UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2005 or


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: 000-50950

VALLEY BANCORP

(Exact Name of Registrant as Specified in Its Charter)


Nevada		88-0493760

(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer I.D. Number)

3500 W. Sahara Avenue, Las Vegas, NV		89102

(Address of Principal Executive Offices)		(Zip Code)

(702) 221-8600

Registrant’s telephone number, including area code

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


Yes þ		No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)


Yes o		No þ

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

Common Stock Issued and Outstanding: 2,824,901 shares as of July 31, 2005.

VALLEY BANCORP

Table of Contents


		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements — Unaudited

	Consolidated Balance Sheets at June 30, 2005 and December 31, 2004		2

	Consolidated Statements of Income for the Three Months Ended June 30, 2005 and 2004		3

	Consolidated Statements of Income for the Six Months Ended June 30, 2005 and 2004		4

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004		5

	Notes to Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		23

Item 4.	Controls and Procedures		25

PART II	OTHER INFORMATION		26

Item 1.	Legal Proceedings		26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		26

Item 3.	Defaults Upon Senior Securities		26

Item 4.	Submission of Matters to a Vote of Security Holders		26

Item 5.	Other Information		26

Item 6.	Exhibits		27

Signatures			28
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

Part I. Financial Information

ITEM 1. FINANCIAL STATEMENTS

Valley Bancorp And Subsidiary

Consolidated Balance Sheets (Unaudited)


	June 30,			December 31,
	2005			2004
Assets
Cash and due from banks	$	5,739,179		$	8,054,489
Federal funds sold		27,770,000			17,850,000

Cash and cash equivalents		33,509,179			25,904,489
Interest-bearing deposits at other financial institutions		7,973,864			9,244,160
Securities available for sale at fair value		38,391,893			36,412,828
Investment in Federal Home Loan Bank Stock, at cost		792,900			—
Loans, net of allowance for loan losses of $2,496,668 and $2,113,188, respectively		245,656,948			196,156,715
Loans held for sale		—			163,829
Premises and equipment, net		6,426,626			4,382,860
Accrued interest receivable		1,093,774			863,912
Deferred taxes, net		338,537			189,391
Other assets		600,030			387,180

Total assets	$	334,783,751		$	273,705,364

Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing demand	$	44,027,052		$	42,664,063
Interest bearing:
Demand		78,737,603			70,228,073
Savings		11,667,062			13,411,583
Time, $100,000 and over		62,373,669			44,241,115
Other time		82,054,920			65,666,600

Total deposits		278,860,306			236,211,434
Accrued interest payable and other liabilities		1,595,624			772,976
Long-term debt		15,446,490			466,845

Total liabilities		295,902,420			237,451,255

Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $1.00 par value, 500,000 shares authorized; none issued or outstanding		—			—
Common stock, $0.73 par value; 10,000,000 shares authorized; 2,808,173 shares issued and outstanding as of June 30, 2005 and 2,790,748 shares issued and outstanding as of December 31, 2004		2,049,966			2,037,246
Additional paid-in capital		29,853,139			29,616,955
Retained earnings		7,183,311			4,687,220
Accumulated other comprehensive income (loss)		(205,085	)		(87,312	)

Total stockholders’ equity		38,881,331			36,254,109

Total liabilities and stockholders’ equity	$	334,783,751		$	273,705,364

See Notes to Consolidated Financial Statements.

Valley Bancorp And Subsidiary

Consolidated Statements Of Income (Unaudited)


	Three Months Ended June 30
	2005			2004
Interest income on:
Loans, including fees	$	4,721,819		$	3,044,447
Securities available for sale		357,125			73,982
Federal funds sold and interest-bearing deposits at other financial institutions		202,519			120,019

Total interest income		5,281,463			3,238,448

Interest expense on:
Deposits		1,404,461			658,837
Long-term debt and other borrowed funds		25,081			10,320

Total interest expense		1,429,542			669,157

Net interest income		3,851,921			2,569,291
Provision for loan losses		229,000			281,000

Net interest income after provision for loan losses		3,622,921			2,288,291

Other income:
Service charges on deposit accounts		45,609			63,875
Net gain (loss) on sale of available for sale securities		—			(10,950	)
Other		15,628			7,741

		61,237			60,666

Other expense:
Salaries and employee benefits		906,159			740,640
Data processing		106,807			86,325
Occupancy		85,787			73,294
Equipment rentals, depreciation and maintenance		66,839			58,358
Outside services		56,222			58,838
Director fees		52,950			19,700
Office supplies & printing		47,021			45,053
Telephone		46,252			37,500
Federal Reserve Bank & correspondent bank fees		25,555			26,186
Advertising and public relations		23,855			45,326
Legal, professional and consulting		(1,510	)		47,075
Other		137,708			61,990

		1,553,645			1,300,285

Income before income taxes		2,130,513			1,048,672
Income tax expense		726,619			357,922

Net income	$	1,403,894		$	690,750

Comprehensive income	$	1,628,069		$	505,674


Earnings per share:
Basic	$	0.50		$	0.40
Diluted	$	0.48		$	0.39

See Notes to Consolidated Financial Statements.

Valley Bancorp And Subsidiary

Consolidated Statements Of Income (Unaudited)


	Six Months Ended June 30
	2005		2004
Interest income on:
Loans, including fees	$	8,652,585	$	5,667,652
Securities available for sale		711,072		176,109
Federal funds sold and interest-bearing deposits at other financial institutions		380,050		217,699

Total interest income		9,743,707		6,061,460

Interest expense on:
Deposits		2,485,640		1,292,544
Long-term debt and other borrowed funds		33,343		19,274

Total interest expense		2,518,983		1,311,818

Net interest income		7,224,724		4,749,642
Provision for loan losses		280,000		386,000

Net interest income after provision for loan losses		6,944,724		4,363,642

Other income:
Service charges on deposit accounts		101,492		138,832
Net gain (loss) on sale of available for sale securities		—		3,001
Other		35,243		19,754

		136,735		161,587

Other expense:
Salaries and employee benefits		1,806,982		1,431,196
Data processing		210,388		161,157
Occupancy		170,791		153,994
Equipment rentals, depreciation and maintenance		152,698		121,724
Outside services		120,738		115,921
Office supplies & printing		117,284		78,702
Legal, professional and consulting		109,919		82,274
Director fees		104,050		44,275
Telephone		92,068		71,970
Advertising and public relations		70,026		74,076
Federal Reserve Bank & correspondent bank fees		50,986		57,318
Other		288,865		139,274

		3,294,795		2,531,881

Income before income taxes		3,786,664		1,993,348
Income tax expense		1,290,573		680,267

Net income	$	2,496,091	$	1,313,081

Comprehensive income	$	2,378,318	$	1,167,850


Earnings per share:
Basic	$	0.89	$	0.76
Diluted	$	0.85	$	0.74

See Notes to Consolidated Financial Statements.

