Management's discussion and analysis should be read in conjunction with the Company's audited Consolidated Financial Statements, including the Notes thereto, in Item 8 of this Annual Report.

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 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 evaluating the business prospects of the Company.

When the Company uses in this Annual Report the words "anticipate," "estimate," "expect," "project," "intend," "commit," "believe" and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Annual Report. 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 currently has one bank subsidiary, Central Valley Community Bank (the Bank) and one business trust subsidiary, Service 1st Capital Trust 1. The Bank of Madera County (BMC) was merged with and into the Bank on January 1, 2005. BMC had two branches in Madera County which continue to be operated by the Bank. After the close of business on November 12, 2008, Service 1st Bancorp (Service 1st) was merged with and into the Company, and Service 1st Bank (S1 Bank) was merged with and into the Bank. S1 Bank had three branches in Stockton, Tracy, and Lodi which continue to be operated by the Bank. Service 1st Capital Trust 1 (the Trust) is a business trust formed for the purpose of issuing trust preferred securities. The Company succeeded to all the rights and obligations of the Trust in connection with the acquisition of Service 1st. The Trust is a subsidiary of the Company. The Company's market area includes the central valley area from Sacramento, California to Bakersfield, California.

During 2008, the Company focused on assuring that competitive products and services were made available to our clients while adjusting to the many new laws and regulations that affect the banking industry. During 2008 the Company acquired Service 1st Bancorp and its banking subsidiary adding three strategically located branches and we relocated our Herndon and Fowler branch from an in-store location to a new larger facility. During 2007, the Bank opened a loan production office in Modesto, California, and relocated our Kerman branch to a new larger facility. During 2006, the Bank opened two full service retail offices in the Fresno one in the downtown area and one in the Sunnyside area of Fresno, respectively. Also in 2006, the Company consolidated its administrative offices into a single stand location in Fresno and opened a limited service branch there. With the acquisition of S1 Bank in 2008, the Bank now operates 15 full-service branches, one limited service branch and one loan production office.

ECONOMIC CONDITIONS

The economy in California's Central Valley has been negatively impacted by the economic recession that began in 2007 and the related real estate market and the slowdown in residential construction. The recession has impacted most industries in our market area. During 2008, housing values throughout the nation and especially in the Central Valley have decreased dramatically, which in turn has negatively affected the personal net worth of much of the population. However, housing in the Central Valley continues to be relatively more affordable than the major metropolitan areas in California.

Agriculture and agricultural related businesses remain a critical part of the Central Valley's economy. The Valley's agricultural production is widely diversified, producing cotton, nuts, vegetables, fruit, cattle, and dairy products. The continued future success of agriculture related businesses is highly dependant on the availability of water and is subject to fluctuation in worldwide commodity prices and demand.

OVERVIEW

Diluted earnings per share (EPS) for the year ended December 31, 2008 was $0.79 compared to $0.99 and $1.07 for the years ended December 31, 2007 and 2006, respectively. Net income for 2008 was $5,139,000 compared to $6,280,000 and $6,911,000 for the years ended December 31, 2007 and 2006, respectively. Total assets at December 31, 2008 were $752,713,000 compared to $483,685,000 at December 31, 2007.

Return on average equity for 2008 was 8.82% compared to 12.13% and 15.17% for 2007 and 2006, respectively. Return on average assets for 2008 was 0.95% compared to 1.32% and 1.47% for 2007 and 2006, respectively. Total equity was $75,375,000 at December 31, 2008 compared to $54,194,000 at December 31, 2007. The primary driver in the growth in total assets and equity at December 31, 2008 compared to 2007 was the acquisition on November 12, 2008 of Service 1st and its subsidiary bank - Service 1st Bank (S1 Bank).

As a result of both the acquisition of Service 1st and organic growth, total loans continued to increase during 2008. Average total loans increased $35,550,000 or 10.7% to $367,009,000 in 2008 compared to $331,459,000 in 2007. As a result of the economic recession during 2008, and the acquisition of Service 1st the Company experienced an increase in the level of nonperforming assets. In 2008, we recorded a provision for credit losses of $1,290,000 compared to $480,000 in 2007 and $800,000 in 2006. The Company had non-accrual loans totaling $15,750,000 at December 31, 2008 and $179,000 at December 31, 2007. Of the nonaccrual loans at December 31, 2008, $14,340,000 related to former S1 Bank loans. Net charge-offs for 2008 were $740,000 compared to $402,000 for 2007 and $330,000 for 2006. Refer to "Asset Quality" below for further information. We had no other real estate owned at either December 31, 2008 or 2007.

