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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-K (Mark One)þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004TRANSITION REPORT UNDER 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
    
    (IRS Employer Identification Number)Incorporation or Organization)3500 W. Sahara Avenue, Las Vegas, NV 89102(Address of Principal Executive Offices, including Zip Code)(702) 221-8600(Registrants telephone number, including area code)SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:NoneSECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:Common Stock, $0.73 Par Value(Title of Class)
 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes o No þ The aggregate market value of the registrants voting stock held by non-affiliates is
approximately $75,298,282, based on the February 28, 2005 closing price of said stock on the Nasdaq
Stock Market ($32.59 per share). As of February 28, 2005, 2,790,748 shares of the registrants common stock were outstanding. Portions of the registrants definitive Proxy Statement for its 2005 Annual Meeting of
Stockholders are incorporated by reference into Part III of this report.




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VALLEY BANCORP
2004 Annual Report on Form 10-K Table of Contents PagePart I
    
    Item 1. Business
    
    
    3Item 2. Properties
    
    
    12Item 3. Legal Proceedings
    
    
    12Item 4. Submission of Matters to a Vote of Security Holders
    
    
    12Part II
    
    Item 5. Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
    
    
    13Item 6. Selected Financial Data
    
    
    14Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    16Item 7a. Qualitative and Quantitative Disclosures about Market Risk
    
    
    40Item 8. Financial Statements and Supplementary Data
    
    
    41Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    70Item 9a. Controls and Procedures
    
    
    70Item 9b. Other Information
    
    
    70Part III
    
    Item 10. Directors and Executive Officers of the Registrant
    
    
    71Item 11. Executive Compensation
    
    
    71Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    71Item 13. Certain Relationships and Related Transactions
    
    
    71Item 14. Principal Accounting Fees and Services
    
    
    71Part IV
    
    Item 15. Exhibits and Financial Statement Schedules
    
    
    72SIGNATURES
    
    
    74EXHIBIT 10.11EXHIBIT 14.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
 2




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PART I 
 Item 1. Business General Valley Bank commenced operations in October 1998 with the mission of providing community bank
services to Las Vegas and its neighboring suburbs. The Company provides banking and other
financial services throughout its primary market area to small and medium size businesses, with
annual revenues ranging from $1 million to $100 million. Many of these small and medium size
businesses provide goods and services, directly or indirectly, to the development of the
infrastructure in and around Las Vegas that services the growing population. The Company also
provides a broad range of banking services and products, including personal checking and savings
accounts, electronic banking, and other consumer banking products, to its customers. In response to the burgeoning Las Vegas population in the late 1990s and early part of this
decade, fueled by rapid growth in the tourism and gaming industry, an influx of retirees and
natural population growth due to births, additional infrastructure has been required to service the
populaces needs. The development of infrastructure, such as office buildings, convenience stores,
strip malls and medical facilities has created an opportunity for the Company to focus its lending
activities on commercial real estate, including construction lending, while continuing to focus its
deposit taking activities on the local consumer population and its existing business customers. In April, 2001 Valley Bank opened its second branch in Pahrump, Nevada (a city located 60 miles
west of Las Vegas), which is in Nye County, Nevada. This was followed in October 2002 by the
opening of a third branch on Sahara Avenue in Las Vegas, Nevada. As its deposit base increased with
additional branches, its lending expanded from participations to local commercial and commercial
real estate loans. The Company completed its holding company reorganization in mid-2001, by which Valley Bank became
its wholly owned subsidiary, and stockholders of Valley Bank became stockholders of Valley Bancorp.
In September of 2004 the Company completed an initial public offering to increase its capital to
meet its growth strategy for the next several years. The Companys goal is to become a premier commercial bank for the long-term benefit of its
stockholders, customers and employees by increasing shareholder value and providing high-quality
customer service. From December 1998 to December 2004, the Company has grown from total assets of
$10.3 million to total assets of $273.6 million, while improving the efficiency ratio from 250% to
50%. Over the next five years, the Company has targeted an annual return on average assets of at
least 1%, a double-digit return on average equity and an efficiency ratio of 60% or less. In
addition, the Company intends to manage its net interest margin to a target of 5%. In order to
achieve these targets, the Companys goal is to grow its assets approximately 25% and its loan
portfolio approximately 20% annually. The Company intends to achieve these results by expanding its business with disciplined execution.
The Company intends to focus on the greater Las Vegas market and transact business with additional
small and medium size businesses with a need for commercial, construction and real estate lending.
The Company believes the rapid economic growth in Clark County will provide sufficient lending
opportunities for it to compete with the other financial institutions doing business in this
region. The proceeds raised in the initial registered public offering in September of 2004 contributed to
Valley Banks increase in legal lending limit, and allowed the bank to originate larger or
additional loans to its current customers with strong credit histories who might otherwise be
forced to bank with its competitors. Additionally, this increased lending limit will allow the bank
to underwrite larger loans without having to participate out a portion of the loan and it may also
help it attract new and larger loan customers. The Company continues to recruit and hire experienced bankers who bring with them an understanding
of Southern Nevada, and Las Vegas in particular, and who have ties to the local communities and
loyal customers. The Company 3




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believes that it offers a working environment that embraces, promotes, and develops its employees,
as well as competitive compensation. Although Southern Nevada does not have a substantial pool of
available commercial bankers, the Company has successfully recruited seasoned commercial bankers in
the past, and believes that it will be able to continue to recruit additional commercial bankers in
the future. The composition of the Companys commercial lending base has historically been different from the
composition of its deposit base. In particular, the Companys deposit customers are primarily
consumers, rather than commercial businesses. The Company offers competitive and comprehensive
demand and time deposit products designed to meet the varying needs of its customers and the
Company has targeted its deposit products towards this customer base. The Company intends to
continue to offer deposit products to meet the needs of its consumer market, while also increasing
its emphasis on attracting deposits from its business loan customers. The Company believes these
efforts will continue to provide a consistent source of funds for its commercial lending activities
at a lower cost to it, while helping to solidify its relationship approach to banking. The Companys website is located at http://www.valleybancorp.com/. The Company makes
available free of charge through its website its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with, or furnished to, the Securities and
Exchange Commission. The Companys Internet website and the information contained therein or
connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. Lending Activities General.The nature of the commercial banking market in Las Vegas is characterized by a large
number of commercial real estate related transactions that require financing. As a result, many
community banks that serve this market have a significant concentration of commercial real estate
loans, including Valley Bank. The Companys loan portfolio primarily consists of commercial real
estate loans. To a lesser extent, the loan portfolio also includes land loans, commercial and
industrial loans, multi-family loans and 1-4 family residential loans. The Companys loans are underwritten using both federal and state guidelines. Interest rates
charged by the Company on loans are principally affected by the competition in the market for
loans, the risk profile of the various loans, and the Companys estimate of both short and long
term interest rate movements. These factors are, in turn, affected by general economic conditions
for the nation and the market area, and the monetary polices of the federal government, including
the Federal Reserve Board. All loans are based on the financial strength of the borrower (typically cash flow and net worth),
the secondary source of repayment (usually the collateral securing the loan), and any tertiary
support offered by any guarantors. Exceptions to loan policy are approved by the Chief Credit
Officer. The Company believes that all of the loans are margined adequately (acceptable terms and
proper loan to value ratio) based on the level of risk associated with a particular loan type. Commercial Real Estate Loans.The majority of the Companys lending activity consists of loans to
finance the purchase of commercial real estate and loans to finance inventory and working capital,
for example that are secured by commercial real estate. The commercial real estate portfolio is
categorized by collateral type and includes both commercial real estate and commercial and
industrial loans secured by real estate. Loans classified as commercial real estate loans are
primarily term loans with either 3-5 year maturities (commonly referred to as mini-perm loans), or
if longer than a 5 year term, loans that reprice every 3 to 5 years to an index plus a margin (i.e.
3 or 5 year treasuries, or the Company Reference Rate). In general, mini-perms are specifically
designed to allow a project to stabilize prior to securing long-term financing. The real estate
collateral securing these loans is primarily retail centers, office buildings, industrial
facilities, and retail buildings such as convenience stores. They can be owner occupied, or income
properties leased to third party lessees. When necessary, the Company underwrites the tenant paying
the rent as a tertiary source of repayment. In most instances, estoppels and lease copies are part
of the documentation of all income producing properties. 4




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The Company typically analyzes all commercial real estate term loans as if they were income
properties. Even if the property is owner occupied, to establish value the Company determines the
ability of the rental income or potential market-rate rental income (in the case of owner occupied
buildings) to service the debt. All real estate secured term loans require an outside appraisal of
the property prior to closing and funding, and those appraisals contain market rent potential for
all commercial properties contemplated as collateral for a loan. The Companys loan policy for this
type of credit generally requires that the loan to appraised value and loan to cost ratio
(whichever is lower) not exceed 75%. Additionally, the propertys cash flow should have a debt
coverage ratio of at least 1.15 to 1 after operating expenses (assuming there are no other negative
economic considerations). If the analysis indicates that the project would have a debt coverage
ratio of less than 1.15 to 1, the Company will not approve the loan unless there are other sources
of repayment that materially add strength to the loan. The Company secures all of its real estate
term loans through a first deed of trust which must be insured by adequate title insurance. Construction/Land Development Loans.While the Companys construction financing may be extended on
a wide variety of projects, the principal types of construction loans originated by the Company
include industrial/warehouse properties, office buildings, retail centers, medical facilities,
restaurants, and on occasion, luxury single-family homes. Construction loans are made only to
experienced local developers with whom the Company has sufficient lending history. An analysis of
each construction project is performed as part of the underwriting process to determine whether the
type of property, location, construction costs, and contingency funds are appropriate and adequate.
As with real estate term loans, if the sensitivity analysis indicates that the project, when
completed and stabilized, would have a debt coverage ratio of less than 1.15 to 1, the Company will
make the loan only if secondary sources of repayment (outside strength of the borrower, guarantees,
other collateral, etc.) materially add strength to the loan. In addition to the conditions set forth above, the Company usually approves a construction loan
only if a take-out commitment from another known and reputable financial institution has been
secured, or when an internal commitment for permanent financing has been extended by the Company.
As with commercial real estate loans, all construction loans require an outside appraisal of the
project by an approved appraisal firm. The Company also typically requires that the loan to value
ratio not exceed 75%. Furthermore, the term of the construction loan cannot exceed the length of time normally required
to construct a particular type of property. For example, 18 months is the maximum term for a
construction loan depending on the project size and complexity. As with any real estate secured
loan, the Company secures all construction loans through a deed of trust insured by title
insurance, and also requires builders risk insurance. Land loans for the purpose of developing a particular property are made only to experienced local
developers with whom the Company has sufficient lending history. These loans are for lots or
parcels of land that can be developed and sold within two years. The Companys policy requires that
the loan to value ratio should not exceed 75% of the appraised value (based upon the appraisal by an
approved outside appraisal firm) of the developed land, or the cost of the property and
improvements, whichever is lower. The Company also normally requires the borrower to either have a
cash investment in the project equal to at least 25% percent of the cost of the project, or own the
land for at least three years to establish an equity position. These land loans generally do not
have a term longer than 18 months. All lot sales are managed through a title company with proceeds
applied toward the repayment of the loan as specified in the loan documents. The Company secures
the loan through a deed of trust insured by title insurance. Construction loans and land development loans are managed through a third-party construction
control company to insure that the project stays on budget. The budget is reviewed prior to funding
by the responsible loan officer for accuracy, and a sufficient contingency allotment is made
depending on the type of project. The contractor is reviewed prior to funding to determine whether
they have the ability to complete the improvements on budget and on time. The contractors are
typically known to the Company, however, the Company occasionally requests financial information on
a contractor as additional due diligence. Raw Land Loans.The Company also extends raw land loans only to a borrower who can support the
monthly payments to repay the loan in full within five years or less. The source of repayment is
usually from income other than the expected sale of the raw land securing the note. The Company
occasionally makes exception to this policy 5