Valley Bancorp And Subsidiary

Consolidated Statements Of Cash Flows (Unaudited)


	Six Months Ended June 30,
	2005			2004
Cash Flows from Operating Activities:
Net income	$	2,496,091		$	1,313,081
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of premises and equipment		180,454			142,996
Loss on sale of other real estate owned		—			4,405
Gain on sale of securities available for sale		—			(3,001	)
Deferred taxes		(88,475	)		(66,958	)
Tax benefit resulting from the exercise of nonqualified stock options		89,234			—
Net accretion/amortization of investment discount/premium		(3,425	)		(81,679	)
Provision for loan losses		280,000			386,000
Increase in accrued interest receivable		(229,862	)		(73,054	)
Increase in other assets		(212,850	)		(72,125	)
Increase in accrued interest payable and other liabilities		822,648			115,244

Net cash provided by operating activities		3,333,815			1,664,909

Cash Flows from Investing Activities:
Net increase in loans		(49,616,404	)		(39,894,553	)
Net decrease in interest bearing deposits at other financial institutions		1,270,296			4,037,597
Purchase of securities available for sale		(3,034,632	)		(9,022,792	)
Proceeds from the maturities of securities available for sale		880,548			1,056,009
Proceeds from the sale of securities available for sale		—			14,078,675
Investment in Federal Home Loan Bank Stock		(792,900	)		—
Purchase of premises and equipment		(2,224,220	)		(49,846	)

Net cash used in investing activities		(53,517,312	)		(29,794,910	)

Cash Flows from Financing Activities:
Net increase in deposits		42,648,872			38,834,573
Principal payments on notes payable		(20,355	)		(18,958	)
Proceeds from FHLB borrowings		15,000,000			—
Proceeds from stock options exercised		159,670			—

Net cash provided by financing activities		57,788,187			38,815,615


Increase in cash and cash equivalents		7,604,690			10,685,614
Cash and cash equivalents, beginning of period		25,904,489			13,826,928

Cash and cash equivalents, end of period	$	33,509,179		$	24,512,542

See Notes to Consolidated Financial Statements.

Valley Bancorp

Notes to Consolidated Financial Statements
(Unaudited)

1. Nature of Business and Basis of Presentation

Valley Bancorp is a bank holding company whose primary subsidiary, Valley Bank, is a Nevada State chartered bank that provides a full range of banking services to commercial and consumer customers through three branches located in Las Vegas, Henderson and Pahrump, Nevada. These entities are collectively referred to herein as the Company. The Company’s business is concentrated in southern Nevada and is subject to the general economic conditions of this area. Segment information is not presented since all of the Company’s revenues are attributable to one operating segment.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general industry practices. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.

The information as of and for the periods ended June 30, 2005 and 2004 has not been audited and is presented in a condensed format which does not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a recurring nature unless otherwise disclosed. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of results to be anticipated for the full year ending December 31, 2005. The interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K. Condensed financial information as of December 31, 2004 has been presented next to the interim consolidated balance sheet for informational purposes. A consolidated statement of stockholders’ equity is not included as part of these interim financial statements since there have been no material changes in the capital structure of the Company during the six months ended June 30, 2005.

2. Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding options, and are determined using the treasury stock method.

Earnings per common share have been computed based on the following:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004


Net income applicable to common stock	$	1,403,894	$	690,750	$	2,496,091	$	1,313,081


Average number of common shares outstanding		2,798,203		1,725,478		2,794,518		1,725,478
Effect of dilutive options		138,739		59,501		150,926		60,024

Average number of common shares outstanding used to calculate diluted earnings per common share		2,936,942		1,784,979		2,945,444		1,785,502


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Basic EPS	$	0.50	$	0.40	$	0.89	$	0.76
Diluted EPS	$	0.48	$	0.39	$	0.85	$	0.74

3. Stock Options

The Company has two stock-based compensation plans, which are described more fully in Note 12 of the Company’s December 31, 2004 Annual Report on Form 10-K as filed with the SEC. The Company accounts for those 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 those plans had an exercise price equal to the estimated fair value of the underlying common stock on the date of grant. 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:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net Income As Reported	$	1,403,894		$	690,750		$	2,496,091		$	1,313,081
Deduct: Total Stock-Based Employee Compensation Expense Determined Under Fair Value Based Method For All Awards, Net Of Related Tax Effects		(18,894	)		(15,750	)		(35,091	)		(31,081	)

Proforma net income	$	1,385,000		$	675,000		$	2,461,000		$	1,282,000


Basic earnings per share — As reported	$	0.50		$	0.40		$	0.89		$	0.76
Basic earnings per share — Pro forma	$	0.49		$	0.39		$	0.88		$	0.74

Diluted earnings per share — As reported	$	0.48		$	0.39		$	0.85		$	0.74
Diluted earnings per share — Pro forma	$	0.47		$	0.38		$	0.84		$	0.72

4. Loans

The composition of the Company’s loan portfolio was as follows:


	At June 30,			At December 31,
	2005			2004
Commercial and industrial	$	38,358,790		$	31,726,393
Real Estate:
Commercial		85,724,649			90,454,931
Construction, raw land and land development		116,406,788			70,928,073
Residential		7,544,353			4,520,612
Consumer		990,606			1,404,676

		249,025,186			199,034,685

Deduct:
Unearned net loan fees		(871,570	)		(764,782	)
Allowance for loan losses		(2,496,668	)		(2,113,188	)

Net loans	$	245,656,948		$	196,156,715

Impaired and nonaccrual loans were approximately $1.8 million and $170,000 as of June 30, 2005 and December 31, 2004, respectively. Net recoveries (charge-offs) for the six months ended June 30, 2005 and 2004 were $110,000 and ($9,000), respectively.

5. Commitments and Contingencies

Contingencies

In December 2003 the Company reached a settlement in connection with certain loan losses it incurred during the year ended December 31, 2002. The Company received $300,000 in January 2004. In addition, the terms of the settlement provide for twelve quarterly payments of $20,000 starting April 2004, and a final payment of $10,000 on April 1, 2007. The Company is recognizing these payments as recoveries to the allowance for loan losses as they are received.

In the normal course of business, the Company is involved in various other legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.

Financial instruments with off-balance-sheet risk

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit. They involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the balance sheets.

The Company’s exposure to credit loss in the event of nonperformance by the other parties to the financial instruments for these commitments is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

A summary of the contract amount of the Company’s exposure to off-balance-sheet risk as of June 30, 2005 and December 31, 2004 is as follows:


	At June 30,		At December 31,
	2005		2004
Commitments to extend credit, of which approximately $6,316,000 and $6,237,000 are unsecured at June 30, 2005 and December 31, 2004, respectively	$	78,137,000	$	66,506,000
Standby letters of credit, of which approximately $25,000 and $275,000 are unsecured at June 30, 2005 and December 31, 2004, respectively		1,025,000		1,639,000

	$	79,162,000	$	68,145,000

Commitments to extend credit

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.

Standby letters of credit

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Lease commitments

In 2001, the Company entered into a non-cancelable operating lease with respect to its Pahrump branch office, expiring in five years. The lease includes two renewal option periods of five years each. The agreement requires monthly rental payments of approximately $7,120 for the first year with an escalation clause for subsequent years. At June 30, 2005, the future lease payments due under this lease commitment totaled approximately $63,000.

