UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission File Number: 000-50950

VALLEY BANCORP

(702) 221-8600

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.

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

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: 2,789,228 shares as of October 31, 2004.

VALLEY BANCORP

Table of Contents

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Part I. Financial Information

ITEM 1. FINANCIAL STATEMENTS

Valley Bancorp And Subsidiary

See Notes to Consolidated Financial Statements.

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Valley Bancorp And Subsidiary

See Notes to Consolidated Financial Statements.

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Valley Bancorp And Subsidiary

See Notes to Consolidated Financial Statements.

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Valley Bancorp

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 September 30, 2004 and 2003 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 nine months ended September 30, 2004 are not necessarily indicative of results to be anticipated for the full year ending December 31, 2004.

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:

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3. Stock Options

The Company has two stock-based compensation plans, which are described more fully in Note 11 of the Company’s December 31, 2003 annual report as filed in the Form S-1 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:

4. Loans

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

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There were no impaired or nonaccrual loans as of September 30, 2004. Impaired and nonaccrual loans were $2.3 million and $704,000 as of December 31, 2003, respectively. Net charge-offs (recoveries) for the nine months ended September 30, 2004 and 2003 were $(20,000) and $93,000, 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 fixed payment of $10,000 on April 1, 2007. The Company will recognize 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 September 30, 2004 and December 31, 2003 is as follows:

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.

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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 September 30, 2004, the future annual lease payments due under this lease commitment totaled approximately $133,000.

6. Stockholders’ Equity

During the three months ended September 30, 2004, the Company issued 1,063,750 shares (including the over-allotment option) of its $0.73 par value common stock in an underwritten public offering at a price to the public of $18.00 per share. The proceeds after discounts and commissions amounted to $18.0 million and direct, incremental costs of issuance were approximately $860,000 which resulted in an increase in stockholders’ equity of $17.1 million.

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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 Months and Nine Months Ended September 30, 2004 and September 30, 2003

Net income increased from $413,000 or $0.23 per diluted share for the quarter ended September 30, 2003 to $879,000 or $0.47 per diluted share for the quarter ended September 30, 2004. For the nine months ended September 30, 2004, net income was $2.2 million or $1.20 per diluted share as compared to $953,000 or $0.56 per diluted share for the same period in 2003. The increase in earnings for both periods was due primarily to increases in loans outstanding and other earning assets. These items 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

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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 formulae 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 September 30, 2004 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 September 30, 2004 and December 31, 2003

Total Assets. Total assets increased 34.4%, from $186.9 million at December 31, 2003 to $251.2 million at September 30, 2004. This overall increase reflects a $52.7 million or 39.4% increase in net loans receivable and a $22.4 million or 162.3% increase in cash and cash equivalents. The increase in net loans receivable is primarily due to a $36.3 million increase in commercial real estate and commercial & industrial lending, an $11.2 million increase in construction lending, and a $3.8 million increase in raw land lending. These increases were partially offset by a $5.4 million decrease in interest-bearing deposits at other financial institutions and a $6.2 million decrease in available for sale investment securities. The decrease in investment securities available for sale is primarily due to sales and calls of agency securities. Federal funds sold increased $17.9 million from December 31, 2003 to September 30, 2004 due primarily to the net proceeds from the initial public offering that was closed on September 28, 2004. These funds have been temporarily invested in the overnight Federal funds pending redeployment elsewhere.

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

(1)

Includes commercial real estate loans and commercial and industrial loans secured by real estate.

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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.

Deposits. Total deposits increased $44.6 million or 26.3%, from $169.8 million at December 31, 2003 to $214.4 million at September 30, 2004. Non-interest-bearing deposits increased $23.0 million or 85.7%, primarily due to a $22.0 million or 88.0% increase in business demand deposit accounts. Interest-bearing deposits increased $21.6 million or 15.1%, primarily due to a $10.7 million or 15.6% increase in time deposits, a $5.2 million or 10.4% increase in money market accounts, and a $3.2 million or 33.4% increase in savings accounts. Transaction accounts, which include both interest-bearing and non-interest-bearing accounts, increased $33.9 million, from $101.4 million at December 31, 2003 to $135.3 million at September 30, 2004. The increase in business demand deposits as well as overall increase in other non-time deposits 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.

Stockholders’ Equity. Stockholders’ equity increased from $16.0 million at December 31, 2003 to $35.2 million at September 30, 2004. This increase was primarily due to the Company issuing common stock through its initial public offering during the quarter ended September 30, 2004 for net proceeds of $17.1 million. Retained earnings also increased by $2.2 million resulting from net income for the nine months ended September 30, 2004.