Key Factors in Evaluating Financial Condition and Operating Performance



As a publicly traded community bank holding company, we focus on several key
factors including:



†          Return to our stockholders;

†          Return on average assets;

†          Development of core earnings, including net interest  income  and
non-interest income;

†          Asset quality;

†          Asset growth; and

†          Operating efficiency;

†          Liquidity

Return to Our Stockholders

Our return to our stockholders is measured in the form of return on average equity (ROE). Our ROE was 8.82% for the year ended 2008 compared to 12.13% and 15.17% for the years ended 2007 and 2006, respectively. The decrease in ROE for 2008 is primarily due to the decrease in our net income and the overall increase in the level of capital due to the additional common stock issued in connection with our acquisition of Service 1st. Our net income for the year ended December 31, 2008 decreased $1,141,000 compared to a decrease of $631,000 and an increase of $867,000 for 2007 and 2006, respectively. During 2008 net interest income decreased due primarily to the 500 basis point reduction in interest rates by the Federal Reserve Bank since September 2007. Non-interest expenses also increased due to higher occupancy expenses from our acquisition and expansion in 2008 and 2007, and higher other general expenses. Basic EPS was $0.83 for 2008 compared to $1.05 and $1.16 for the years ended 2007 and 2006, respectively. Diluted EPS was $0.79 for the year ended 2008 compared to $0.99 and $1.07 for the years ended 2007 and 2006, respectively. The decrease in EPS in 2008 was due primarily to the decrease in net income and the increase in weighted average shares outstanding.

Return on Average Assets

Our return on average assets (ROA) is a measure we use to compare our performance with other banks and bank holding companies. Our ROA for the year ended 2008 decreased to 0.95% compared to 1.32% and 1.47% for the years ended December 31, 2007 and 2006, respectively. The 2008 decrease in ROA is due to the decrease in net income compounded by our increase in average assets. Annualized ROA for our peer group was 0.44% at September 30, 2008. Peer group information from SNL Financial data includes bank holding companies in central California with assets from $300M to $950M and not subchapter S.

Development of Core Earnings

Over the past several years, we have focused on not only our net income, but improving the consistency of our core earnings in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income. Specifically, we have focused on net interest income through a variety of processes, including changes in the mix and increases in average interest earning assets through loan generation and retention and maintaining our net interest margin by managing the cost of funds. Since September 2007, the Federal Reserve Bank has reduced interest rates by 500 basis points, which has had a significant negative impact on our ability to increase a sizable increase on net interest income in this type of a falling rate environment. As a result, our net interest income before provision for credit losses increased only slightly by $59,000 or 0.2% to $24,567,000 for the year ended 2008 compared to $24,508,000 and $24,373,000 for the years ended 2007 and 2006, respectively. Our net interest margin contracted 61 basis points to 5.13% for the year ended 2008 compared to 5.74% for the year ended 2007 and 5.79% for 2006.

Our non-interest income is generally made up of service charges and fees on deposit accounts, fee income from loan placements, appreciation in cash surrender value of bank owned life insurance, and other income. Non-interest income in 2008 increased $672,000 or 14.9% to $5,190,000 compared to $4,518,000 in 2007 and $5,177,000 in 2006. Customer service charges increased $491,000 or 17.2% to $3,350,000 in 2008 compared to $2,859,000 and $2,532,000 in 2007 and 2006, respectively, mainly due to an increase in fee rates and in the number of transaction accounts. Non-interest income in 2006 included tax-exempt proceeds from a life insurance policy of $625,000, and net pre-tax gains from the sale of real estate and equipment of $192,000. Further detail on non-interest income is provided below.

Asset Quality

For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations. Asset quality is measured in terms of percentage of total loans and total assets, and is a key element in estimating the future earnings of a company. We had non-performing loans totaling $15,750,000 or 3.25% of gross loans as of December 31, 2008 and $179,000 or 0.05% of gross loans as of December 31, 2007. We did not have any other non performing assets at December 31, 2008 or 2007. Of the non-performing loans at December 31, 2008, $14,340,000 related to the loan portfolio acquired from Service 1st. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on non-accrual status until such time as management has determined that the loans are likely to remain current in future periods. The Company did not have any other real estate owned at December 31, 2008 or 2007.

Asset Growth

As revenues from both net interest income and non-interest income are a function of asset size, the continued growth in assets has a direct impact in increasing net income and therefore ROE and ROA. The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth. The acquisition of Service 1st on November 12, 2008 contributed to the growth our asset size in 2008. Total assets increased 55.6% during 2008 to $752,713,000 as of December 31, 2008 from $483,685,000 as of December 31, 2007. Total gross loans increased 42.0% to $484,238,000 as of December 31, 2008, compared to $341,128,000 at December 31, 2007. Total investment securities and Federal funds sold increased 96.4% to $194,215,000 as of December 31, 2008 compared to $98,909,000 as of December 31, 2007. Total deposits increased 57.8% to $635,058,000 as of December 31, 2008 compared to $402,562,000 as of December 31, 2007. Our loan to deposit ratio at December 31, 2008 was 76.3% compared to 84.7% at December 31, 2007. The loan to deposit ratio of our peers was 97.0% at September 30, 2008.