In 2005, the Company entered into another non-cancelable operating lease expiring in ten years. The Company will open an additional branch in the leased space. The lease includes one renewal option period of five years. The agreement requires monthly rental payments of approximately $3,813 for the first year with an escalation clause for subsequent years. At June 30, 2005, the future minimum lease payments due under this lease commitment totaled approximately $528,000.

Financial instruments with concentrations of credit risk

Concentration by geographic location

The Company makes commercial, commercial real estate, residential real estate and consumer loans to customers primarily in southern Nevada. At June 30, 2005 and December 31, 2004, real estate loans accounted for approximately 84% and 83%, respectively of the total loans. Substantially all of these loans are secured by first liens with an initial loan to value ratio of generally not more than 75%. The Company’s policy for requiring collateral is to obtain collateral whenever it is available or desirable; depending upon the degree of risk the Company is willing to take. The Company’s loans are expected to be repaid from cash flow or from proceeds from the sale of selected assets of the borrowers. Approximately 4% and 3% of the Company’s loan portfolio was unsecured at June 30, 2005 and December 31, 2004, respectively.

A substantial portion of the Company’s customers’ ability to honor their contracts is dependent on the economy in the area.

Employment and severance agreements

The Company entered into a three-year employment agreement with its president commencing on March 22, 2000. In the event the Company terminates the employment of the president without cause, or upon change in control of the Company, the Company may be liable for a payment as outlined in the employment agreement. The employment agreement was amended in October 2002 to extend the agreement for an additional 3 years, through March 2006. The employment agreement was amended again in May 2004 to extend the agreement for an additional 3 years, through March 2009. In addition, the Company has severance agreements with two executive officers, whereby upon change in control of the Company, the Company may be liable for a payment as outlined in the severance agreements.

6. Reclassifications

The reserve for unfunded commitments of approximately $88,000 at March 31, 2005 and $82,000 at December 31, 2004 has been reclassified from the allowance for loan losses to the other liability category on the consolidated balance sheets for the respective period pursuant AICPA Statement of Position 01-6 “Accounting by Certain Entities that Lend to or Finance Activities of Others”. There was no change to previously reported net income or stockholders equity as a result of this reclassification.

7. Long-term Debt

The Company has a commitment from the Federal Home Loan Bank of San Francisco (FHLB) for advances. Borrowing capacity is determined based on collateral pledged, generally consisting of loans and securities, at the time of the advance. During the quarter ended June 30, 2005, the Company took a $15 million advance, with a maturity date of June 23, 2008 at a rate of 4.07%, secured by securities with a carrying value of $15,961,000. Advances from the FHLB at June 30, 2005 and December 31, 2004 were $15,000,000 and $0, respectively.

In October 2002, the Company purchased a building for $1,240,000. In connection with the agreement, the Company assumed a promissory note from the seller for approximately $550,000. The note is secured by the property and guaranteed by the seller. The note is due in monthly installments of approximately $6,100, including interest at 7.13% through July 2013. The Company is subject to a prepayment penalty if the note is paid in full prior to April 2013. The outstanding balance was approximately $446,000 and $447,000 at June 30, 2005 and December 31, 2004, respectively.

8. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) published FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS 123(R)” or the “Statement”). FAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. FAS 123(R) permits entities to use any option-pricing model that meets the fair value objective in the Statement. Modifications of share-based payments will be treated as replacement awards with the cost of the incremental value recorded in the financial statements.

The Statement is effective at the beginning of the first quarter of 2006. As of the effective date, the Company will apply the Statement using a modified version of prospective application. Under that transition method, compensation cost will be recognized for (1) all awards granted after the required effective date and to awards modified, cancelled, or repurchased after that date and (2) the portion of awards granted subsequent to the completion of our IPO and prior to the effective date for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated for pro forma disclosures under SFAS 123.

The impact of this Statement on the Company in 2006 and beyond will depend upon various factors, among them being the future compensation strategy.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather are statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as “expects,” ”feels,” “believes,” “anticipates,” “intends,” and similar expressions. Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause the Company’s actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; changes in market conditions in the Company’s principal market area; adverse changes in the financial condition of the loan loss reserves; competitive pressures on loan or deposit terms; legislative and regulatory changes; and other factors disclosed periodically in the Company’s filings with the Securities and Exchange Commission. Because of the risks and uncertainties inherent in forward-looking statements, readers are cautioned not to place undue reliance on them, whether included in this report or made elsewhere from time to time by the Company or on its behalf. The Company assumes no obligation to update any forward-looking statements.

Overview of Operating Results for the Three and Six Months Ended June 30, 2005 and 2004

Net income increased from $691,000 or $0.39 per diluted share for the quarter ended June 30, 2004 to $1.4 million or $0.48 per diluted share for the quarter ended June 30, 2005. This represents an increase of 103% in net income from prior period. The increase was primarily the result of higher interest income from loans and other earning assets due to increased outstanding totals as well as an improved interest margin. A rising interest rate environment has contributed to the improvement in the interest margin. The efficiency ratio for the quarter, which represents total non-interest expense divided by the sum of net interest income and total non-interest income excluding provision for loan losses and gain or loss on sales of securities, has also improved, decreasing to 40% for the quarter ended June 30, 2005 as compared to 49% for the quarter ended June 30, 2004. For the quarter, weighted average shares outstanding on a fully diluted basis at June 30, 2005 were 2,936,942 shares as compared to 1,784,979 shares at June 30, 2004. This represents an increase of 1,152,054 shares or 65% and was due primarily to the successful completion of the Company’s Initial Public Offering that closed on September 28, 2004.

For the six months ended June 30, 2005, net income totaled $2.5 million as compared to $1.3 million for the six months ended June 30, 2004. This represents an increase of $1.2 million or 90% from prior period. Improved earnings can be attributed to the same factors as discussed in the above paragraph and are discussed in further detail below.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. Based on its consideration of accounting policies that involve the most complex and subjective decisions and assessments, management has identified the allowance for loan losses as its most critical accounting policy.

Allowance for Loan Loss Methodology. The Company’s allowance for loan loss methodology incorporates a variety of risk considerations, both quantitative and qualitative in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, peer group experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers’ sensitivity to interest rate movements. Qualitative factors include the general economic environment in markets, including economic conditions and in particular, the state of certain industries. Size and complexity of individual credits in relation to loan structure, existing loan policies and pace of portfolio growth are other qualitative factors

that are considered in the methodology. Changes in the factors themselves are driven by perceived risk in pools of homogenous loans classified by collateral type, purpose, terms, etc. Management monitors local trends and peer experiences to anticipate future delinquency potential on a quarterly basis.

Since the Company has neither extensive loss history with segregation nor a large sample of loans from inception to charge off, the Company does not use migration analysis to accurately anticipate future losses through that method. The Company relies heavily on the statistics provided through the FDIC regarding loss percentages experienced by banks in the Western United States to establish potential risk based on collateral type securing each loan. As additional comparison, the Company examines local peer group banks to determine the nature and scope of their losses to date. Finally, the Company closely examines each credit graded Special Mention and below to individually assess the appropriate loan loss reserve for that particular credit.