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for loans to experienced local developers with whom the Company has a lending history. Those
developers inventory land for development into lots or project construction within 18 months. The
loan to value ratio for raw land loans normally does not exceed 50 percent of the appraised value
based upon a qualified outside appraisal, or 50% of the purchase price, whichever is lower. All of
these loans are current and performing in accordance with their respective loan agreements. Commercial and Industrial Loans.In addition to real estate related loan products, The Company also
originates commercial and industrial loans, including working capital lines of credit, inventory
and accounts receivable lines, equipment loans, and other types of term loans normally associated
with commerce. The terms of these loans typically range from one to five years with interest rates
both fixed and variable. If variable, they are tied to the Companys in-house reference interest
rate plus a margin. Fixed rate loans carry a maturity date from 3 to 5 years. The Companys typical
commercial loan customer is a manufacturing company, contractor, retailer, or service company in
the greater Las Vegas area. Underwriting guidelines for commercial business loans include an evaluation of the borrowers
operation and management, specific use of the loan proceeds and a proper identification of the
repayment source. The loan proceeds are advanced against security interests in current and
longer-term assets, and equipment loans are advanced against underlying specific equipment.
Guaranties are almost always required from the principals of corporate borrowers. In addition to term loans, the Company also offers commercial revolving lines of credit to finance
accounts receivable and inventory on a short-term basis, usually a year or less. This short term
financing enables borrowers to finance their cash needs during a business cycle and repay as cash
is collected from their customers. Other.Loans in this category loans are secured by multi-family residential property, secured by
single-family residential property and consumer loans. The single-family residential category
includes loans made to business owners for working capital purposes, using their residential real
estate equity as collateral. The balance of the category represents short-term loans to builders to
finance model homes in single-family developments. The Companys loan portfolio includes a small percentage of consumer loans. These loans were made
primarily as an accommodation to the business customers and as a result of business-related
referrals. The consumer loan portfolio consists primarily of auto loans, cash secured loans, and
loans secured by securities. At present, the Company is not encouraging or emphasizing the
origination of consumer loans. The Company may at some future date decide to pursue and develop
this type of lending, however, no assurances can be made whether the Company will more aggressively
pursue consumer lending or whether it will continue as primarily a business bank. Origination and Sources of Loans.The majority of loans are originated by the Companys senior
business development officers. These officers have extensive business contacts in the markets
because they have been successful commercial bankers in Las Vegas for many years. The average
commercial lending experience of these business development officers is in excess of 20 years. Most
of the customers have multiple relationships with the Company, and are a source of future business
both by referrals and by word of mouth. This enables the Company to leverage this customer base. Participations.The Company has relationships with other banks through senior management which
enables the Company to sell any portion of credits that would be too large for the Company to keep
on its own books. Local community banks often ask the Company to participate in credits originated
by them. Participations among local community banks in the area are a significant part of
commercial banking in the market area and allow local community banks to compete for many of the
larger loans in the Las Vegas market. As required by bank regulators, every loan is independently
underwritten by the Company, regardless of origin. Competition The banking and financial services business in Southern Nevada generally and in Las Vegas in
particular, is highly competitive. The increasingly competitive environment is a result primarily
of growth in start-up banks, changes in 6




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regulation, changes in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Company competes for loans, deposits, and
customers with other commercial banks, savings and loan associations, securities and brokerage
companies, mortgage companies, insurance companies, finance companies, money market funds, credit
unions, and other non-bank financial service providers. Some of these competitors are not subject
to the same level of regulation and oversight that are required of banks and bank holding
companies. Many of these competitors are much larger in total assets and capitalization, have
greater access to capital markets and offer a broader range of financial services than the Company
can offer. Technological advances continue to contribute to greater competition in domestic and
international products and services. Supervision and Regulation General The Company is extensively regulated under federal and state law. These laws and regulations are
primarily intended to protect depositors, not stockholders. The following discussion is only
intended to provide summaries of significant statutes and regulations that affect the banking
industry and is therefore not complete. Changes in applicable laws or regulations, and in the
policies of regulators, may have a material effect on the Companys business and prospects. The
Company cannot accurately predict the nature or extent of the effects on its business and earnings
that fiscal or monetary policies, or new federal or state laws, may have in the future. Compliance In order to assure that the Company is in compliance with the laws and regulations that apply to
its operations, including those summarized below, the Company employs a compliance officer, and the
Company engages an independent compliance auditing firm. The Company is regularly reviewed by the
FDIC and the Nevada Department of Business and Industry, Financial Institutions Division (the
Nevada FID), during which reviews such agencies assess the Companys compliance with applicable
laws and regulations. Based on the assessments of its outside compliance auditors and the FDIC and
Nevada FID, the Company believes that it materially complies with all of the laws and regulations
that apply to its operations. Federal Bank Holding Company Regulation General.Valley Bancorp is a bank holding company as defined in the Bank Holding Company Act of
1956, as amended, and is therefore subject to regulation, supervision and examination by the
Federal Reserve. In general, the Bank Holding Company Act limits the business of bank holding
companies to owning or controlling banks and engaging in other activities closely related to
banking. Valley Bancorp must file reports with the Federal Reserve and must provide it with such
additional information as it may require. Under the Financial Services Modernization Act of 1999, a
bank holding company may apply to the Federal Reserve to become a financial holding company, and
thereby engage (directly or through a subsidiary) in certain activities deemed financial in nature,
such as securities brokerage and insurance underwriting. Valley Bancorp has not applied to become a
financial holding company. Bank holding companies that qualify and elect to become financial holding companies can engage in a
wider variety of financial activities than permitted under previous law, particularly with respect
to insurance and securities underwriting activities. In addition, in a change from previous law,
bank holding companies will be in a position to be owned, controlled or acquired by any company
engaged in financially related activities, so long as the company meets certain regulatory
requirements. The act also permits national banks (and, in states with wildcard statutes, certain
state banks), either directly or through operating subsidiaries, to engage in certain non-banking
financial activities. The Company does not believe that the act will negatively affect its operations in the short term.
However, to the extent the legislation permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation. This consolidation
could result in a growing number of larger 7




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financial institutions that offer a wider variety of financial services than the Company currently
offer, and these companies may be able to aggressively compete in the markets the Company currently
serves. Holding Company Bank Ownership.The Bank Holding Company Act requires every bank holding company to
obtain the prior approval of the Federal Reserve before (1) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares, (2) acquiring all or
substantially all of the assets of another bank or bank holding company, or (3) merging or
consolidating with another bank holding company. Holding Company Control of Non-banks.With some exceptions, the Bank Holding Company Act also
prohibits a bank holding company from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The principal exceptions
to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve
regulation or order, have been identified as activities closely related to the business of banking
or of managing or controlling banks. Transactions with Affiliates.Subsidiary banks of a bank holding company are subject to
restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or
its subsidiaries, on investments in their securities and on the use of their securities as
collateral for loans to any borrower. These regulations and restrictions may limit Valley Bancorps
ability to obtain funds from Valley Bank for its cash needs, including funds for payment of
dividends, interest and operational expenses. Tying Arrangements.The Company is prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property or furnishing of services. For
example, with certain exceptions, neither Valley Bancorp nor Valley Bank may condition an extension
of credit to a customer on either (1) a requirement that the customer obtain additional services
provided by us or (2) an agreement by the customer to refrain from obtaining other services from a
competitor. Support of Subsidiary Banks.Under Federal Reserve policy, Valley Bancorp is expected to act as a
source of financial and managerial strength to Valley Bank. This means that Valley Bancorp is
required to commit, as necessary, resources to support Valley Bank. Any capital loans a bank
holding company makes to its subsidiary banks are subordinate to deposits and to certain other
indebtedness of those subsidiary banks. State Law Restrictions.As a Nevada corporation, Valley Bancorp is subject to certain limitations
and restrictions under applicable Nevada corporate law. For example, state law restrictions in
Nevada include limitations and restrictions relating to indemnification of directors, maintenance
of books, records, and minutes, and observance of certain corporate formalities. Federal and State Regulation of Valley Bank General.Valley Bank is a Nevada chartered commercial bank with deposits insured by the FDIC. As a
result, Valley Bank is subject to supervision and regulation by the Nevada FID and the FDIC. These
agencies have the authority to prohibit banks from engaging in what they believe constitute unsafe
or unsound banking practices. Lending Limits.State banking law generally limits the amount of funds that a bank may lend to a
single borrower to 25% of stockholders equity plus retained earnings and allowance for loan
losses. Control of Financial Institutions.Nevada banking laws require that changes in ownership of 10% or
more of a banks outstanding voting stock must be reported to the Nevada FID within three business
days. If 20% or more of the banks voting power is acquired by a natural person, or 10% or more is
acquired by an entity, then the acquisition may be deemed a change in control requiring prior
approval of the Nevada FID. 8




