORP

(Name of small business issuer in its charter)

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

Yes  ý     No  o

State the number of shares outstanding of each of the issuer’s classes of common equity, as of November 02, 2004: 2,628,367 shares

Transitional Small Business Disclosure Format (check one)

Yes  o        No  ý

INDEX

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PART I

ITEM 1. FINANCIAL STATEMENTS

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(In Thousands Except Share Amounts)

See notes to unaudited consolidated financial statements.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands Except Per Share Amounts)

See notes to unaudited consolidated financial statements.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003

(In Thousands Except Share and Per Share Amounts)

See notes to unaudited consolidated financial statements.

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CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(In Thousands)

See notes to unaudited consolidated financial statements

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CENTRAL VALLEY COMMUNITY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.   GENERAL

All adjustments (consisting only of normal recurring accruals) which, in the opinion of Management, are necessary for a fair presentation of Central Valley Community Bancorp’s (the “Company”) consolidated financial position at September 30, 2004 and December 31, 2003; the results of its operations for the three month periods ended September 30, 2004 and 2003, and the nine month periods ended September 30, 2004 and 2003, and changes in its shareholders’ equity and its cash flows for the nine-month periods ended September 30, 2004 and 2003 have been included.  Certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted.  These interim consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2003 Annual report to Shareholders.  The results of operations and cash flows for the periods presented are not necessarily indicative of the results for a full year.

The accompanying unaudited financial statements have been prepared on a basis consistent with the accounting principles and policies reflected in the Company’s annual report for the year ended December 31, 2003.

Note 2.   STOCK-BASED COMPENSATION

The Company issues stock options under two stock-based compensation plans, the Central Valley Community Bancorp 2000 Stock Option Plan and the Central Valley Community Bank 1992 Stock Option Plan.  The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards.  These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values.  The Company’s calculations were made using the Black-Scholes option pricing model with the following assumptions: expected option life, 10 years; expected stock volatility of 66.27% for 2004 and 65.4% to 72.77% for 2003; risk free interest rates of 4.17% for 2004 and ranging from 2.05% to 3.18% for 2003; and a dividend yield of 0.05% during the expected term for 2004 and 2003.  The Company’s calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur.

In accordance with Financial Accounting Standards Board (“FASB”) No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of FASB No. 123, the following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

Pro forma adjustments to the Company’s consolidated net earnings and earnings per share are disclosed during the years in which the options become vested.

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Note 3.   EARNINGS PER SHARE (EPS)

Basic earnings per share (EPS), which excludes dilution, is computed by dividing net income by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. There was no difference in the net income used in the calculation of basic earnings per share and diluted earnings per share.

Weighted Average Number of Shares Outstanding

Note 4.   COMPREHENSIVE INCOME

Total comprehensive income is comprised of net earnings and net unrealized gains and losses on available-for-sale securities.  Total comprehensive income for the three-month periods ended September 30, 2004 and 2003 was

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$2,156,000 and $160,000, respectively.  Total comprehensive income for the nine-month periods ended September 30, 2004 and 2003 was $2,516,000 and $1,923,000, respectively.

Note 5.   COMMITMENTS AND CONTINGENCIES

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. Off balance sheet commitments are comprised of the unused portions of commitments to make or purchase extensions of credit in the form of loans or participations in loans, lease financing receivables, or similar transactions.  Included are loan proceeds that the Company is obligated to advance, such as loan draws, construction progress payments, seasonal or living advances to farmers under prearranged lines of credit, rotating or revolving credit arrangements, including retail credit cards, or similar transactions if there has been no credit deteriation. The Company holds no off balance sheet derivatives and engages in no hedging activities.

The following table illustrates the distribution of the Company’s undisbursed loan commitments at September 30, 2004 and 2003, respectively.

Commitments generally have fixed expiration dates of one year or less or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Commitments are evaluated and extended in the same manner as funded loans.  Fees deferred for letters of credit are not significant.  Credit risk is addressed in “Provision for Credit Losses”.