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Non-Performing Assets. The Company had no non-performing assets at September 30, 2004. The allowance for loan losses increased $526,000 or 33.7%, from $1.6 million at December 31, 2003 to $2.1 million at September 30, 2004 primarily due to the growth in loans. The allowance for loan losses reflected the current risk in the loan portfolio and represented 1.11% of total loans.

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

(1)

Includes commercial real estate loans and commercial and industrial loans secured by real estate.

Comparison of Operating Results for the Three Months and Nine Months Ended September 30, 2004 and September 30, 2003.

Net Income. Net income was $879,000 for the three months ended September 30, 2004 compared to $413,000 for the three months ended September 30, 2003. This represents an increase of $466,000 or 112.8%. Diluted earnings per share increased $0.24, from $0.23 for the three months ended September 30, 2003 to $0.47 for the same period in 2004. Return on average assets increased from 0.94% for the three months ended September 30, 2003 to 1.51% for the same period in 2004. Return on average equity also increased, from 10.73% for the three months ended September 30, 2003 to 19.47% for the same period in 2004. These increases are mainly attributable to an increase in interest income from lending activity during the three months ended September 30, 2004 as compared to the same period in 2003. The Company also had a decrease in cost of funds during 2004 due to lower interest rates being paid on deposits.

For the nine months ended September 30, 2004, net income was $2.2 million as compared to $953,000 for the same period in 2003. This represents an increase of $1.2 million or 130.0%. Diluted earnings per share increased $0.64, from $0.56 for the nine months ended September 30, 2003 to $1.20 for the same period in 2004. Return on average assets increased from 0.75% for the nine months ended September 30, 2003 to 1.32% for the same period in 2004. Return on average equity also increased, from 8.86% for the nine months ended September 30, 2003 to 16.82% for the same period in 2004. These increases are mainly attributable to higher interest income on loans due to higher loan balances outstanding during the first nine months of 2004 as compared to the same period in 2003. The Company also had lower cost of funds on deposits during 2004 despite having higher deposit balances outstanding. Non-interest expense increased $433,000 or 12.3% for the nine months ended September 30, 2004 as compared to the comparable period in 2003. This non-interest expense variance was due primarily to increased compensation and employee benefits costs. These changes are discussed in more detail in the following sections.

Net Interest Income. Net interest income increased $932,000 or 49.8%, from $1.9 million for the three months ended September 30, 2003 to $2.8 million for the same period in 2004. The Company experienced increased volume in both average interest-earning assets and average interest-bearing liabilities. Average interest-earning assets increased $54.6 million or 32.8%, while average interest-bearing liabilities increased $27.1 million or 19.3%.

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Interest rate spread increased 0.51%, from 4.15% for the three months ended September 30, 2003 to 4.66% for the same period in 2004. Net interest margin increased 0.59%, from 4.46% for the three months ended September 30, 2003 to 5.05% for the same period in 2004. The ratio of average interest-earning assets to average interest-bearing liabilities increased 13.3%, from 118.8% for the three months ended September 30, 2003 to 132.1% for the same period in 2004.

Net interest income increased $2.5 million or 50.6%, from $5.0 million for the nine months ended September 30, 2003 to $7.6 million for the same period in 2004. Although there was, in general, an overall decline in both yields and costs when comparing the nine months ended September 30, 2003 to the same period ended September 30, 2004, the Company experienced increased volume in both average interest-earning assets and average interest-bearing liabilities. Average interest-earning assets increased $47.7 million or 29.5%, while average interest-bearing liabilities increased $26.0 million or 18.9%. Interest rate spread increased 0.65%, from 3.81% for the nine months ended September 30, 2003 to 4.46% for the same period in 2004. Net interest margin increased 0.67%, from 4.15% for the nine months ended September 30, 2003 to 4.82% for the same period in 2004. The ratio of average interest-earning assets to average interest-bearing liabilities increased 10.5%, from 117.4% for the nine months ended September 30, 2003 to 127.9% for the same period in 2004.

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.

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Interest Income. For the three months ended September 30, 2004, interest income increased $902,000 or 35.1%, primarily due to an increase of $863,000 or 35.7% in loan interest income as compared to the same period in 2003. This increase is the result of an increase of $50.6 million or 38.8% in average loans receivable. The average yield on these loans decreased, from 7.34% for the three months ended September 30, 2003 to 7.20% for the same period in 2004. Interest income on all other investments increased by $39,000 or 25.0%. The average yield for these investments increased 0.22%, from 1.73% for the three months ended September 30, 2003 to 1.95% for the same period in 2004. This increase is the result of rising rate environment during 2004.