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Community Reinvestment.The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, the Federal Reserve or the FDIC
evaluate the record of the financial institution in meeting the credit needs of its local
communities, including low and moderate income neighborhoods, consistent with the safe and sound
operation of the institution. These factors are also considered in evaluating mergers, acquisitions
and applications to open a branch or facility. Insider Credit Transactions.Banks are also subject to certain Federal Reserve restrictions on
extensions of credit to executive officers, directors, principal stockholders or any related
interests of such persons (i.e., insiders). Extensions of credit (1) must be made on substantially
the same terms and pursuant to the same credit underwriting procedures as those for comparable
transactions with persons who are neither insiders nor employees, and (2) must not involve more
than the normal risk of repayment or present other unfavorable features. Banks are also subject to
certain lending limits and restrictions on overdrafts to insiders. A violation of these
restrictions may result in regulatory sanctions on the bank or its insiders. Regulation of Management.Federal law sets forth circumstances under which officers or directors of
a bank may be removed by the institutions federal supervisory agency. Federal law also prohibits
management personnel of a bank from serving as a director or in a management position of another
financial institution whose assets exceed a specified amount or which has an office within a
specified geographic area. Safety and Soundness Standards.Federal law imposes upon banks certain non-capital safety and
soundness standards. These standards cover internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset growth,
compensation and benefits. Additional standards apply to asset quality, earnings and stock
valuation. An institution that fails to meet these standards must develop a plan acceptable to its
regulators, specifying the steps that the institution will take to meet the standards. Failure to
submit or implement such a plan may subject the institution to regulatory sanctions. Under Nevada
state law, if the stockholders equity of a Nevada state-chartered bank becomes impaired, the
Commissioner of the Nevada FID will require the bank to make the impairment good. Failure to make
the impairment good may result in the Commissioners taking possession of the bank and liquidating
it. Anti-terrorism Legislation USA Patriot Act of 2001.On October 26, 2001, President Bush signed the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (Patriot Act)
of 2001. Among other things, the Patriot Act (i) prohibits banks from providing correspondent
accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening
or holding accounts for foreign financial institutions or wealthy foreign individuals (iii)
requires financial institutions to establish an anti-money-laundering compliance program, and (iv)
eliminates civil liability for persons who file suspicious activity reports. The Patriot Act also
increases governmental powers to investigate terrorism, including expanded government access to
account records. The Department of the Treasury is empowered to administer and make rules to
implement the Patriot Act. While the Company believes the Patriot Act may, to some degree, affect
the Companys record keeping and reporting expenses, the Company does not believe that it will have
a material adverse effect on the Companys business and operations. Interstate Banking And Branching The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act)
generally authorizes interstate branching. Currently, bank holding companies may purchase banks in
any state, and banks may merge with banks in other states, as long as the home state of neither
merging bank has opted out under the legislation. The Interstate Act requires regulators to consult
with community organizations before permitting an interstate institution to close a branch in a
low-income area. Nevada has enacted opting in legislation authorizing interstate mergers pursuant to the
Interstate Act. The Nevada statute permits out-of-state banks and bank holding companies meeting
certain requirements to maintain and operate the Nevada branches of a Nevada bank with which the
out-of-state company engaged in an interstate combination. 9




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An out-of-state depository without a branch in Nevada, or an out-of-state holding company without a
depository institution in Nevada, must first acquire the Nevada institution itself or its charter,
before it can establish a de novo branch or acquire a Nevada branch through merger. Deposit Insurance Valley Banks deposits are currently insured to a maximum of $100,000 per depositor through the
Bank Insurance Fund administered by the FDIC. Valley Bank is required to pay deposit insurance
premiums, which are assessed semiannually and paid quarterly. The premium amount is based upon a
risk classification system established by the FDIC. Banks with higher levels of capital and a low
degree of supervisory concern are assessed lower premiums than banks with lower levels of capital
or a higher degree of supervisory concern. The FDIC is also empowered to make special assessments on insured depository institutions in
amounts determined by the FDIC to be necessary to give it adequate assessment income to repay
amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems
necessary. Dividends The principal source of Valley Bancorps cash reserves is dividends received from Valley Bank.
Nevada law imposes certain restrictions on a banks ability to pay dividends and prohibits a bank
from paying dividends if doing so would reduce its stockholders equity below its initial
stockholders equity. In addition, a bank may not pay cash dividends if doing so would reduce its
capital below minimum applicable federal capital requirements. See Capital Adequacy below for a
discussion of the applicable federal capital requirements. See Item 5. Market for the Registrants
Common Equity and Related Stockholder Matters for a discussion of limitations on the payment of
dividends. Capital Adequacy Regulatory Capital Guidelines.Federal bank regulatory agencies use capital adequacy guidelines in
the examination and regulation of bank holding companies and banks. The guidelines are
risk-based, meaning that they are designed to make capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies. Tier I and Tier II Capital.Under the guidelines, an institutions capital is divided into two
broad categories, Tier I capital and Tier II capital. Tier I capital generally consists of common
stockholders equity, surplus and undivided profits. Tier II capital generally consists of the
allowance for loan losses, hybrid capital instruments, and subordinated debt. The sum of Tier I
capital and Tier II capital represents an institutions total capital. The guidelines require that
at least 50% of an institutions total capital consist of Tier I capital. Risk-based Capital Ratios.The adequacy of an institutions capital is gauged primarily with
reference to the institutions risk weighted assets. The guidelines assign risk weightings to an
institutions assets in an effort to quantify the relative risk of each asset and to determine the
minimum capital required to support that risk. An institutions risk weighted assets are then
compared with its Tier I capital and total capital to arrive at a Tier I risk-based ratio and a
total risk-based ratio, respectively. The guidelines provide that an institution must have a
minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of 8%. Leverage Ratio.The guidelines also employ a leverage ratio, which is Tier I capital as a
percentage of total assets less intangibles, to be used as a supplement to risk-based guidelines.
The principal objective of the leverage ratio is to constrain the maximum degree to which a bank
holding company may leverage its equity capital base. The minimum leverage ratio is 3%; however,
for all but the most highly rated bank holding companies and for bank holding companies seeking to
expand, regulators generally expect an additional cushion of at least 1% to 2%. 10




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##### Table of Contents



Prompt Corrective Action.Under the guidelines, an institution is assigned to one of five capital
categories depending on its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. The categories range from well
capitalized to critically undercapitalized. Institutions that are deemed to be
undercapitalized, depending on the category to which they are assigned, are subject to certain
mandatory supervisory corrective actions. Effects of Government Monetary Policy The Companys earnings and growth are affected not only by general economic conditions, but also by
the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The
Federal Reserve can and does implement national monetary policy for such purposes as curbing
inflation and combating recession. The nature and impact of future changes in monetary policies and
their impact on the Company cannot be predicted with certainty. Corporate Governance and Accounting Legislation Sarbanes-Oxley Act of 2002.On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the Act) was signed
into law to address corporate and accounting fraud. The Act establishes a new accounting oversight
board that will enforce auditing standards and restricts the scope of services that accounting
firms may provide to their public company audit clients. Among other things, the Act also (i)
requires chief executive officers and chief financial officers to certify to the accuracy of
periodic reports filed with the Securities and Exchange Commission (the SEC); (ii) imposes new
disclosure requirements regarding internal controls, off-balance-sheet transactions, and pro forma
(non-GAAP) disclosures; (iii) accelerates the time frame for reporting of insider transactions and
periodic disclosures by public companies; and (iv) requires companies to disclose whether or not
they have adopted a code of ethics for senior financial officers and whether the audit committee
includes at least one audit committee financial expert. The Act also requires the SEC, based on certain enumerated factors, to regularly and systematically
review corporate filings. To deter wrongdoing, the Act: (i) subjects bonuses issued to top
executives to disgorgement if a restatement of a companys financial statements was due to
corporate misconduct; (ii) prohibits an officer or director from misleading or coercing an auditor;
(iii) prohibits insider trades during pension fund blackout periods; (iv) imposes new criminal
penalties for fraud and other wrongful acts; and (v) extends the period during which certain
securities fraud lawsuits can be brought against a company or its officers. As a public reporting company, the Company is subject to the requirements of the Act and related
rules and regulations issued by the SEC and NASDAQ. The Company anticipates that it will incur
additional expense as a result of the Act, but it does not expect that such compliance will have a
material impact on its business. Employees The Las Vegas area is experiencing a period of rapid growth, placing a premium on highly qualified
employees in a number of industries, including the financial services industry. The Companys
business plan includes, and is dependent upon, its hiring and retaining highly qualified and
motivated executives and employees at every level, and, in particular, experienced loan originators
and branch managers. The Company expects to experience substantial competition in its endeavor to
identify, hire and retain the top-quality employees that it believes are a key to its future
success. If the Company is unable to hire and retain qualified employees, it may not be able to
grow its franchise and successfully execute its business strategy. Due to the above, the Company continues to strive to make Valley Bank an employer of choice. As
the Companys reputation as a good place to work expands, it expects to continue to have the
hiring success it has had in the past. In fact, the Company aggressively pursues the best
employees in the area, as they contribute mightily to its efficiency ratio. Valley Bank had a total of forty-five (45) full-time and two (2) part-time employees at December
31, 2004. There are no separate full-time employees of Valley Bancorp. 11