The Company periodically reviews the assumptions and formulas by which additions are made to the specific and general valuation allowances for losses in an effort to refine such allowances in light of the current status of the factors described above.

As the Company adds new products and increase the diversity of our loan portfolio, we will enhance our methodology accordingly. We may report a materially different amount for the provision for loan losses in the statement of income to change the allowance for loan losses if our assessment of the above factors were different.

Although the Company believes the levels of the allowance as of June 30, 2005 was adequate to absorb probable losses in the loan portfolio, a decline in local economic conditions, or other factors, could result in increasing losses that cannot be reasonably predicted at this time.

Comparison of Financial Condition at June 30, 2005 and December 31, 2004

Total Assets. Total assets increased 22%, from $274 million at December 31, 2004 to $335 million at June 30, 2005. This overall increase reflects primarily a $50 million or 25% increase in net loans receivable and an $8 million or 29% increase in cash and cash equivalents. Fixed assets also increased by $2 million or 47% due to a purchase of the new headquarters for the Company to be occupied in the third quarter of 2005. The increase in net loans receivable is due primarily to a $45 million increase in construction and land lending and a $7 million increase in commercial and industrial loans, offset by a $5 million decrease in commercial real estate loans. Federal funds sold increased $10 million from December 31, 2004 to June 30, 2005 to accommodate the loan funding needs as well as the liquidity needs for the next 30-45 days.

The Company’s commercial loan growth was centered in commercial real estate loans, specifically in construction of commercial retail, industrial, and office properties. Additionally, the Las Vegas real estate market drove an increase in land and land development loans.

The following table sets forth the composition of our loan portfolio by the type of loan at the dates indicated:


	At June 30, 2005						At December 31, 2004
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Construction, raw land and land development loans	$	116,407			46.75	%	$	70,928			35.63	%
Commercial real estate loans		85,724			34.42	%		90,455			45.45	%
Commercial and industrial loans		38,359			15.40	%		31,726			15.94	%
Other loans		8,535			3.43	%		5,926			2.98	%

Total loans		249,025			100.00	%		199,035			100.00	%


Allowance for loan losses		(2,497	)					(2,113	)


	At June 30, 2005				At December 31, 2004
	Amount			Percent	Amount			Percent
	(Dollars in thousands)
Unearned net loan fees		(871	)			(765	)


Net loans	$	245,657			$	196,157

The following table sets forth the composition of the securities portfolio at the periods indicated. The securities are shown at fair value and unrealized gains and losses are excluded from earnings and are reported net of deferred taxes in accumulated other comprehensive income as a component of stockholders’ equity.


	June 30, 2005		December 31, 2004
	(Dollars in thousands)

US Government agency securities	$	29,770	$	29,863
Mortgage backed securities		6,967		4,625
Collateralized mortgage obligations		1,655		1,925


Total	$	38,392	$	36,413

Deposits. Total deposits increased $43 million or 18%, from $236 million at December 31, 2004 to $279 million at June 30, 2005. Non-interest-bearing deposits increased $1 million or 3%, primarily due to an increase in business demand deposit accounts. Interest-bearing deposits increased $41 million or 21%, primarily due to a $35 million or 31% increase in time deposits, an $8 million or 16% increase in money market accounts, and a $2 million or 13% decrease in savings accounts. The significant increase in time deposits was due to the promotion that was run during the quarter ended March 31, 2005 to generate the funds needed for loan originations. Transaction accounts, which include both interest-bearing and non-interest-bearing accounts, increased $8 million, from $126 million at December 31, 2004 to $134 million at June 30, 2005. The increase in business demand deposits and business money market accounts is due to increased business relationships and marketing efforts focused on gaining and retaining core deposit accounts.

The following table reflects deposit ending balances by category as of the dates indicated.


	At June 30, 2005					At December 31, 2004
			Percent of					Percent of
	Amount		Deposits			Amount		Deposits
	(Dollars in thousands)
Transaction accounts:
Savings accounts	$	11,667		4.18	%	$	13,411		5.68	%
Money market deposit accounts		60,607		21.73	%		52,126		22.07	%
NOW accounts		18,131		6.50	%		18,102		7.66	%
Noninterest-bearing demand accounts		44,027		15.79	%		42,664		18.06	%


Total transaction accounts		134,432		48.20	%		126,303		53.47	%


Time Deposits:
$100,000 and over		62,373		22.37	%		44,241		18.73	%
Other time		82,055		29.43	%		65,667		27.80	%


Total time deposits		144,428		51.80	%		109,908		46.53	%


Total Deposits	$	278,860		100.00	%	$	236,211		100.00	%

Stockholders’ Equity. Stockholders’ equity increased from $36.3 million at December 31, 2004 to $38.9 million at June 30, 2005. This increase was primarily due to the $2.5 million net income earned during the first half of 2005 offset by an increase in unrealized losses on available for sale securities of approximately $118,000. Additionally, proceeds and tax benefits associated with stock options exercised by employees during the first half of 2005 also added approximately $249,000 to the stockholders’ equity.

Non-Performing Assets. The Company had three non-accrual loans of approximately $1.8 million and one loan of approximately $41,000 that was past due 90 days or more as of June 30, 2005. Of the three non-accrual loans, one loan of approximately $1.7 million was subsequently paid off in full in July 2005. Management increased the allowance for loan losses $384,000, or 18%, from $2.1 million at December 31, 2004 to $2.5 million at June 30, 2005 primarily due to the growth in loans. The allowance for loan losses reflected the current risk in the loan portfolio and represented about 1.01% of total loans as of June 30, 2005.

The following table sets forth information concerning the allocation of allowance for loan losses by loan category at the dates, indicated.


	At June 30, 2005					At December 31, 2004
			Percent of					Percent of
			Loans in					Loans in
			Each					Each
			Category to					Category to
	Amount		Total Loans			Amount		Total Loans
	(Dollars in thousands)
Construction, land and land development loans	$	592		46.75	%	$	809		35.63	%
Commercial real estate loans		478		34.42	%		526		45.45	%
Commercial and industrial loans		1,349		15.40	%		720		15.94	%
Other loans		78		3.43	%		58		2.98	%

Total	$	2,497		100.00	%	$	2,113		100.00	%

Comparison of Operating Results for the Three and Six Months Ended June 30, 2005 and 2004.

Net Income. Net income was $1.4 million for the three months ended June 30, 2005 as compared to $691,000 for the same period in 2004. This represents an increase of $713,000 or 103%. Diluted earnings per share increased 23%, from $0.39 for the three months ended June 30, 2004 to $0.48 for the same period in 2005. Return on average assets increased from 1.23% for the quarter ended June 30, 2004 to 1.75% for the same period in 2005. Return on average equity, however, decreased, from 16.24% for the quarter ended June 30, 2004 to 14.81% for the same period in 2005 due to a higher average equity balance during the quarter resulting from the successful completion of the Initial Public Offering that closed on September 28, 2004. Higher net income for the quarter was due to expanded loan portfolio and earning assets, increased net interest margin and improved efficiency ratio.