For the nine months ended September 30, 2004, interest income increased $2.2 million or 29.2%, primarily due to an increase of $2.0 million or 29.4% in loan interest income as compared to the same period in 2003. This increase is the result of an increase of $43.2 million or 35.1% in average loans receivable. The average yield on these loans decreased, from 7.51% for the nine months ended September 30, 2003 to 7.18% for the same period in 2004.

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Interest income on all other investments increased by $126,000 or 27.2%. The average yield for these investments increased 0.23%, from 1.60% for the nine months ended September 30, 2003 to 1.83% for the same period in 2004.

Interest Expense. For the three months ended September 30, 2004, total interest expense decreased $30,000 or 4.3% as compared to the same period last year. This decrease is primarily due to a decrease in the average cost of deposits, which declined from 1.96% for the three months ended September 30, 2003 to 1.57% for the same period in 2004. Average deposits increased $27.1 million or 19.4%, from $139.6 million for the three months ended September 30, 2003 to $166.8 million for the same period in 2004. The total cost of funds decreased 0.39%, from 1.98% for the three months ended September 30, 2003 to 1.59% for the same period in 2004.

For the nine months ended September 30, 2004, total interest expense decreased $380,000 or 16.1% as compared to the same period last year. This decrease is primarily due to a decrease in the average cost of deposits, which declined from 2.27% for the nine months ended September 30, 2003 to 1.60% for the same period in 2004. Average deposits increased $26.0 million or 18.8%, from $137.2 million for the nine months ended September 30, 2003 to $163.2 million for the same period in 2004. The total cost of funds decreased 0.67%, from 2.29% for the nine months ended September 30, 2003 to 1.62% for the same period in 2004.

Provision for Loan Losses. The provision for loan losses totaled $120,000 for the three months ended September 30, 2004 as compared to $113,000 for the same period ended September 30, 2003. This $7,000 increase is primarily due to the increase in the balance of the loan portfolio. Net recoveries increased $25,000, from $4,000 for the quarter ended September 30, 2003 to $29,000 for the same period in 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 September 30, 2004. 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.

The provision for loan losses totaled $506,000 for the nine months ended September 30, 2004 compared to $306,000 for the same period in 2003. This $200,000 or 65.5% increase is primarily due to an increase in the amount of the loan portfolio. Net charge-offs declined $113,000, from $93,000 for the nine months ended September 30, 2003 to net recoveries of $20,000 for the same period 2004.

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

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(1)

Includes commercial real estate loans and commercial and industrial loans secured by real estate.

Non-Interest Income. Non-interest income was $63,000 for the three months ended September 30, 2004, as compared to $91,000 for the same period in 2003. The decrease of $28,000 was due to a loss on the sale of securities of $9,000 in the third quarter of 2004 while there was a gain on the sale of securities of $20,000 in the third quarter of 2003. Non-interest income increased by $9,000 for the nine months ended September 30, 2004 to $225,000 as compared to $216,000 for the same period last year, due primarily to increase in service fee income.

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

Non-Interest Expense. Non-interest expense increased $191,000 or 15.6%, from $1.2 million for the three months ended September 30, 2003 to $1.4 million for the same period in 2004. The increase was primarily a result of increased compensation and employee benefits costs due to increasing staff levels and higher group insurance premiums. For the three months ended September 30, 2004, non-interest expense as a percentage of average earning assets on annualized basis was 2.56% as compared to 2.94% for the same period in 2003. The Company also achieved an Efficiency Ratio of 49.2% for three months ended September 30, 2004 as compared to 63.0% for the same period in 2003.

Non-interest expense increased $433,000 or 12.3%, from $3.5 million for the nine months ended September 30, 2003 to $3.9 million for the same period in 2004. This $433,000 variance was due mainly to increased compensation and employee benefits costs associated with new hires, annual salary adjustments for existing personnel, as well as higher group insurance premiums. Salaries and employee benefits expenses totaled $2.3 million for the nine months ended September 30, 2004 as compared to $1.9 million for the same period in 2003. Total number of full-time equivalent employees increased to 47 as of September 30, 2004 as compared to 42 as of September 30, 2003. Legal and professional expense decreased $110,000 for the nine months ended September 30, 2004 to $146,000 as compared to $256,000 for the comparable period in 2003. This decrease was due primarily to lower legal fees associated with a loan foreclosure and the equipment lease agreement lawsuit which were both settled in the last quarter of 2003. For the nine months ended September 30, 2004, non-interest expense as a percentage of average earning assets on annualized basis was 2.51% as compared to 2.90% for the same period in 2003. The Company also achieved an Efficiency Ratio of 50.7% for nine months ended September 30, 2004 as compared to 67.4% for the same period in 2003.

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

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