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##### Table of Contents



Item 2. Properties Valley Bank owns the bank building at 370 North Stephanie Street, Henderson, Nevada. In
addition to the approximately 9,000 sq. ft. two-story building, Valley Bank owns approximately 0.8
acres of land on which the building stands. This building and land is not subject to any mortgage
or encumbrance. Valley Bank also owns the bank building, of approximately 5,700 sq. ft., at 3500 W. Sahara Avenue,
Las Vegas, Nevada, and the approximately 0.6 acres on which the building stands. In connection with
the purchase of this building and land, Valley Bank assumed a loan in the principal amount of
$549,996, payable monthly with a final maturity of July 1, 2013. Valley Bank leases the branch office building, of approximately 5,400 sq. ft., at 3250 S. Highway
160 in Pahrump, Nevada. On February 1, 2001, Valley Bank entered into a lease with Joe Sladek CPCU
with respect to the Pahrump branch office. The lease is for an initial term of five years with two
five-year tenant options and requires aggregate payments of $110,000 through 2006. On January 20, 2005, Valley Bank has purchased a new 9,960-square-foot two-story office building at
the corner of Jones and Charleston Boulevard in Las Vegas, Nevada. The purchase price was $1.8
million. After tenant improvements are completed, occupancy is tentatively scheduled for the second
quarter of the year. This building will serve as the administrative headquarters for both Valley
Bancorp and Valley Bank. Although we expect to open additional branches in the future if the opportunities exist, management
believes that its existing facilities are adequate for its present purposes. 
 Item 3. Legal Proceedings There are no major pending legal proceedings to which the Company is a party or to which any
of its properties are subject. There are no material proceedings known to the Company to be
contemplated by any governmental authority. The Company is involved in a variety of litigation
matters in the ordinary course of its business and anticipates that it will become involved in new
litigation matters from time to time in the future. Management believes that any liability
resulting from such matters would not have a material adverse effect on the consolidated financial
statements. 
 Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders during the fourth quarter of 2004. 12




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##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities Since September 23, 2004, the common stock of the Company has been traded on the Nasdaq Stock
Market (NASDAQ Symbol: VLLY) and quoted daily in leading financial publications. As of February
28, 2005, there were 1,381 common stockholders of record. Prior to the completion of the Companys initial registered public offering, there has been no
public market for the common stock. Trades prior to that time cannot be characterized as amounting
to an active market. Those shares were traded by individuals on a personal basis and were not
listed on any exchange or traded on the over-the-counter market prior to September 23, 2004. The following table presents the information regarding the historical market prices of the
Companys common stock as traded on the Nasdaq Stock Market since September 23, 2004. Market Prices Period
    
    High
    
    Low
    
    CloseThird Quarter 2004
    
    $23.85
    
    $20.85
    
    $23.25Fourth Quarter 2004
    
    $45.00
    
    $23.00
    
    $42.69
 The Company has never paid a cash dividend on the common stock and does not anticipate paying any
cash dividends in the foreseeable future. The Company currently intends to retain any earnings to
help fund the growth of Valley Bank. The Company cannot predict when such dividends, if any, will
ever be paid. The payment of dividends, if any, will at all times be subject to the discretion of
the board of directors and the ability of Valley Bank to pay dividends to Valley Bancorp, as well
as restrictions contained in the Nevada Revised Statutes. Valley Bancorp is a legal entity separate and distinct from Valley Bank. Since Valley Bancorp is a
holding company with no significant assets other than Valley Bank, the Company presently depends
upon dividends from Valley Bank for the revenue. Accordingly, the ability to pay dividends depends
upon the receipt of dividends or other capital distributions from Valley Bank. Valley Banks
ability to pay dividends to Valley Bancorp is subject to, among other things Valley Banks
financial condition and federal and state regulatory limitations. Under Nevada law, a corporation cannot pay a dividend if, after giving effect to the dividend: (i)
the corporation would not be able to pay its debts as they come due, or (ii) the corporations
assets would be less than the sum of its total liabilities plus the amount that would be needed, if
the corporation were to be dissolved at the time of distribution, to satisfy the dissolution rights
of any preferred stockholders. In addition to federal regulatory limitations on Valley Banks ability to pay dividends to Valley
Bancorp, Nevada law provides that a Nevada bank may not declare or pay a dividend if the effect of
the payment of such dividend would be to reduce the stockholders equity of the bank to a level
below (i) the initial stockholders equity of the bank, or (ii) 6% of the total deposit liability
of the bank, as determined by the Commissioner of Financial Institutions Division for the State of
Nevada. Equity Compensation Plan Information The Company maintains two compensation plans that provide for the issuance of our common stock to
officers and other employees, directors and consultants. These consist of the Incentive Stock
Option Plan and the Non-Qualified 13




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##### Table of Contents



Stock Option Plan, each of which have been approved by stockholders. The following table sets
forth information regarding outstanding options and shares reserved for future issuance under the
foregoing plans as of December 31, 2004: Number of sharesremaining available forNumber of shares to be
    
    
    Weighted-average
    
    
    future issuance underissued upon exercise of
    
    
    exercise price of
    
    
    equity compensationoutstanding options,
    
    
    outstanding options,
    
    
    plans (excluding shareswarrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
stockholders
    
    
    245,100
    
    
    $
    9.85
    
    
    
    7,505Equity compensation
plans not approved by
stockholders
    
    
    0
    
    
    $
    0
    
    
    
    0
 
 Item 6. Selected Financial Data Summary of Selected Consolidated Financial Data At or For the Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000 (1)(Dollars in thousands, except per share data)Financial Condition Data:Total assets
    
    $
    273,624
    
    
    $
    186,916
    
    
    $
    152,372
    
    
    $
    105,476
    
    
    $
    90,609Total earning assets
    
    
    259,746
    
    
    
    178,104
    
    
    
    144,870
    
    
    
    99,986
    
    
    
    85,278Loans, net
    
    
    196,075
    
    
    
    133,795
    
    
    
    113,079
    
    
    
    92,172
    
    
    
    64,603Securities (all available for sale)
    
    
    36,413
    
    
    
    19,006
    
    
    
    3,029
    
    
    
    728
    
    
    
    3,390Interest-bearing deposits at other financial institutions
    
    
    9,244
    
    
    
    14,865
    
    
    
    8,110
    
    
    
    2,674
    
    
    
    2,173Federal funds sold
    
    
    17,850
    
    
    
    8,875
    
    
    
    19,430
    
    
    
    3,465
    
    
    
    14,390Deposits
    
    
    236,211
    
    
    
    169,798
    
    
    
    140,036
    
    
    
    93,949
    
    
    
    79,860Total liabilities
    
    
    237,370
    
    
    
    170,919
    
    
    
    141,136
    
    
    
    94,438
    
    
    
    80,261Total stockholders equity
    
    
    36,254
    
    
    
    15,997
    
    
    
    11,236
    
    
    
    11,038
    
    
    
    10,348Statement of Operations Data:Interest income
    
    $
    13,458
    
    
    $
    10,006
    
    
    $
    8,602
    
    
    $
    7,968
    
    
    $
    5,582Interest expense
    
    
    2,708
    
    
    
    2,992
    
    
    
    3,250
    
    
    
    3,907
    
    
    
    3,086Net interest income
    
    
    10,750
    
    
    
    7,014
    
    
    
    5,352
    
    
    
    4,061
    
    
    
    2,496Provision for loan losses
    
    
    632
    
    
    
    478
    
    
    
    1,596
    
    
    
    340
    
    
    
    464Net interest income after provision for loan losses
    
    
    10,118
    
    
    
    6,536
    
    
    
    3,756
    
    
    
    3,721
    
    
    
    2,032Noninterest income
    
    
    295
    
    
    
    296
    
    
    
    210
    
    
    
    218
    
    
    
    90Noninterest expenses
    
    
    5,543
    
    
    
    4,725
    
    
    
    3,772
    
    
    
    3,186
    
    
    
    1,985Income before income tax expense (benefit)
    
    
    4,870
    
    
    
    2,107
    
    
    
    194
    
    
    
    753
    
    
    
    137Income tax expense (benefit)
    
    
    1,659
    
    
    
    708
    
    
    
    72
    
    
    
    96
    
    
    
    (117
    )Net income
    
    $
    3,211
    
    
    $
    1,399
    
    
    $
    122
    
    
    $
    657
    
    
    $
    254
 14




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##### Table of Contents



At or For the Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000 (1)(Dollars in thousands, except per share data)Per Share Data:Earnings per share  Basic
    
    $
    1.59
    
    
    $
    0.84
    
    
    $
    0.09
    
    
    $
    0.46
    
    
    $
    0.20Earnings per share  Diluted
    
    
    1.53
    
    
    
    0.81
    
    
    
    0.08
    
    
    
    0.45
    
    
    
    0.20Book value per share
    
    $
    12.99
    
    
    $
    9.27
    
    
    $
    7.81
    
    
    $
    7.72
    
    
    $
    7.25Weighted average shares outstanding  Basic
    
    
    2,017,094
    
    
    
    1,659,750
    
    
    
    1,432,871
    
    
    
    1,428,516
    
    
    
    1,245,656Weighted average shares outstanding  Diluted
    
    
    2,103,963
    
    
    
    1,716,744
    
    
    
    1,457,035
    
    
    
    1,461,400
    
    
    
    1,268,966Common shares outstanding
    
    
    2,790,748
    
    
    
    1,725,478
    
    
    
    1,438,130
    
    
    
    1,429,880
    
    
    
    1,427,130Performance Ratios and Other Data:Return on average assets
    
    
    1.40
    %
    
    
    0.81
    %
    
    
    0.09
    %
    
    
    0.66
    %
    
    
    0.40
    %Return on average stockholders equity
    
    
    14.61
    %
    
    
    9.92
    %
    
    
    1.09
    %
    
    
    6.12
    %
    
    
    3.09
    %Equity to assets  average balances
    
    
    9.58
    %
    
    
    8.11
    %
    
    
    8.68
    %
    
    
    10.76
    %
    
    
    12.81
    %Interest rate spread (2)
    
    
    4.54
    %
    
    
    3.92
    %
    
    
    3.94
    %
    
    
    3.64
    %
    
    
    3.37
    %Net interest margin (3)
    
    
    4.93
    %
    
    
    4.24
    %
    
    
    4.35
    %
    
    
    4.31
    %
    
    
    4.14
    %Efficiency ratio (4)
    
    
    50.16
    %
    
    
    64.80
    %
    
    
    68.03
    %
    
    
    74.46
    %
    
    
    76.76
    %Average earning assets to interest-bearing liabilities
    
    
    131.45
    %
    
    
    118.36
    %
    
    
    115.70
    %
    
    
    116.15
    %
    
    
    115.12
    %Loan originations  gross
    
    $
    166,742
    
    
    $
    84,016
    
    
    $
    55,715
    
    
    $
    62,781
    
    
    $
    58,877Asset Quality Ratios:Non-performing loans to total loans (5)
    