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

Note 6.   SUBSEQUENT EVENT

On July 19, 2004, the Company signed a definitive agreement to merge Bank of Madera County (“BMC”) into the Company’s wholly owned subsidiary, Central Valley Community Bank (the “Bank”).  BMC is a two branch state chartered bank formed in 1999, with $62,947,000 in total assets and $4,726,000 in shareholders’ equity as of September 30, 2004. Under the terms of the Agreement, BMC shareholders will receive a total of approximately $12,400,000 in cash and stock, representing $6,200,000 in cash (subject to adjustment) and 261,053 shares of the Company’s common stock.  BMC shareholders will have the right to request to receive all cash or all stock.  However, no shareholder is assured to receive all cash or all stock.  If requests of the BMC shareholders exceed the number of shares of the Company’s common stock to be issued in the merger, the shares will be distributed to the BMC shareholders who elect to receive stock on a pro rata basis and the remainder of their merger consideration will be paid in cash.  Similarly, if requests of the BMC shareholders exceed $6,200,000 in cash, the cash will be distributed to the BMC shareholders who elect to receive cash on a pro rata basis and the remainder of their merger consideration will be paid in the Company’s common stock.  The two branches of BMC, located in Oakhurst and Madera, California, will become branches of the Bank.

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition or Plan of Operations

Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties.  Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates, a decline in economic conditions at the international, national or local level on the Company’s results of operations, the Company’s ability to continue its internal growth at historical rates, the Company’s ability to maintain its net interest margin, 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; (7) risks associated with pending acquisition, relating to difficulty in integrating combined operations, potential disruption of 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 evaluating the business prospects of the Company.

When the Company uses in this Quarterly Report on Form 10-QSB 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-QSB.  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.

INTRODUCTION:

Central Valley Community Bancorp (NASDAQ: CVCY) (the “Company”) was incorporated on February 7, 2000.  The formation of the holding company offered the Company more flexibility in meeting the long-term needs of customers, shareholders, and the communities it serves. The Company is subject to the supervision of the Federal Reserve Board under the Bank Holding Company Act.  The Company currently has one bank subsidiary, Central Valley Community Bank (the “Bank”).  The Bank remains subject to the supervision of the California Department of Financial Institutions (“DFI”) and the Federal Deposit Insurance Corporation (“FDIC”).   The Company’s market area includes the entire central valley area from Sacramento, California to Bakersfield, California.

In 2002, the Company changed the name of its one subsidiary, Clovis Community Bank, to Central Valley Community Bank (the “Bank”).  The Bank has seven (7) branches located in Fresno County and the Sacramento area.  The Bank anticipates additional branch openings to meet the growing service needs of its customers through establishment of new branches, or bank/branch acquisitions.   The Bank received FDIC and DFI approval for a full service retail office in the Fresno downtown area which is expected to open in the second quarter of 2005.   Additionally, the Company anticipates expanding existing branches in the Clovis and Kerman areas.

On July 19, 2004, the Company signed a definitive agreement to merge Bank of Madera County (“BMC”) into the Company’s wholly owned subsidiary, Central Valley Community Bank (the “Bank”).  BMC is a two branch state chartered bank formed in 1999, with $62,947,000 in total assets and $4,726,000 in shareholders’ equity as of September 30, 2004. Under the terms of the Agreement, BMC shareholders will receive a total of approximately $12,400,000 in cash and stock, representing $6,200,000 in cash (subject to adjustment) and 261,053 shares of the Company’s common stock.

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BMC shareholders will have the right to request to receive all cash or all stock.  However, no shareholder is assured to receive all cash or all stock.  If requests of the BMC shareholders exceed the number of shares of the Company’s common stock to be issued in the merger, the shares will be distributed to the BMC shareholders who elect to receive stock on a pro rata basis and the remainder of their merger consideration will be paid in cash.  Similarly, if requests of the BMC shareholders exceed $6,200,000 in cash, the cash will be distributed to the BMC shareholders who elect to receive cash on a pro rata basis and the remainder of their merger consideration will be paid in the Company’s common stock.  The Company filed a Form S-4, Registration Statement Under the Securities Act of 1933 on August 25, 2004 with the Securities Exchange Commission to register the shares of the Company’s common stock to be issued in the merger, and applications for approval of the merger with the FDIC and DFI, and with the Federal Reserve Bank of San Francisco, under the Bank Holding Company Act, on August 20, 2004.  Approval from the Federal Reserve Bank was received August 30, 2004. All other filings are pending approval.