For the six months ended June 30, 2005, net income was $2.5 million or $0.85 per diluted share as compared to $1.3 million or $0.74 per diluted share for the same period in 2004. This represents an increase of $1.2 million or 90% in earnings from prior period. As with the second quarter of 2005, improvement in the year-to-date earnings can also be attributed to increased loan portfolio and earning assets, improved net interest margin, and expense control which resulted in improved efficiency ratio. Return on average assets and return on average equity for the first half of 2005 were 1.64% and 13.45% as compared to 1.23% and 15.79% for 2004, respectively. Lower ROE from prior period was due again to a higher average equity balance during the period resulting from the successful completion of the Initial Public Offering that closed on September 28, 2004.

Net Interest Income. Net interest income increased $1.3 million or 50%, from $2.6 million for the three months ended June 30, 2004 to $3.9 million for the same period in 2005. The Company’s average interest-earning assets increased $93 million or 43%, exceeding the increase in average interest-bearing liabilities of $66 million or 40% for quarter ended June 30, 2005 as compared to the quarter ended June 30, 2004. Interest rate spread for the same

period decreased by 0.03% from 4.48% for the three months ended June 30, 2004 to 4.45% for the same period in 2005. Net interest margin, however, increased 0.21%, from 4.83% for the quarter ended June 30, 2004 to 5.04% for the same period in 2005. The ratio of average interest-earning assets to average interest-bearing liabilities increased 3.38%, from 127.92% for the three months ended June 30, 2004 to 131.30% for the same period in 2005. Improvements in the net interest margin can be attributed to the Company’s asset sensitive balance sheet in a rising interest rate environment as well as higher earning assets as a percentage of total assets.

For the six months ended June 30, 2005, net interest income totaled $7.2 million as compared to $4.8 million for the same period last year. This represents an increase of $2.5 million or 52% from 2004. The average earning assets for the first half of 2005 increased $88 million or 43% to $291 million as compared to $203 million for the first half of 2004. The average interest-bearing liabilities for the first six months of 2005 increased $59 million or 36% to $221 million as compared to $162 million for the same period in 2004. Interest spread for the first half of 2005 was 4.45% as compared to 4.37% for the first half of 2004, an increase of 0.08%. Net interest margin also improved 0.30% to 5.00% for the first six months of 2005 from 4.70% for the same period in 2004. Improvement in the net interest margin as well as interest spread versus prior year reflects the Company’s asset sensitive balance sheet in a rising interest rate environment as well as higher earning assets as a percentage of total assets on a year-to-date basis as well.

The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) interest rate spread (the difference between the average yield earned on our earning assets and the rate paid on interest bearing liabilities); and (v) net interest margin.

Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential


	Three Months Ended June 30,
	2005								2004
				Interest		Average						Interest		Average
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance (1)			Expense		Cost (2)			Balance (1)			Expense		Cost (2)
	(Dollars in thousands)
Assets
Earning assets:
Loans (3) (4) (5)	$	240,560		$	4,722		7.87	%	$	168,299		$	3,045		7.28	%
Federal funds sold (6)		16,270			119		2.93	%		19,015			46		0.97	%
Interest bearing deposits (6)		10,682			84		3.15	%		13,255			74		2.25	%
Investment securities (6)		39,101			357		3.66	%		13,392			74		2.22	%

Total earning assets and interest income		306,613			5,282		6.91	%		213,961			3,239		6.09	%

Non-interest earning assets:
Cash and due from banks		7,141								7,153
Premises and equipment		6,282								4,384
Other assets		2,392								1,678
Allowance for credit losses		(2,374	)							(1,938	)

Total assets	$	320,054							$	225,238


Liabilities and Stockholders’ Equity
Interest bearing liabilities:
Interest bearing demand deposits	$	75,394		$	262		1.39	%	$	68,483		$	140		0.82	%
Savings deposits		11,768			22		0.75	%		11,639			14		0.48	%
Time deposits $100,000 or more		61,741			457		2.97	%		33,406			185		2.23	%


	Three Months Ended June 30,
	2005							2004
			Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/
	Balance (1)		Expense		Cost (2)			Balance (1)		Expense		Cost (2)
	(Dollars in thousands)
Other time deposits		82,522		664		3.23	%		53,237		321		2.43	%
Long-term borrowings		2,101		25		4.77	%		493		9		7.34	%

Total interest bearing liabilities		233,526		1,430		2.46	%		167,258		669		1.61	%

Noninterest-bearing liabilities:
Demand deposits		46,959							40,089
Other liabilities		1,554							874
Stockholders’ equity		38,015							17,017

Total liabilities and stockholders’ equity	$	320,054						$	225,238


Net Interest Spread (7)						4.45	%						4.48	%


Net interest income/margin (8)			$	3,852		5.04	%			$	2,570		4.83	%


	Six Months Ended June 30,
	2005								2004
				Interest		Average						Interest		Average
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance (1)			Expense		Cost (2)			Balance (1)			Expense		Cost (2)
	(Dollars in thousands)
Assets
Earning assets:
Loans (3) (4) (5)	$	224,521		$	8,653		7.77	%	$	158,799		$	5,668		7.18	%
Federal funds sold (6)		17,939			240		2.70	%		16,048			78		0.98	%
Interest bearing deposits (6)		9,898			140		2.85	%		13,605			140		2.07	%
Investment securities (6)		38,764			711		3.70	%		14,877			176		2.38	%

Total earning assets and interest income		291,122			9,744		6.75	%		203,329			6,062		6.00	%

Non-interest earning assets:
Cash and due from banks		7,379								6,502
Premises and equipment		6,042								4,409
Other assets		2,207								1,613
Allowance for credit losses		(2,310	)							(1,880	)

Total assets	$	304,440							$	213,973


Liabilities and Stockholders’ Equity
Interest bearing liabilities:
Interest bearing demand deposits	$	74,300		$	475		1.29	%	$	67,410		$	275		0.82	%
Savings deposits		12,192			40		0.66	%		10,656			26		0.49	%
Time deposits $100,000 or more		56,098			781		2.81	%		32,241			364		2.27	%
Other time deposits		77,105			1,190		3.11	%		50,972			628		2.48	%
Short-term borrowings		—			—		—			153			1		1.31	%
Long-term borrowings		1,287			33		5.17	%		497			18		7.28	%

Total interest bearing liabilities		220,982			2,519		2.30	%		161,929			1,312		1.63	%

Noninterest-bearing liabilities:


	Six Months Ended June 30,
	2005							2004
			Interest		Average					Interest		Average
	Average		Income/		Yield/			Average		Income/		Yield/
	Balance (1)		Expense		Cost (2)			Balance (1)		Expense		Cost (2)
	(Dollars in thousands)
Demand deposits		44,739							34,534
Other liabilities		1,288							789
Stockholders’ equity		37,431							16,721

Total liabilities and stockholders’ equity	$	304,440						$	213,973


Net Interest Spread (7)						4.45	%						4.37	%


Net interest income/margin (8)			$	7,225		5.00	%			$	4,750		4.70	%


(1)		Average balances are obtained from the best available daily data.