    
    0.09
    %
    
    
    0.59
    %
    
    
    0.47
    %
    
    
    2.58
    %
    
    
    0.99
    %Non-performing assets total assets (6)
    
    
    0.06
    %
    
    
    0.55
    %
    
    
    0.35
    %
    
    
    2.86
    %
    
    
    0.70
    %Net charge-offs to average loans
    
    
    
    
    
    
    0.11
    %
    
    
    1.27
    %
    
    
    0.14
    %
    
    
    Allowance for loan losses to non-performing loans
    
    
    1291.00
    %
    
    
    194.52
    %
    
    
    227.99
    %
    
    
    39.77
    %
    
    
    113.34
    %Allowance for loan losses to total loans at end of period
    
    
    1.11
    %
    
    
    1.15
    %
    
    
    1.07
    %
    
    
    1.02
    %
    
    
    1.11
    %Capital Ratios:Tier 1 leverage capital to average assets (7)
    
    
    14.17
    %
    
    
    8.59
    %
    
    
    7.66
    %
    
    
    10.24
    %
    
    
    12.50
    %Tier 1 capital to risk weighted assets (7)
    
    
    16.00
    %
    
    
    10.67
    %
    
    
    9.00
    %
    
    

    11.33
    %
    
    
    13.54
    %Total capital to risk weighted assets (7)
    
    
    16.97
    %
    
    
    11.72
    %
    
    
    9.99
    %
    
    
    12.31
    %
    
    
    14.49
    %
   (1)
    
    Valley Bank data only. The holding company reorganization was completed on May 1, 2001.(2)
    
    Interest rate spread represents the difference between the weighted average yield on earning assets and the weighted
average rate paid on interest-bearing liabilities.(3)
    
    Net interest margin represents net interest income as a percentage of average interest-earning assets.(4)
    
    Efficiency ratio represents noninterest expenses, excluding loan loss provision, as a percentage of the aggregate of net
interest income and noninterest income, excluding gains or (losses) on sales of securities.(5)
    
    Non-performing loans are defined as loans that are past due 90 days or more plus loans placed in nonaccrual status.(6)
    
    Non-performing assets are defined as loans that are past due 90 days or more plus loans placed in nonaccrual status
plus other real estate owned.(7)
    
    Tier 1 leverage (or core) capital are computed as a percentage of average total assets. Risk-based capital is computed
as a percentage of risk-weighted assets. 15




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Forward-Looking Statements The following discussion should be read in conjunction with the Companys audited consolidated
financial statements and the notes to those statements presented elsewhere in this report. This
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. 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. 16




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##### Table of Contents



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 increases the diversity of the loan portfolio, management will
enhance its methodology accordingly. Management 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 its
assessment of the above factors were different. This discussion and analysis should be read in conjunction with the consolidated financial
statements and accompanying notes presented elsewhere herein. Although the Company believes the
levels of the allowance as of December 31, 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. Inflation and Changing Prices The Companys consolidated financial statements and related data presented in this report have been
prepared in accordance with generally accepted accounting principles in the United States of
America, which require the measurement of financial position and operating results in terms of
historical dollars (except with respect to available-for-sale securities which are carried at
market value), without considering changes in the relative purchasing power of money over time due
to inflation. Unlike most industrial companies, substantially all of the Companys assets and
liabilities are monetary in nature. As a result, interest rates have a more significant impact on
the Companys performance than the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of goods and
services. Overview The Company is a bank holding company organized under the laws of Nevada, chartered in mid-2001.
The Company is located in Las Vegas, Nevada and conducts its operations through its subsidiary,
Valley Bank, a Nevada state-chartered bank, which commenced operations in October 1998. The Company
does not engage in any substantial activities other than acting as a holding company for Valley
Bank. The financial information presented in this report for the year ending December 31, 2000
pertains only to Valley Bank, as the holding company was not yet formed. The Company successfully completed its initial registered public offering at the end of the third
quarter 2004. Net proceeds from this offering totaled $17.1 million. With this additional capital
raised in 2004 and its historical growth trend, the Company believes that the foundation for
sustainable growth has been established. Key Indicators At or For The Years Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in thousands, except per share data)Net income
    
    $
    3,211
    
    
    $
    1,399
    
    
    $
    122Basic earnings per share
    
    $
    1.59
    
    
    $
    0.84
    
    
    $
    0.09Diluted earnings per share
    
    
    1.53
    
    
    
    0.81
    
    
    
    0.08Total assets
    
    $
    273,624
    
    
    $
    186,916
    
    
    $
    152,372Total loans (net)
    
    
    196,075
    
    
    
    133,795
    
    
    
    113,079Total deposits
    
    
    236,211
    
    
    
    169,798
    
    
    
    140,036Net interest margin
    
    
    4.93
    %
    
    
    4.24
    %
    
    
    4.35
    %Return on assets
    
    
    1.40
    %
    
    
    0.81
    %
    
    
    0.09
    %Return on equity
    
    
    14.61
    %
    
    
    9.92
    %
    
    
    1.09
    %Efficiency ratio
    
    
    50.16
    %
    
    
    64.80
    %
    
    
    68.03
    %
 17




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##### Table of Contents



Net income for 2004 was $3.2 million, or $1.53 per diluted share, as compared to $1.4 million, or
$0.81 per diluted share, in 2003 and $122,000, or $0.08 per diluted share, in 2002. The net
interest margin for 2004 was 4.93% as compared to 4.24% for 2003 and 4.35% for 2002. Increased
non-interest bearing demand deposits and higher loan balances outstanding contributed to this
improved net interest margin in 2004. The Company made a provision for loan losses of $632,000 in
2004 as compared to $478,000 in 2003, primarily in recognition of the significant loan growth
experienced in 2004. The provision for loan losses for 2002 was $1.6 million reflecting a
charge-off of an Equipment Lease Loan. Please see a discussion on Provision for Loan Losses
below for more details. Non-interest income for 2004 of $295,000 was flat to 2003 of $296,000.
Non-interest income for 2002 was $210,000. Higher average balances on deposit accounts maintained
by the customers continued to hold down service charges income. Non-interest expense for 2004 was
$5.5 million as compared to $4.7 million for 2003 and $3.8 million for 2002. Of the $818,000 full
year non-interest expense variance for 2004 to 2003, $609,000 was due to increased compensation and
employee benefits costs while $209,000 was due to increased other operating expenses. Of the
$953,000 full year non-interest expense variance for 2003 to 2002, $603,000 was due to increased
compensation and employee benefits costs while $350,000 was due to increased other operating
expenses. The Company experienced strong asset growth for the years ended December 31, 2004, 2003,and 2002.
Total assets at December 31, 2004 were $273.6 million as compared to $186.9 million at December 31,
2003 and $152.4 million at December 31, 2002. This asset growth of $86.7 million or 46.4% from
December 31, 2003 can primarily be attributed to the strong loan growth. In order to fund this
increased loan demand, the Company increased total deposits through a combination of both retail
and wholesale deposits. Total assets grew $34.5 million or 22.6% in 2003 and $46.9 million or
44.5% in 2002 from the previous year, primarily as a result of loan originations. Funding for this
growth came primarily from deposit growth resulting from the second branch opening in 2001 and
third branch opening in 2002 as well as from relationships with new and existing business
customers. Analysis of Statement of Income Net Interest Income Net interest income before the provision for loan losses for 2004 increased 53.3% to $10.8 million,
as compared to $7.0 million for 2003. Net interest income before the provision for loan losses in
2003 increased 31.1% to $7.0 million, as compared to $5.4 million in 2002. The increases in net
interest income during 2004 when compared to the same periods in the prior year reflect the
substantial increases in interest-earning assets (primarily loans) combined with decreases in the
cost of funds on the deposits during such periods. The increases in interest-earning assets reflect
the Companys strategy of growing the loan portfolio. The decreases in cost of funds are
attributable to the eleven interest rate cuts by the Federal Reserve Board during 2001, combined
with the Companys decision during 2001 to focus more on non-time deposit products as well as
non-interest bearing deposits to build more core deposits. In addition, since the deposits repriced
more quickly than the loans, the cost of funds declined more rapidly than the yield earned on
interest-earning assets. Interest Income Total interest income increased 34.5% to $13.5 million for 2004, as compared to $10.0 million for
2003. Total interest income was $8.6 million for 2002. This represents an increase of $1.4 million
or 16.3% for year 2003 as compared to year 2002. Interest income on loans totaled $12.6 million for
2004, $9.3 million for 2003, and $8.2 million for 2002. Substantially all interest income in each
period is derived from loans. 18




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##### Table of Contents



The increases in interest income from period to period reflect the increases in the average balance
of loans receivable. While loan volume increased, yield on loans steadily declined from 7.97% at
December 31, 2002, to 7.43% at December 31, 2003 and to 7.26% at December 31, 2004. This decline in
the average yield reflected the overall decrease in market rates of interest that occurred over
this period. Interest Expense Total interest expense for 2004 was $2.7 million as compared to $3.0 million for 2003 and $3.3
million for 2002. Although total deposits increased from period to period, the interest expense has
been decreasing from prior periods due to the lower interest rate environment as well as the
increase in non-time deposits and non-interest bearing deposits as a percentage of total deposits. The average balance of interest-bearing liabilities has increased from $139.6 million for 2003 to
$165.9 million for 2004. The effect on interest expense of the increase in the average balance of
liabilities was partially offset by a decline in the average rate paid on deposits due to the
general decline in market rates of interest during such periods. The average rate paid on
interest-bearing deposits declined from 2.12% for 2003 to 1.62% for 2004. Interest expense on borrowings for 2004 consisted of Federal discount window borrowings for three
days and the note payable associated with the purchase of the Sahara Branch office in Las Vegas,
Nevada in 2002. This note payable carries an interest rate of 7.13% with a remaining term to
maturity of 8 years and 7 months from December 31, 2004. Net Interest Margin The net interest margin at December 31, 2004 of 4.93% improved 0.69% from 4.24% at December 31,
2003. This improvement was due primarily to lower cost of funds on deposits. Cost of funds on
interest-bearing deposits decreased 0.51% from 2.14% at December 31, 2003 to 1.63% at December 31,
2004. Net interest margin at December 31, 2002 was 4.35%. Despite periodic decreases by the Federal
Reserve Bank in federal funds borrowing rates (which totaled 5.50% from 2001 through 2003) the net
interest margin remains relatively stable because of the active asset and liability management. As previously noted, net interest income is the difference between the interest income and fees
earned on loans and investments, and the interest expense paid on deposits and other borrowings.
The amount by which interest income exceeds interest expense depends on two factors: the volume and
mix of earning assets as compared to that of interest bearing deposits and borrowings, and the
interest rates earned versus the interest rates paid on each of the balance sheet portfolios. The
net interest margin is net interest income expressed as a percentage of average earning assets. 19