Branch expansions provide the Company with opportunities to expand its loan and deposit base; however, based on past experience, management expects these new offices will initially have a negative impact on earnings until the volume of business grows to cover fixed overhead expenses.

In 2002, the Bank formed a real estate investment trust (“REIT”), Central Valley Community Realty, LLC (“CVCR”).  The trust invested in the Bank’s real estate related assets and provided an alternative means to potentially generate additional capital with a view to affording certain tax advantages. (Refer to “Income Taxes” for further discussion of CVCR.)

ECONOMIC CONDITIONS

Fresno County’s economy has slowed over the past quarter, but still exhibits a certain level of stability.  Most industries in the County are either stable or contracting very modestly.  Fresno County’s double digit unemployment is one of the highest rates in California and the nation.  This high level is a strong hindrance to strong growth in the County.  Agriculture and agricultural related businesses remain a critical part of the County’s economy.  The County’s Ag production is widely diversified producing cotton, nuts, vegetables, fruit, cattle, and dairy products.  Fresno County also offers lower living costs compared with metro areas to the North and South of the County.  Residential construction, while slowing somewhat, still appears to be strong.  The local economy benefited from growth in housing and construction fueled by record low long-term interest rates, demand for new housing and refinance activity.  The Central Valley experienced significant appreciation in home and real estate values in the past two years while remaining relatively inexpensive compared to other metropolitan areas in the State.

OVERVIEW

For the nine month period ended September 30, 2004, the Company reported net income of $2,654,000 or $0.91 diluted earnings per share compared to $2,609,000 or $0.92 diluted earnings per share in the first nine months of 2003.   Net interest income increased $1,174,000 in the periods under review, primarily as the result of increased volumes in earning assets and a 75 basis point increase in interest rates by the Federal Open Market Committee (“FOMC”), combined with modest decreases in the cost of interest-bearing liabilities.  Also contributing to net income was an increase of $127,000 in additional gains on sale of investments in the first nine months of 2004 compared to the same period of 2003.  These increases were partially offset by reductions of $392,000 in rental income from equipment leased to others and $166,000 in loan placement fees. Net interest margin on a fully tax equivalent basis for the first nine months of 2004 was 4.81% compared to 4.83% for the same period in 2003.  The net interest margin on a fully tax equivalent basis for the third quarter of 2004 was 5.00% compared to 4.50% for the same period of 2003.  This increase reflects a 75 basis point increase in prime interest rates during the third quarter and the positive impact on net interest income from the Bank’s asset sensitive position.

Average earning assets for the first nine months of 2004 were $304,671,000 compared to $270,060,000 for the same period of 2003.  The major contributor to the 12.8% increase in average earning assets was an 11.8% increase in average loans and a 12.0% increase in average investment securities which were the result of a 14.4% growth in deposits.  Loan and deposit growths are discussed in more detail below.

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Annualized return on average assets (ROA) and return on average equity (ROE) for the three and nine month periods ended September 30, 2004 and September 30, 2003 are reflected in the following table.

Similar to most of the banking industry, the Company’s net interest margin was challenged by the impact of twelve consecutive decreases in the Federal funds interest rate by the FOMC in the past four years. Managing the loan yields affected by the interest rate movements and increased competition, and controlling the effective rates paid on deposits continues to challenge the Company’s net interest margin. The Company is asset-sensitive and is positioned well in the event of future rate increases. The FOMC has increased the Federal funds interest rate by 75 basis points during the third quarter of 2004, providing opportunities for the Company’s asset sensitive loan portfolio to reprice at higher rates, which are reflected in the increase in the Company’s net interest margin. For additional information, please see Market Risk for further discussion of the Bank’s interest rate position.