Operating Efficiency

Operating efficiency is the measure of how efficiently earnings before taxes are generated as a percentage of revenue. The Company's efficiency ratio (non-interest expenses, excluding amortization of intangibles divided by net interest income plus non-interest income, excluding net gains from sale of securities) was 70.10% for 2008 compared to 65.21% for 2007 and 62.28% for 2006. The deterioration in the efficiency ratio in 2008 is due to the increase in operating expenses due to our acquisition and expansion. The Company's net interest income before provision for credit losses plus non-interest income increased 2.5% to $29,757,000 in 2008 compared to $29,026,000 in 2007 and $29,550,000 in 2006, while operating expenses increased 9.8% in 2008, 3.0% in 2007, and 15.9% in 2006.

Liquidity

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers' credit needs and ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Director's Asset/Liability Committees. This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flow for off-balance sheet commitments. Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco.

RESULTS OF OPERATIONS

Net Income

Net income was $5,139,000 in 2008 compared to $6,280,000 and $6,911,000 in 2007 and 2006, respectively. Basic earnings per share were $0.83, $1.05, and $1.16 for 2008, 2007 and 2006, respectively. Diluted earnings per share were $0.79, $0.99, and $1.07 for 2008, 2007 and 2006, respectively. ROE was 8.82% for 2008 compared to 12.13% for 2007 and 15.17% for 2005. ROA for 2008 was 0.95% compared to 1.32% for 2007 and 1.47% for 2006.

The decrease in net income for 2008 compared to 2007 was due primarily to the 500 basis point reduction in interest rates by the Federal Reserve Bank since September 2007, the increase in the provision for credit losses and the increases in non interest expenses. These items were offset by the increase in non interest income, primarily service charges and gains on sales of investment securities and the reduction in the provision for income taxes.. Net income for 2007 decreased compared to 2006 mainly due to the decrease in non-interest income primarily due to the tax-exempt life insurance proceeds of $625,000 and the net gain from the sale of real estate and equipment of $192,000 received in 2006, the decrease in loan placement fees and increases in non-interest expenses, partially offset by the increases in services charges and the decrease in the provision for credit losses.

Interest Income and Expense

Net interest income is the most significant component of our income from operations. Net interest income (the interest rate spread) is the difference between the gross interest and fees earned on the loan and investment portfolios and the interest paid on deposits and other borrowings. Net interest income depends on the volume of and interest rate earned on interest earning assets and the volume of and interest rate paid on interest bearing liabilities.

The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented. Average balances are derived from daily balances, and non-accrual loans are not included as interest earning assets for purposes of this table. For 2008, average balances reflect the acquisition of Service 1st for 13.4% of the year.

CENTRAL VALLEY COMMUNITY BANCORP

SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES

(Dollars in thousands)

                                     YEAR ENDED DECEMBER 31,               YEAR ENDED DECEMBER 31,
                                               2008                                  2007
                                             Interest     Average                  Interest     Average
                                 Average      Income/     Interest     Average      Income/     Interest
                                 Balance      Expense       Rate       Balance      Expense       Rate
ASSETS
Interest-earning deposits in
other banks                     $   1,318    $      39        2.96 %  $     168    $       5        2.98 %
Securities
Taxable securities                 81,925        4,806        5.87 %     67,516        3,350        4.96 %
Non-taxable securities (1)         28,709        1,694        5.90 %     23,848        1,333        5.59 %
Total investment securities       110,634        6,500        5.88 %     91,364        4,683        5.13 %
Federal funds sold                 13,980          251        1.80 %     11,721          583        4.97 %
Total                             125,932        6,790        5.39 %    103,253        5,271        5.10 %
Loans (2) (3)                     364,285       25,631        7.06 %    331,347       27,748        8.37 %
Federal Home Loan Bank stock        2,197          118        5.37 %      1,964          102        5.19 %
Total interest-earning
assets                            492,414    $  32,539        6.61 %    436,564    $  33,121        7.59 %
Allowance for credit losses        (4,676 )                              (3,794 )
Non-accrual loans                   2,724                                   112
Cash and due from banks            17,888                                16,675
Bank premises and equipment         6,043                                 5,747
Other non-earning assets           27,396                                22,017
Total average assets            $ 541,789                             $ 477,321
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings and NOW accounts        $  76,900    $     279        0.36 %  $  73,072    $     445        0.61 %
Money market accounts             108,216        2,098        1.94 %     99,448        2,621        2.64 %
Time certificates of
deposit, under $100,000            69,691        2,085        3.00 %     49,552        2,112        4.26 %
Time certificates of
deposit, $100,000 and over         58,734        1,878        3.21 %     60,467        2,716        4.49 %
Total interest-bearing
deposits                          313,541        6,340        2.03 %    282,539        7,894        2.79 %
Other borrowed funds               32,526          938        2.89 %      2,759          164        5.94 %
Total interest-bearing
liabilities                       346,067    $   7,278        2.11 %    285,298    $   8,058        2.82 %
Non-interest bearing demand
deposits                          131,744                               135,152
Other liabilities                   5,727                                 5,117
Shareholders' equity               58,251                                51,754
Total average liabilities
and shareholders' equity        $ 541,789                             $ 477,321
Interest income and rate
earned on average earning
assets                                       $  32,539        6.61 %               $  33,121        7.59 %
Interest expense and
interest cost related to
average interest-bearing
liabilities                                      7,278        2.11 %                   8,058        2.82 %
Net interest income and net
interest margin (4)                          $  25,261        5.13 %               $  25,063        5.74 %