(2)		Annualized.

(3)		Loans are gross of allowance for credit losses but after unearned fees.

(4)		Non-accruing loans are included in the average balances.

(5)		Interest income includes loan fees of $22,000, $115,000, $82,000 and $237,000 for the three and six months ended June, 2005 and 2004, respectively.

(6)		All investments are taxable.

(7)		Represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities

(8)		Net interest margin represents net interest income as a percentage of average interest-earning assets.

Interest Income. For the three months ended June 30, 2005, interest income increased $2.0 million or 63%, primarily due to an increase of $1.7 million or 55% in loan interest income as compared to the same period in 2004. This increase is the result of an increase of $72 million or 43% in average loans receivable. The average yield on these loans increased, from 7.28% for the three months ended June 30, 2004 to 7.87% for the same period in 2005. Interest income on all other investments increased by $366,000 or 188%. The average yield for these investments increased 1.69%, from 1.71% for the three months ended June 30, 2004 to 3.40% for the same period in 2005. Larger investment portfolio and a rising rate environment contributed to the increase in investment income as well as investment yield for the quarter ended June 30, 2005 as compared to the same period in 2004.

Interest income totaled $9.7 million for the six months ended June 30, 2005 as compared to $6.1 million for the same period in 2004, an increase of $3.7 million or 61%. Of the $3.7 million increase, $3.0 million came from loan interest income, a 53% increase from prior year for the comparable period. The average loans receivable for the first half of 2005 was $225 million as compared to $159 million for the first half of 2004. This represents an increase of $66 million or 41% from 2004. The average yield on these loans increased, from 7.18% for the six months ended June 30, 2004 to 7.77% for the same period in 2005. Interest income on all other investments for the six months increased by $697,000 or 177%. The average yield for these investments increased 1.52%, from 1.78% for the six months ended June 30, 2004 to 3.30% for the same period in 2005. Larger investment portfolio and a rising rate environment contributed to the increase in investment income as well as investment yield for the six months ended June 30, 2005 as compared to the same period in 2004.

Interest Expense. For the three months ended June 30, 2005, total interest expense increased $761,000 or 114% as compared to the same period last year. This increase is primarily due to an increase in the average deposit balances as well as the cost of those deposits. Average deposits increased $64 million or 39%, from $167 million for the three months ended June 30, 2004 to $231 million for the same period in 2005. The total cost of funds increased 0.85%, from 1.61% for the quarter ended June 30, 2004 to 2.46% for the same period in 2005. This increase is due to the current rising rate environment.

For the six months ended June 30, 2005, total interest expense was $2.5 million as compared to $1.3 million for the same period in 2004, an increase of $1.2 million or 92%. As with the quarter, the increase is primarily due to higher average deposit balances and higher interest rates on those deposits. For the first half of 2005, average deposits increased $59 million or 37% to $220 million as compared to $161 million for the comparable period in 2004. The total cost of funds increased 0.67%, from 1.63% for the six months ended June 30, 2004 to 2.30% for the same period in 2005.

Provision for Loan Losses. The provision for loan losses totaled $229,000 for the three months ended June 30, 2005 as compared to $281,000 for the same period in 2004. Net recoveries for the second quarter 2005 were $20,000 as compared to net charge-offs of $209,000 for the second quarter 2004. Management feels that their evaluations and estimations were reasonable for determining the provision, and the allowance for loan losses is deemed to be adequate as of June 30, 2005. However, a decline in economic conditions or other factors beyond management’s control could significantly alter the amount of losses the Company recognizes in the future.

For the six months ended June 30, 2005, the provision for loan losses was $280,000 as compared to $386,000 for the same period last year. Net recoveries for the first half 2005 were $110,000 as compared to net charge-offs of $9,000 for the first half 2004. Net recoveries for the first half of 2004 included $320,000 received from the equipment lease loan that was charged off for $1.3 million due to an alleged fraud in 2002 (see Note 7 to the Consolidated Financial Statements for more details).

The following table sets forth the activity in allowance for loan losses for the periods indicated.


	At or For the						At or For the
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(Dollars in thousands)						(Dollars in thousands)
Balance at the beginning of period	$	2,248		$	1,761		$	2,113		$	1,457

Charge-offs:
Construction, land and land development loans		—			(169	)		—			(169	)
Commercial real estate loans		—			(150	)		—			(150	)
Commercial and industrial loans		—			—			—			(100	)
Other loans		—			(8	)		—			(8	)

Total charge-offs		—			(327	)		—			(427	)

Recoveries:
Commercial real estate loans		—			2			—			2
Commercial and industrial loans		20			116			110			416

Total recoveries		20			118			110			418


Net (charge-offs)/recoveries		20			(209	)		110			(9	)


Additions charge to operations		229			281			280			386
Unfunded commitment reserve adjustments (1)		—			55			(6	)		54

Balance at end of period	$	2,497		$	1,888		$	2,497		$	1,888


Allowance for loan losses as a percent of total loans		1.01	%		1.08	%		1.01	%		1.08	%

Ratio of net charge-offs/(recoveries) to average loans — annualized		(0.03	)%		0.50	%		(0.10	)%		0.01	%


(1)		Unfunded commitments reserve included in other liabilities was $80,000 at June 30, 2005 and $52,000 at June 30, 2004.

Non-Interest Income. Non-interest income was $62,000 for the three months ended June 30, 2005, as compared to $61,000 for the same period in 2004. For the six months ended June 30, 2005, non-interest income totaled $137,000 as compared to $162,000 for the comparable period in 2004. The decrease of $25,000 for the six-month period was due primarily to lower aggregate service charges on deposit accounts.

The following table sets forth information regarding noninterest income for the periods shown.


	Noninterest Income					Noninterest Income
	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
	2005		2004			2005		2004
	(Dollars in thousands)					(Dollars in thousands)
Banking and service charge fees	$	46	$	64		$	102	$	139
Gain on sale of securities		—		(11	)		—		3
Other income		16		8			35		20

Total noninterest income	$	62	$	61		$	137	$	162

Non-Interest Expense. Non-interest expense increased $253,000 or 19%, from $1.3 million for the three months ended June 30, 2004 to $1.6 million for the same period in 2005. For the six months ended June 30, 2005, Non-interest expense was $3.3 million as compared to $2.5 million for the same period in 2004. This represents an increase of $763,000 or 30% from the comparable period in 2004. The increase for the quarter and the six-month period was primarily a result of increased compensation and employee benefits costs due to increasing staff levels, higher professional fees associated with being a publicly traded company, higher data processing expenses due to increased number of customers’ accounts and transactions being processed, and higher marketing and advertising costs. Legal, professional and consulting fees showed a credit of $2,000 for the quarter ended June 30, 2005 due to a year-to-date adjustment of the accrual estimate associated SOX 404 and loan review costs. For the quarter ended June 30, 2005, non-interest expense as a percentage of average earning assets on an annualized basis was 2.03% as compared to 2.43% for the same period in 2004. For the six-month period, non-interest expense as a percentage of average earning assets on an annualized basis was 2.26% as compared to 2.49% for the comparable period in 2004. The Company also achieved an efficiency ratio of 40% and 45% for the three and six months ended June 30, 2005 as compared to 49% and 52% for the same period in 2004, respectively. The efficiency ratio represents total non-interest expense divided by the sum of net interest income and total non-interest income excluding provision for loan losses and gain or loss on sales of securities. Lower efficiency ratio is good. Due to the planned occupation of the Company’s new headquarters and the 4^th branch in the third quarter of 2005 and the potential opening of the 5^th branch in the fourth quarter of 2005, the efficiency ratio may increase from the current level. Full time equivalent employees at June 30, 2005 were 53 as compared to 47 at June 30, 2004. This represents an increase of 6 FTEs or 13%.