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##### Table of Contents



The margin, average balances, related income and expenses, and resulting yields and rates are
presented in Table 1. An analysis of changes in net interest income is presented in Table 2. Table 1
Consolidated Average Balances and Interest Rates Years Ended December 31,2004
    
    
    2003
    
    
    2002Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance (1)
    
    
    Expense
    
    
    Cost
    
    
    Balance (1)
    
    
    Expense
    
    
    Cost
    
    
    Balance (1)
    
    
    Expense
    
    
    Cost(Dollars in thousands)AssetsEarning assets:Loans (2) (3) (4)
    
    $
    172,967
    
    
    $
    12,563
    
    
    
    7.26
    %
    
    $
    125,794
    
    
    $
    9,349
    
    
    
    7.43
    %
    
    $
    103,242
    
    
    $
    8,224
    
    
    
    7.97
    %Federal funds sold (5)
    
    
    18,447
    
    
    
    257
    
    
    
    1.39
    %
    
    
    18,224
    
    
    
    200
    
    
    
    1.10
    %
    
    
    14,177
    
    
    
    224
    
    
    
    1.58
    %Interest bearing deposits (5)
    
    
    11,576
    
    
    
    244
    
    
    
    2.11
    %
    
    
    10,631
    
    
    
    228
    
    
    
    2.14
    %
    
    
    4,485
    
    
    
    118
    
    
    
    2.63
    %Investment securities (5)
    
    
    15,098
    
    
    
    394
    
    
    
    2.61
    %
    
    
    10,594
    
    
    
    229
    
    
    
    2.16
    %
    
    
    1,216
    
    
    
    36
    
    
    
    2.96
    %Total earning assets and interest income
    
    
    218,088
    
    
    
    13,458
    
    
    
    6.17
    %
    
    
    165,243
    
    
    
    10,006
    
    
    
    6.06
    %
    
    
    123,120
    
    
    
    8,602
    
    
    
    6.99
    %Non-interest earning assets:Cash and due from banks
    
    
    7,386
    
    
    
    
    
    
    
    
    
    
    
    4,402
    
    
    
    
    
    
    
    
    
    
    
    3,099Premises and equipment
    
    
    4,382
    
    
    
    
    
    
    
    
    
    
    
    4,557
    
    
    
    
    
    
    
    
    
    
    
    3,264Other assets
    
    
    1,702
    
    
    
    
    
    
    
    
    
    
    
    917
    
    
    
    
    
    
    
    
    
    
    
    1,364Allowance for credit losses
    
    
    (1,976
    )
    
    
    
    
    
    
    
    
    
    
    (1,353
    )
    
    
    
    
    
    
    
    
    
    
    (1,078
    )Total assets
    
    $
    229,582
    
    
    
    
    
    
    
    
    
    
    $
    173,766
    
    
    
    
    
    
    
    
    
    
    $
    129,769Liabilities and Stockholders EquityInterest bearing liabilities:Interest bearing demand deposits
    
    $
    69,771
    
    
    $
    628
    
    
    
    0.90
    %
    
    $
    56,504
    
    
    $
    619
    
    
    
    1.10
    %
    
    $
    37,010
    
    
    $
    590
    
    
    
    1.59
    %Savings deposits
    
    
    11,629
    
    
    
    57
    
    
    
    0.49
    %
    
    
    8,478
    
    
    
    70
    
    
    
    0.83
    %
    
    
    6,135
    
    
    
    82
    
    
    
    1.34
    %Time deposits $100,000 or more
    
    
    32,502
    
    
    
    728
    
    
    
    2.24
    %
    
    
    29,617
    
    
    
    871
    
    
    
    2.94
    %
    
    
    22,976
    
    
    
    853
    
    
    
    3.71
    %Other time deposits
    
    
    51,439
    
    
    
    1,259
    
    
    
    2.45
    %
    
    
    44,491
    
    
    
    1,394
    
    
    
    3.13
    %
    
    
    40,193
    
    
    
    1,717
    
    
    
    4.27
    %Short-term borrowings
    
    
    76
    
    
    
    1
    
    
    
    1.32
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term borrowings
    
    
    487
    
    
    
    35
    
    
    
    7.19
    %
    
    
    524
    
    
    
    38
    
    
    
    7.25
    %
    
    
    97
    
    
    
    8
    
    
    
    8.25
    %Total interest bearing liabilities
    
    
    165,904
    
    
    
    2,708
    
    
    
    1.63
    %
    
    
    139,614
    
    
    
    2,992
    
    
    
    2.14
    %
    
    
    106,411
    
    
    
    3,250
    
    
    
    3.05
    %Noninterest-bearing liabilities:Demand deposits
    
    
    40,877
    
    
    
    
    
    
    
    
    
    
    
    19,369
    
    
    
    
    
    
    
    
    
    
    
    11,529Other liabilities
    
    
    817
    
    
    
    
    
    
    
    
    
    
    
    687
    
    
    
    
    
    
    
    
    
    
    
    561Stockholders equity
    
    
    21,984
    
    
    
    
    
    
    
    
    
    
    
    14,096
    
    
    
    
    
    
    
    
    
    
    
    11,268Total liabilities and stockholders equity
    
    $
    229,582
    
    
    
    
    
    
    
    
    
    
    $
    173,766
    
    
    
    
    
    
    
    
    
    
    $
    129,769Net Interest Spread (6)
    
    
    
    
    
    
    
    
    
    
    4.54
    %
    
    
    
    
    
    
    
    
    
    
    3.92
    %
    
    
    
    
    
    
    
    
    
    
    3.94
    %Net interest income/margin (7)
    
    
    
    
    
    $
    10,750
    
    
    
    4.93
    %
    
    
    
    
    
    $
    7,014
    
    
    
    4.24
    %
    
    
    
    
    
    $
    5,352
    
    
    
    4.35
    %
   (1)
    
    Average balances are obtained from the best available daily data.(2)
    
    Loans are gross of allowance for credit losses but after unearned fees.(3)
    
    Non-accruing loans are included in the average balances.(4)
    
    Interest income includes loan fees of $398,000, $264,000, and $125,000 for the years ended December 31, 2004, 2003, and 2002,
respectively.(5)
    
    All investments are taxable.(6)
    
    Represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.(7)
    
    Net interest margin represents net interest income as a percentage of average interest-earning assets. 20




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##### Table of Contents



Table 2
Analysis of Changes in Net Interest Income Increase/(Decrease) Due ToTotal Net IncreaseVolume
    
    
    Rate
    
    
    Rate/Volume
    
    
    (Decrease)12/31/04
    
    
    12/31/03
    
    
    12/31/04
    
    
    12/31/03
    
    
    12/31/04
    
    
    12/31/03
    
    
    12/31/04
    
    
    12/31/03(Dollars in thousands)Earning assets:Loans
    
    $
    3,506
    
    
    $
    1,796
    
    
    $
    (212
    )
    
    $
    (551
    )
    
    $
    (80
    )
    
    $
    (120
    )
    
    $
    3,214
    
    
    $
    1,125Federal funds sold
    
    
    2
    
    
    
    64
    
    
    
    54
    
    
    
    (68
    )
    
    
    1
    
    
    
    (20
    )
    
    
    57
    
    
    
    (24
    )Interest bearing
deposits
    
    
    20
    
    
    
    162
    
    
    
    (4
    )
    
    
    (22
    )
    
    
    0
    
    
    
    (30
    )
    
    
    16
    
    
    
    110Investment
securities
    
    
    97
    
    
    
    278
    
    
    
    47
    
    
    
    (10
    )
    
    
    21
    
    
    
    (75
    )
    
    
    165
    
    
    
    193Interest income
    
    
    3,625
    
    
    
    2,300
    
    
    
    (115
    )
    
    
    (651
    )
    
    
    (58
    )
    
    
    (245
    )
    
    
    3,452
    
    
    
    1,404Interest bearing
liabilities:Interest bearing
demand deposits
    
    
    145
    
    
    
    311
    
    
    
    (110
    )
    
    
    (185
    )
    
    
    (26
    )
    
    
    (97
    )
    
    
    9
    
    
    
    29Savings deposits
    
    
    26
    
    
    
    31
    
    
    
    (28
    )
    
    
    (31
    )
    
    
    (11
    )
    
    
    (12
    )
    
    
    (13
    )
    
    
    (12
    )Time deposits
$100,000 or more
    
    
    85
    
    
    
    247
    
    
    
    (208
    )
    
    
    (177
    )
    
    
    (20
    )
    
    
    (52
    )
    
    
    (143
    )
    
    
    18Other time deposits
    
    
    218
    
    
    
    184
    
    
    
    (305
    )
    
    
    (458
    )
    
    
    (48
    )
    
    
    (49
    )
    
    
    (135
    )
    
    
    (323
    )Total interest
bearing deposits
    
    
    474
    
    
    
    773
    
    
    
    (651
    )
    
    
    (851
    )
    
    
    (105
    )
    
    
    (210
    )
    
    
    (282
    )
    
    
    (288
    )Short-term
borrowings
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    1
    
    
    
    0Long-term
borrowings
    
    
    (3
    )
    
    
    35
    
    
    
    0
    
    
    
    (1
    )
    
    
    0
    
    
    
    (4
    )
    
    
    (3
    )
    
    
    30Total interest
expense
    
    
    471
    
    
    
    808
    
    
    
    (651
    )
    
    
    (852
    )
    
    
    (104
    )
    
    
    (214
    )
    
    
    (284
    )
    
    
    (258
    )Net interest income
    
    $
    3,154
    
    
    $
    1,492
    
    
    $
    536
    
    
    $
    201
    
    
    $
    46
    
    
    $
    (31
    )
    