(2) Loan interest income includes loan fees of $720 in 2008 and $873 in 2007.

(3) Average loans do not include non-accrual loans.

(4) Net interest margin is computed by dividing net interest income by total average interest-earning assets.

Interest and fee income from loans decreased $2,117,000 or 7.6% in 2008 compared to 2007. Interest and fee income increased $2,221,000 or 8.7% in 2007 compared to 2006. The decrease in 2008 is attributable to a decrease in the yield of 131 basis points partially offset by a 9.9% increase in the level of average loans in 2008 compared to 2007. Average total loans for 2008 increased $35,550,000 to $367,009,000 compared to $331,459,000 for 2007 and $304,074,000 for 2006. The yield on loans for 2008 was 7.06% compared to 8.37% and 8.40% for 2007 and 2006, respectively.

Interest income from total investments, (total investments include investment securities, Federal funds sold, interest bearing deposits with other banks, and other securities) not on a fully tax equivalent basis, increased $1,396,000 or 29.0% in 2008 compared to 2007 primarily due to a $21,529,000 increase in the average balance to $125,932,000 in 2008 compared to $103,253,000 in 2007, coupled with an increase in yield on investments of 29 basis points. In 2007, total investment income decreased $587,000 from 2006 mainly due to a 17.9% decrease in the average balances of these investments partially offset by a 39 basis point increase in the yields earned. Average total investments for 2007 were $103,253,000 compared to $125,702,000 for 2006. The decrease in the investment portfolio is due primarily to the growth in our loans as maturities and sales of investments were used to fund loans in the absence of a corresponding growth in deposits.

In an effort to increase yields, without accepting unreasonable risk, a significant portion of the investment purchases have been in mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs). At December 31, 2008, we held $45,757,000 or 24.6% of the total market value of the investment portfolio in MBS and CMOs with an average yield of 6.16%. We understand the interest rate risks and prepayment risks associated with MBS and CMOs. In a declining interest rate environment, prepayments from MBS and CMOs could be expected to increase and the expected life of the investment could be expected to shorten. Conversely, if interest rates increase, prepayments could be expected to decline and the average life of the MBS and CMOs could be expected to extend. Additionally, changes in interest rates are reflected in the market value of the investment portfolio. During declining interest rates, the investment portfolio could be expected to have market value gains and in increasing rate environments, the market value could be expected to decline. The net of tax effect value of the change in market value of the available-for-sale investment portfolio is also reflected in the Company's equity. At December 31, 2008, the average life of the investment portfolio was 7.9 years and the market value reflected a pre-tax gain of $313,000. Management reviews market value declines on individual investment securities to determine whether they represent an other-than-temporary impairment and has concluded that none such existed as of December 31, 2008. However, future deterioration in the market values of our investment securities may require the Company to recognize other-than-temporary impairment losses.

A component of the Company's strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans. At December 31, 2008, an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $18,250,000. Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio is $14,936,000. The modeling environment assumes management would take no action during an immediate shock of 200 basis points. The likelihood of immediate changes of 200 basis points is contrary to expectation, as evidenced by the changes in interest rates in the past year, which were in 25, 50 and 75 basis point increments. However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and to measure the possible future risk in the investment portfolio. For further discussion of the Company's market risk, refer to Item 7A - Quantitative and Qualitative Disclosures about Market Risk.

Management's review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with our investment policy. The policy . . .