The following tables set forth information regarding noninterest expenses for the periods shown.


	Noninterest Expense
	For the Three Months
	Ended June 30,
	2005		2004
	(Dollars in thousands)
Salaries and employee benefits	$	906	$	741
Occupancy and equipment		153		131
Data processing		107		86
Outside services		56		59
Director fees		53		20
Office supplies & printing		47		45


	Noninterest Expense
	For the Three Months
	Ended June 30,
	2005			2004
	(Dollars in thousands)
Telephone		46			38
Federal Reserve Bank & correspondent bank fees		26			26
Advertising and public relations		24			46
Legal, professional and consulting		(2	)		47
Other		138			62


Total noninterest expense	$	1,554		$	1,301


As a % of average earning assets — annualized		2.03	%		2.43	%


Efficiency Ratio		39.70	%		49.24	%


Average earning assets	$	306,613		$	213,961


	Noninterest Expense
	For the Six Months
	Ended June 30,
	2005			2004
	(Dollars in thousands)
Salaries and employee benefits	$	1,807		$	1,431
Occupancy and equipment		324			276
Data processing		210			161
Outside services		121			116
Office supplies & printing		117			79
Legal, professional and consulting		110			82
Director fees		104			44
Telephone		92			72
Advertising and public relations		70			74
Federal Reserve Bank & correspondent bank fees		51			57
Other		289			140


Total noninterest expense	$	3,295		$	2,532


As a % of average earning assets — annualized		2.26	%		2.49	%


Efficiency Ratio		44.76	%		51.58	%


Average earning assets	$	291,122		$	203,329

Liquidity and Capital Resources

The Company’s primary sources of funds are customer deposits, proceeds from loan principal and interest payments, sale of loans, and maturing securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are influenced greatly by general interest rates, other economic conditions, and competition. The Company generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At June 30, 2005, cash and cash equivalents and interest-bearing deposits at other financial institutions totaled $41 million or 12% of total assets, and investment securities available for sale that are

not currently being pledged as collateral totaled $22 million or 7% of total assets, for a total of $63 million in liquid assets.

The Company’s liquidity is comprised of three primary classifications: cash flows from operating activities; cash flows used in investing activities; and cash flows provided by financing activities. Net cash provided by operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the loan loss provision, investment and other amortizations and depreciation. For the six months ended June 30, 2005 net cash provided by operating activities was $3.3 million, as compared to net cash provided by operating activities of $1.7 million for the same period of 2004. This variance from the prior period was due primarily to an increase in net income as well as increases in interest payable and other liabilities.

The Company’s primary investing activities are the origination of real estate, commercial and consumer loans and purchase and sale of securities and interest-bearing deposits at other financial institutions. For the six months ended June 30, 2005, total net loans increased by $50 million or 25% from December 31, 2004. Investment securities and interest-bearing deposits, however, remained at $46 million at June 30, 2005, same as December 31, 2004.

Net cash used in all investing activities was $54 million and $30 million for the six months ended June 30, 2005 and 2004, respectively. At June 30, 2005 the Company had outstanding loan commitments of approximately $78 million and outstanding letters of credit of approximately $1 million. The Company anticipates that it will have sufficient funds available to meet current loan commitments through its own liquid assets and borrowing capability from the Federal Home Loan Bank of San Francisco.

Net cash provided by financing activities has been impacted significantly by increases in deposit levels, especially time deposits during the first half of 2005. For the six months ended June 30, 2005, total deposits increased by $43 million or 18% while time deposits increased by $35 million or 31% from December 31, 2004. During the quarter ended June 30, 2005, the Company also borrowed $15 million from the Federal Home Loan Bank of San Francisco (FHLB) at a rate of 4.07% with a maturity date of June 23, 2008 and collateralized by securities with a carrying value of $16 million.

Capital adequacy refers to the level of capital required to sustain asset growth over time and to absorb losses. The Company’s objective is to maintain a level of capitalization that is sufficient to take advantage of profitable growth opportunities while meeting regulatory requirements. This is achieved by improving profitability through effectively allocating resources to more profitable businesses, improving asset quality, strengthening service quality, and streamlining costs.

As of June 30, 2005, the Company and the Bank’s regulatory capital ratios were in excess of all applicable regulatory requirements. The following tables reflect the Company’s and the Bank’s actual levels of regulatory capital as of June 30, 2005. Also included are the applicable minimum regulatory capital requirements together with the regulatory capital requirements to be deemed “well capitalized”, pursuant to the prompt corrective action requirements.


	Valley Bancorp’s Capital Ratios At June 30, 2005
											To be well capitalized
						For capital					under prompt corrective
	Actual					adequacy purposes					action provisions (2)
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Tier 1 leverage capital to average assets (1)	$	39,086		12.21	%	$	12,802		4.00	%		n/a		n/a
Tier 1 capital to risk weighted assets (1)		39,086		13.93	%		11,220		4.00	%		n/a		n/a
Total capital to risk weighted assets (1)		41,663		14.85	%		22,441		8.00	%		n/a		n/a


(1)		Tier 1 leverage (or core) capital ratio is computed as a percentage of average total assets of $320.1 million. Risk-based capital ratios are computed as a percentage of risk-weighted assets of $280.5 million.

(2)		See “Supervision and Regulation — Capital Adequacy — Prompt Corrective Action.”


	Valley Bank’s Capital Ratios At June 30, 2005
											To be well capitalized
						For capital					under prompt corrective
	Actual					adequacy purposes					action provisions (2)
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Tier 1 leverage capital to average assets (1)	$	37,001		11.62	%	$	12,736		4.00	%	$	15,920		5.00	%
Tier 1 capital to risk weighted assets (1)		37,001		13.21	%		11,208		4.00	%		16,812		6.00	%
Total capital to risk weighted assets (1)		39,578		14.12	%		22,416		8.00	%		28,020		10.00	%


(1)		Tier 1 leverage (or core) capital ratio is computed as a percentage of average total assets of $318.4 million. Risk-based capital ratios are computed as a percentage of risk-weighted assets of $280.2 million.