COMPANY LINES OF BUSINESS

The Company’s market focus is lending to small to medium size commercial businesses offering both commercial and real estate loans.  The Company also offers retail consumer loan products.  These loans offer diversification as to industries and types of business, thus reducing exposure in any one industry concentration.  The Company offers both fixed and floating interest rate loans and typically obtains collateral in the form of real estate, business equipment, deposit accounts, and accounts receivable, but looks mainly to business cash flow as its primary source of repayment.

The Company offers Small Business Administration (SBA) loans, and agricultural lending, as well. For the fifth consecutive year, Central Valley Community Bank has been honored as the number one SBA 504 lender in Fresno, Kings and Madera counties. At September 30, 2004 and 2003, SBA 504 loans were $13,112,000 and $9,644,000, respectively.

Agricultural loans increased $8,027,000 in the third quarter of 2004 compared to the same period of 2003. Agricultural loans were 9.0% of total loans at September 30, 2004 compared to 5.8% at September 30, 2003.  The Company has several experienced and seasoned agricultural lending officers who provide expertise to agricultural lending.

As of September 30, 2004, in management’s judgment, a concentration of loans existed in commercial loans and real estate-related loans.  At that date, commercial and real estate-related loans represented 26.6% and 61.3% of gross total loans, respectively.  These concentrations are within the Company strategic plan and are the main focus of its business.  Commercial and real estate related loans are generally a mix of short to medium-term, fixed and floating rate instruments and are mainly tied to the borrower’s ability to repay from business cashflow.  Similar concentrations existed as of December 31, 2003 with commercial and real estate-related loans representing 29.9% and 61.7% of total loans, respectively.

Although management believes the loans within these concentrations have no more than the normal risk of collectibility, a substantial decline in the performance of the economy in general or a decline in real estate values in the Company’s primary market area, in particular, could have an adverse impact on collectibility, increase the level of real

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estate related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on the financial condition of the Company.

The composition of the loan portfolio at September 30, 2004, December 31, 2003 and September 30, 2003 is summarized in the table below.

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

Deposits are the Company’s main source of funding for loans.  As a result of the market focus on small and medium businesses, deposits from these businesses and their corresponding relationships are significant contributors to this funding resource.  The Company also offers numerous retail consumer deposit products and services to meet the needs of its customers.

The Company offers a variety of deposit products having a range of interest rates and terms.  The Company’s deposits consist of savings, demand deposits, and certificate of deposit accounts.  The flow of deposits is influenced significantly by general economic conditions, changes in the money market, prevailing interest rates and competition.  The Company’s deposits are obtained primarily from the geographic area in which its offices are located.  The Company relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits.   Based on historical experience, management believes it will continue to retain a large portion of its time deposit accounts at maturity.  During the second quarter of 2004, the Bank began participating in Certificate of Deposit Account Registry Services (CDARS) and had $1,165,000 in CDAR deposits.  CDARS is a program that enables the Bank to place large deposits into certificates of deposits issued by multiple banks which ensure eligibility for full FDIC insurance.  Management’s Assets and Liability Committee (ALCO) meets regularly to discuss economic conditions, competition, community needs, and set competitive rates and fees.

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The composition of the deposits and average interest rates paid at September 30, 2004, December 31, 2003 and September 30, 2003 is summarized in the table below.

COMPANY’S SOURCE OF INCOME

Net interest income is the Company’s primary source of revenue.  Net interest income is the difference between the interest income received on interest-earning assets and the interest expense paid on interest-bearing liabilities.  Net interest income is primarily affected by two factors, the volume and mix of interest-earning assets and interest-bearing liabilities and the interest rates earned on those assets and paid on those liabilities.

QUARTERLY AVERAGE BALANCES

The following table sets forth average assets, liabilities, and shareholders’ equity; interest income earned and interest expense paid; and the average yields earned or rates paid thereon for the three month periods ended September 30, 2004 and 2003.  The average balances reflect daily averages except non-accrual loans that were computed using month-end averages.  Net interest margin is calculated by dividing net interest income by average interest earning assets and computed on a taxable equivalent basis.

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CENTRAL VALLEY COMMUNITY BANCORP
SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES
(Unaudited) (Dollars In Thousands)