    $
    3,736
    
    
    $
    1,662
 Provision for Loan losses The Company recorded provisions for loan losses of $632,000 during 2004 as compared to $478,000 for
2003, primarily as a result of increased loan portfolio. The provision was $1.6 million during
2002. The increases were the result of an increased loan portfolio in each of these years and, with
respect to 2002, the charge-off of an Equipment Lease Loan. The Company also recovered $360,000
during 2004 from the Equipment Lease Loan that was charged off in 2002. This recovery was recorded
as an increase to the allowance for loan losses. As part of the settlement, the Company is entitled
to receive $20,000 per quarter until the Company receives a total of $550,000 (including the
$360,000 received in 2004). These additional payments, while smaller than the initial recovery,
will be recognized as recoveries to the allowance for loan losses as they are received, and may
affect the amount of the provision in future periods. The provisions the Company established during
2004, 2003, and 2002 were made in order to maintain the allowance for loan losses at what
management believed to be an adequate level. The assessment of the adequacy of the allowance for loan losses is based upon a number of
quantitative and qualitative factors, including levels and trends of past due and non-accrual
loans, levels and trends in asset classifications, change in volume and mix of loans, and
collateral values. Quantitative factors used to assess the adequacy of the allowance for loan
losses are established based upon managements assessment of the credit risk in the portfolio,
historical loan loss experience and the loan underwriting policies. Management believes that its allowance for loan losses at December 31, 2004 was adequate.
Nevertheless, there can be no assurance that additions to such allowance will not be necessary in
future periods, particularly as the Company continues to grow the loan portfolio. In addition,
various regulatory agencies, as an integral part of their examination process, periodically review
the Companys loan portfolio and the sufficiency of the allowance for loan losses from their
perspective as the regulators. These agencies may require increases to the allowance based on their
judgments of the information available to them at the time of their examination. Non-Interest Income Non-interest income consists primarily of income earned on banking and service charge fees.
Non-interest income for 2004 of $295,000 was flat to 2003 of $296,000. Higher average balances on
deposit accounts maintained by the customers continued to hold down service charge income.
Non-interest income for 2002 was $210,000. 21




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##### Table of Contents



Table 3 presents the major components of non-interest income. Table 3
Non-Interest Income For the Years Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in thousands)Banking and service charge fees
    
    $
    255
    
    
    $
    236
    
    
    $
    151Gain on sale of securities
    
    
    (6
    )
    
    
    18
    
    
    
    17Other income
    
    
    46
    
    
    
    42
    
    
    
    42Total non-interest income
    
    $
    295
    
    
    $
    296
    
    
    $
    210
 Non-Interest Expense Total non-interest expense increased to $5.5 million in 2004 as compared to $4.7 million for 2003.
Total non-interest expense for 2002 was $3.8 million. As a percentage of average earning assets,
total operating expense was 2.54% 2004 as compared 2.86% 2003, and 3.06% for 2002. This positive
trend reflects the Companys efforts to control expense while pursuing growth. The overhead efficiency ratio for all the periods under review declined due to the Companys growth
and expense control. The overhead 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. The overhead efficiency ratio was 50.16% for 2004 as compared
to 64.80% for 2003 and 68.03% for 2002. Table 4 shows the major components of non-interest expense. Table 4
Non-Interest Expense For the Years Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in thousands)Salaries and employee benefits
    
    $
    3,130
    
    
    $
    2,521
    
    
    $
    1,918Occupancy and equipment
    
    
    573
    
    
    
    589
    
    
    
    570Data processing
    
    
    347
    
    
    
    311
    
    
    
    254Legal, professional and consulting
    
    
    258
    
    
    
    300
    
    
    
    245Advertising and public relations
    
    
    138
    
    
    
    133
    
    
    
    126Outside services
    
    
    251
    
    
    
    227
    
    
    
    163Office supplies & printing
    
    
    154
    
    
    
    127
    
    
    
    110Telephone
    
    
    158
    
    
    
    123
    
    
    
    82Director fees
    
    
    114
    
    
    
    89
    
    
    
    68Federal Reserve Bank & correspondent bank fees
    
    
    112
    
    
    
    81
    
    
    
    64Other
    
    
    308
    
    
    
    224
    
    
    
    172Total non-interest expense
    
    $
    5,543
    
    
    $
    4,725
    
    
    $
    3,772As a % of average earning assets
    
    
    2.54
    %
    
    
    2.86
    %
    
    
    3.06
    %Efficiency Ratio (1)
    
    
    50.16
    %
    
    
    64.80
    %
    
    
    68.03
    %
   (1)
    
    Efficiency ratio represents non-interest expenses, excluding loan loss provision, as a percentage of the
aggregate of net interest income and non-interest income, excluding gains or (losses) on sales of securities. 22




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##### Table of Contents



Salaries and employee benefits increased $609,000 or 24.2% to $3.1 million for 2004 as compared to
$2.5 million for 2003. This increase was due to new hires, salary adjustments, and $449,000 in
year-end incentive payouts for various personnel. For 2002, salaries and employees benefits expense
was $1.9 million. The increase of $603,000 in 2003 as compared to 2002 was due to several factors.
First, Valley Bank opened its third branch location in October 2002 and as such the full year
impact of this branch operation was reflected in 2003. Secondly, there were year-end incentive
payouts of $26,000 in 2002, while year-end payouts totaled $150,000 in 2003. Finally, new hires and
salary adjustments for various personnel contributed to the remaining variance. Occupancy and equipment expense was $573,000 for 2004 as compared to $589,000 for 2003 and $570,000
for 2002. Occupancy and equipment expense remained relatively the same for the past three years as
no new branch opening has occurred since 2002. Data processing expense was $347,000 for 2004 as compared to $311,000 for 2003 and $254,000 for
2002. Variances between these years were due primarily to higher volume of loan and deposit
accounts and transactions being processed. Legal, professional and consulting expense decreased $42,000 or 14.0% to $258,000 for 2004 as
compared to $300,000 for 2003. This decrease was due primarily to lower legal expense associated
with a loan foreclosure and the equipment lease agreement lawsuit, which were both, settled in the
last quarter of 2003. For 2002, legal, professional, and consulting expense was $245,000. The
increase of $55,000 for 2003 was due mainly to the legal fees associated with the previously
mentioned loan lawsuit and the equipment lease agreement lawsuit. Advertising and public relations expenses for 2004, 2003, and 2002, were $138,000, $133,000, and
$126,000, respectively. These expenses remained stable from year to year. Outside services expense for 2004 was $251,000 as compared to $227,000 for 2003. For 2002, this
expense was $163,000. Variances between these years were due to higher courier and armored-car
expenses between branches as well as ATM network processing costs associated with higher
transaction volume. Other operating expenses for 2004 were $846,000 as compared to $644,000 for 2003 and $496,000 for
2002. The increases between years were due to the higher telephone expense, loan collection
expense, printing and supplies and bank correspondent bank fees associated with more loan and
deposit activities. Income Taxes Income tax expense for 2004 was $1.7 million as compared to $708,000 for 2003 and $72,000 for 2002,
reflecting an effective tax rate of 34%, 34% and 37%, respectively. The effective tax rate (income
tax expense divided by net income before taxes) for each period approximates the maximum U.S.
federal income tax rate of 35% for each year. 23




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##### Table of Contents



Balance Sheet Analysis Investment Securities The investment portfolio serves several purposes: (i) it provides liquidity to mitigate uneven cash
flows from the loan and deposit activities of customers; (ii) it provides a source of pledged
assets for securing public deposits and borrowed funds; (iii) it is a large base of assets, the
maturity and interest rate characteristics of which can be changed more readily than the loan
portfolio to better match changes in the deposit base and other funding sources; (iv) it is an
alternative interest-earning use of funds when loan demand is light; and (v) it may provide
partially tax exempt income. The major components of the investment portfolio are: (i) Fed Funds Sold, which are temporary
overnight sales of excess funds to correspondent banks, (ii) interest-bearing deposits at other
financial institutions and (iii) investment securities. Fed funds sold totaled $17.9 million at
December 31, 2004, $8.9 million at December 31, 2003, and $19.4 million at December 31, 2002.
Fluctuation in Fed funds sold from year to year was due to cash flow activities of the Company and
the daily liquidity that the Company needs to maintain to meet loan originations, large deposit
account activities, and day to day operations. Interest-bearing deposits at other financial institutions consist of certificates of deposit and
money market deposit accounts spread over many financial institutions to take advantage of 100%
Federal Deposit Insurance coverage. These interest-bearing deposits totaled $9.2 million at
December 31, 2004, $14.9 million at December 31, 2003, and $8.1 million at December 31, 2002. All
of these interest-bearing deposits have a maturity date of two years or less. All of the investment securities are classified as available-for-sale pursuant to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities and are reported at fair value,
with unrealized gains and losses excluded from earnings and instead reported as a separate
component of stockholders equity. The investment securities portfolio is primarily composed of US Agency issues with small amounts in
mortgage-backed securities and collateralized mortgage obligations. The relative distribution of
these groups within the overall portfolio has varied over the periods noted in the table to follow. The Companys securities portfolio is managed in accordance with guidelines set by the Companys
Investment Policy. The Companys chief executive officer and chief financial officer in accordance
with a comprehensive written Investment Policy manage specific day-to-day transactions affecting
the securities portfolio. These securities activities are reviewed monthly or more often, as
needed, by the Management Asset Liability Committee and are reported monthly to the board of
directors. The Investment Policy, which addresses strategies, types and levels of allowable investments and
which is reviewed and approved annually by the board of directors, authorizes the Company to invest
in a variety of highly liquid, investment grade fixed-income, U.S. Government and agency securities
and other investment securities, subject to various limitations. The Investment Policy limits the
amount the Company can invest in various types of securities, places limits on terms of securities,
and limits the securities dealers that Company can conduct business with. Although the policies permit the Company to invest in any investment grade securities, as of
December 31, 2004, all of the investments have consisted of AAA-rated U.S. Government agency,
mortgage-backed securities and collateralized mortgage obligations that are insured or guaranteed
by U.S. government agencies or government-sponsored enterprises. At December 31, 2004, the
consolidated securities portfolio consisted of $29.9 million of U.S. Government agency securities,
$4.6 million of mortgage-backed securities and $1.9 million of collateralized mortgage obligations. The following tables set forth the composition of the securities portfolio and the securities
maturity distribution of the consolidated securities portfolio at the periods indicated. The
securities are shown at amortized cost and 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. 24