(2)		See “Supervision and Regulation — Capital Adequacy — Prompt Corrective Action.”

At June 30, 2005, the Company had off-balance sheet loan commitments of approximately $79 million. Of this amount, the unused portion of lines of credit extended by the Company was approximately $78 million and $1 million for standby letters of credit. Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Most guarantees extend from one to two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Impact of Inflation and Changing Prices

The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial condition and operating results in terms of historical dollars without considering the change in relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are financial. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. As a financial institution, the Company’s market risk exposure is primarily that of interest rate risk. The Company has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates. The Company does not engage in trading of financial instruments and does not have any exposure to exchange rates.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to result in a decrease in net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to result in a decrease in net interest income.

Interest rate risk is managed in accordance with policies approved by the Company’s Board of Directors. Management formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, management considers the impact on earnings and capital of the current interest rate outlook, potential changes in interest rates, regional economy, liquidity, business strategies and other factors. Management meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market value of assets and liabilities, unrealized gains and losses, purchase and sales activities, commitments to originate loans and the maturities of investments. Management uses an analysis of relationships between interest-earning assets and interest-bearing liabilities to manage interest rate risk.

The following table presents the Company’s repricing gap at June 30, 2005. The table indicates that at June 30, 2005 the Company was liability sensitive up to twelve months. This would indicate a decrease in earnings in a rising rate environment.


	At June 30,2005
			More Than
	Within		One Year
	Twelve		to Five		Over Five
	Months		Years		Years		Total
	(Dollars in thousands)
Rate-Sensitive Assets:
Interest-bearing deposits at other financial institutions	$	7,776	$	198		—	$	7,974
Fed funds sold		27,770		—		—		27,770
Securities — all available for sale		4,955		27,481		5,956		38,392
Construction and land development loans		109,400		7,007		—		116,407


	At June 30,2005
				More Than
	Within			One Year
	Twelve			to Five			Over Five
	Months			Years			Years			Total
	(Dollars in thousands)
Commercial real estate loans		21,803			63,921			—			85,724
Commercial and industrial loans		26,563			11,705			91			38,359
Other loans		6,072			2,463			—			8,535

Total Rate-Sensitive Assets		204,339			112,775			6,047			323,161

Rate-Sensitive Liabilities:
Interest-bearing demand deposits		78,738			—			—			78,738
Savings deposits		11,667			—			—			11,667
Time deposits		141,997			2,431			—			144,428
Long-term debt		43			15,206			197			15,446

Total Rate-Sensitive Liabilities	$	232,445		$	17,637		$	197		$	250,279

Excess (deficiency) of Rate-Sensitive Assets over Rate-Sensitive Liabilities	$	(28,106	)	$	95,138		$	5,850

Cumulative Excess (deficiency) of Rate-Sensitive Assets over Rate-Sensitive Liabilities	$	(28,106	)	$	67,032		$	72,882

Cumulative Excess (deficiency) of Rate-Sensitive Assets over Rate-Sensitive Liabilities as a percentage of total assets		(8.40	)%		20.02	%		21.77	%

Although gap analysis as reflected in the table above is a useful measurement device available to management to determine the existence of interest rate exposure, its static focus as of a particular date makes it necessary for management to utilize other techniques to measure exposure to changes in interest rates. For example, gap analysis is limited in its ability to predict trends in future earnings and includes no assumptions regarding changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in interest rates.

As a result of the limitations inherent in gap analysis, the Company also uses the “FinServ” asset liability management model, a proprietary dynamic system that incorporates data regarding the Company’s loans, investments, deposits and borrowings into an interest sensitivity analysis designed for financial institutions. This analysis measures interest rate risk by computing changes in net interest income and net interest margin in the event of assumed changes in interest rates. The analysis assesses the effect on net interest income and net interest margin in the event of an increase or a decrease in interest rates, assuming that such increase or decrease occurs ratably over the next 12 months and remains constant over the subsequent 12 months. The Company’s sensitivity to gains or losses in future earnings due to hypothetical increases or decreases in the Federal Funds rate as measured by this model as of June 30, 2005 is as follows:


Increase in	Net Interest Change					Decrease in			Net Interest Change
Interest Rates	$		%			Interest Rates			$			%
	(Dollars in thousands)
+1.00%	$	446		3	%		-1.00	%	$	(510	)		(3	)%
+2.00%	$	919		5	%		-2.00	%	$	(1,089	)		(6	)%
+3.00%	$	1,420		8	%		-3.00	%	$	(1,736	)		(10	)%

Accordingly, a rise of 1.00% in interest rates would result in an increase in our net interest income of $446,000, while a decline of 1.00% in interest rates would result in a decrease of $510,000 in our net interest income, in each case over the 12 months following June 30, 2005.

Management believes that the assumptions used in its interest sensitivity analysis to evaluate the vulnerability of its net interest income to changes in interest rates are reasonable. However, the interest rate sensitivity of the Company’s assets and liabilities, and the estimated effects of changes in interest rates on net interest income, could vary substantially if different assumptions were used or if actual experience differs from the projections upon which they are based.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), an evaluation was carried out with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.

Changes in Internal Controls

In the quarter ended June 30, 2005, the Company did not make any significant changes in, or take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls.

Part II. Other Information

Item 1. Legal Proceedings

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

	(a)		The Annual Shareholders Meeting was held on Tuesday, April 19, 2005 at 2:00pm. Total shares outstanding amounted to 2,790,748. A total of 2,386,617 shares (85.52%) were represented by shareholders in attendance at the meeting or by proxy.

	(b)		Directors elected at the meeting were: Barry L. Hulin, Thomas J. Krob and James A. McKellar to serve as directors for 3-year terms.

			Continuing directors are: George A. Brizendine, Don Hamilton, William F. Snyder, Mary Hausch, Dick Rottman, Dan H. Stewart and Gary Vause.

			The voting results were:


	Votes Cast
	For		Withheld		Total
Barry L. Hulin		2,356,817		29,800		2,386,617
Thomas J. Krob		2,352,902		33,715		2,386,617
James A. McKellar		2,350,254		36,363		2,386,617

	(c)		A proposal amending the Valley Bancorp Employee Stock Option Plan was approved to (i) extend the term of the Plan by 10 years (to March 23, 2015), (ii) to increase the number of shares available for grant under the Plan by 100,000 (to 310,000), and (iii) to provide for the grant of restricted stock awards.

			The voting results were:


Votes Cast
					Broker
For	Against		Abstain		Non-Votes		Total
1,523,739		92,932		9,960		759,986		2 ,386,617

(d)

N/A

Item 5. Other Information

None.

Item 6. Exhibits

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

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

	32		CEO and CFO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes – Oxley Act of 2002

Pursuant to the requirements of section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	VALLEY BANCORP
Date: August 10, 2005	By:	/s/ Barry L. Hulin
		Barry L. Hulin
		President and Chief Executive Officer



Date: August 10, 2005	By:	/s/ Dick Holtzclaw
		Dick Holtzclaw
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Valley Bancorp 10-Q