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##### Table of Contents



Table 5
Composition of the Securities Portfolio At December 31,2004
    
    
    2003
    
    
    2002Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value(Dollars in thousands)US Government agency securities
    
    $
    29,941
    
    
    $
    29,863
    
    
    $
    18,979
    
    
    $
    19,006
    
    
    $
    3,019
    
    
    $
    3,029Mortgage backed securities
    
    
    4,673
    
    
    
    4,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Collateralized Mortgage
Obligations
    
    
    1,931
    
    
    
    1,925
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    36,545
    
    
    $
    36,413
    
    
    $
    18,979
    
    
    $
    19,006
    
    
    $
    3,019
    
    
    $
    3,029
 Table 6
Securities Maturity Distribution and
Weighted-Average Yield to Maturity At December 31, 2004One Year
    
    
    Over One Year
    
    
    Over Five Yearsor Less
    
    
    Through Five Years
    
    
    Through Ten Years
    
    
    Over Ten YearsAmount
    
    
    Yield (1)
    
    
    Amount
    
    
    Yield (1)
    
    
    Amount
    
    
    Yield (1)
    
    
    Amount
    
    
    Yield (1)(Dollars in thousands)US Government agency securities
    
    $
    1,002
    
    
    
    2.34
    %
    
    $
    25,945
    
    
    
    3.42
    %
    
    $
    2,994
    
    
    
    4.45
    %
    
    
    
    
    
    
    Mortgage backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,728
    
    
    
    3.80
    %
    
    
    2,945
    
    
    
    4.28
    %Collateralized Mortgage Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    938
    
    
    
    3.91
    %
    
    
    993
    
    
    
    4.12
    %Total
    
    $
    1,002
    
    
    
    2.34
    %
    
    $
    25,945
    
    
    
    3.42
    %
    
    $
    5,660
    
    
    
    4.16
    %
    
    $
    3,938
    
    
    
    4.24
    %
   (1)
    
    Weighted yield. Loans The loan growth, consisting primarily of commercial loans and commercial real estate, was very
strong in 2004. Net loans after unearned fees and allowance for loan losses increased 46.6% to
$196.1 million at December 31, 2004 as compared to $133.8 million at December 31, 2003. At December
31, 2002, 2001, and 2000, net loans were $113.1 million, $92.2 million, and $64.6 million,
respectively. Net loans increased $20.7 million or 18.3% in 2003, $20.9 million or 22.7% in 2002,
$27.6 or 42.7% in 2001 and $34.7 million or 116.1% in 2000. This steady growth is consistent with
the current focus and strategy to grow the loan portfolio. For 2004, the Company funded a total of
$128.4 million in new loans and for the years 2003, 2002, 2001, and 2000, the Company funded $74.1
million, $52.3 million, $62.9 million and $52.2 million in new loans respectively. Commercial
loans, both real estate and non-real estate related loans, made up the majority of the originations
and are likely to continue to be the principle types of loans originated as they represent the
Companys expertise and support the Companys strategic plan for growth and profitability. These
positive results were due to the efforts of the business development officers, both existing and
new hires, coupled with general improvement in the overall economy at both the local and national
levels. The Companys commercial loan growth during 2004 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 development and raw land
loans. 25




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##### Table of Contents



A distribution of the loan portfolio as of December 31, 2004 is presented in Table 7 based on the
type of loans at the dates indicated. Table 7
Distribution of Loan Portfolio At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Construction and land
development loans
    
    $
    43,460
    
    
    
    21.83
    %
    
    $
    21,324
    
    
    
    15.70
    %
    
    $
    17,862
    
    
    
    15.55
    %
    
    $
    10,452
    
    
    
    11.16
    %
    
    $
    11,526
    
    
    
    17.53
    %Raw land loans
    
    
    27,468
    
    
    
    13.80
    %
    
    
    18,446
    
    
    
    13.57
    %
    
    
    12,542
    
    
    
    10.93
    %
    
    
    3,943
    
    
    
    4.21
    %
    
    
    3,465
    
    
    
    5.27
    %Commercial real estate loans (1)
    
    
    90,455
    
    
    
    45.45
    %
    
    
    65,793
    
    
    
    48.42
    %
    
    
    50,066
    
    
    
    43.62
    %
    
    
    45,073
    
    
    
    48.13
    %
    
    
    27,716
    
    
    
    42.14
    %Commercial and industrial loans
    
    
    31,726
    
    
    
    15.94
    %
    
    
    24,900
    
    
    
    18.32
    %
    
    
    26,310
    
    
    
    22.92
    %
    
    
    29,310
    
    
    
    31.30
    %
    
    
    20,756
    
    
    
    31.56
    %Other loans
    
    
    5,926
    
    
    
    2.98
    %
    
    
    5,420
    
    
    
    3.99
    %
    
    
    8,009
    
    
    
    6.98
    %
    
    
    4,871
    
    
    
    5.20
    %
    
    
    2,304
    
    
    
    3.50
    %Total loans
    
    
    199,035
    
    
    
    100.00
    %
    
    
    135,883
    
    
    
    100.00
    %
    
    
    114,789
    
    
    
    100.00
    %
    
    
    93,649
    
    
    
    100.00
    %
    
    
    65,767
    
    
    
    100.00
    %Allowance for loan losses
    
    
    (2,195
    )
    
    
    
    

    
    
    (1,563
    )
    
    
    
    
    
    
    (1,222
    )
    
    
    
    
    
    
    (947
    )
    
    
    
    
    
    
    (722
    )Unearned net loan fees
    
    
    (765
    )
    
    
    
    
    
    
    (525
    )
    
    
    
    
    
    
    (488
    )
    
    
    
    
    
    
    (530
    )
    
    
    
    
    
    
    (442
    )Net loans
    
    $
    196,075
    
    
    
    
    
    
    $
    133,795
    
    
    
    
    
    
    $
    113,079
    
    
    
    
    
    
    $
    92,172
    
    
    
    
    
    
    $
    64,603
   (1)
    
    Includes commercial real estate loans and commercial and industrial loans secured by real estate. The following Table 8 sets forth information at December 31, 2004 regarding the dollar amount
of loans maturing in portfolio based on the contractual terms to maturity or scheduled
amortization, excluding potential prepayments. Table 8
Maturities of Loan Portfolio At December 31, 2004One Year
    
    
    One to
    
    
    Afteror less
    
    
    Five Years
    
    
    Five Years
    
    
    Total(Dollars in thousands)Construction and land development loans
    
    $
    33,736
    
    
    $
    5,243
    
    
    $
    4,481
    
    
    $
    43,460Raw land loans
    
    
    21,638
    
    
    
    5,773
    
    
    
    57
    
    
    $
    27,468Commercial real estate loans (1)
    
    
    12,146
    
    
    
    18,265
    
    
    
    60,044
    
    
    $
    90,455Commercial and industrial loans
    
    
    19,372
    
    
    
    8,989
    
    
    
    3,365
    
    
    $
    31,726Other loans
    
    
    3,086
    
    
    
    2,300
    
    
    
    540
    
    
    $
    5,926Total loans
    
    $
    89,978
    
    
    $
    40,570
    
    
    $
    68,487
    
    
    $
    199,035
   (1)
    
    Includes commercial real estate loans and commercial and industrial loans secured by real
estate. The following Table 9 sets forth the dollar amount of loans held for investment due more than one
year from December 31, 2004 as shown in preceding tables, which have fixed interest rates or
floating or adjustable interest rates. 26




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##### Table of Contents



Table 9
Fixed Rates and Adjustable Rates of Loan Portfolio
Due After One Year At December 31, 2004Floating orFixed
    
    
    AdjustableRate
    
    
    Rate
    
    
    Total(Dollars in thousands)Construction and land development loans
    
    $
    113
    
    
    $
    9,611
    
    
    
    9,724Raw land loans
    
    
    1,027
    
    
    
    4,803
    
    
    
    5,830Commercial real estate loans (1)
    
    
    2,980
    
    
    
    75,329
    
    
    
    78,309Commercial and industrial loans
    
    
    5,698
    
    
    
    6,656
    
    
    
    12,354Other loans
    
    
    677
    
    
    
    2,163
    
    
    
    2,840Total
    
    $
    10,495
    
    
    $
    98,562
    
    
    $
    109,057
   (1)
    
    Includes commercial real estate loans and commercial and industrial loans
secured by real estate. Deposits Deposits increased 39.1% to $236.2 million at December 31, 2004, as compared to $169.8 million at
December 31, 2003. This strong deposit growth was due primarily to an increase in deposits from the
business customers resulting from the Sahara Branch opening in 2002 as well as time deposit
promotions conducted during the year. Non-interest bearing deposits grew $15.8 million or 59.0%
from December 31, 2003 to December 31, 2004 primarily in the business deposit category. Time
deposits grew $41.5 million or 60.7% from December 31, 2003 to December 31, 2004 primarily in the
one-year term of less than $100,000 category resulting from the promotions conducted during the
last quarter of 2004. Total deposits at December 31, 2002 were $140.0 million. An important balance sheet component impacting the net interest margin is the composition and cost
of the deposit base. The Company can improve the net interest margin to the extent that growth in
deposits can be focused in the less volatile and somewhat more traditional core deposits, which are
non-interest bearing demand, NOW accounts, savings accounts, money market deposit accounts and time
deposits under $100,000. The Company attempts to price these deposit products in order to promote
deposit growth and satisfy the liquidity requirements and offer a variety of deposit products in
order to satisfy the clients needs. Through the branch network in Las Vegas, Henderson and Pahrump, Nevada, the Company provides a wide
array of deposit products. The Company has historically relied upon, and expects to continue to
rely upon, deposits to satisfy the needs for sources of funds. The Company offers regular checking,
savings, NOW and money market deposit accounts; fixed-rate, fixed maturity retail certificates of
deposit ranging in terms from 30 days to five years; individual retirement accounts and non-retail
certificates of deposit consisting of jumbo (generally greater than or equal to $100,000)
certificates. The Company has historically relied on higher interest bearing certificates of deposit to attract
deposit market share and provide the Company with a source of funds. Recently, the Company has
begun to replace higher cost certificates of deposit with lower costing core transaction account
deposits. At December 31, 2004, the deposit portfolio was comprised of 18.1% non-interest bearing
deposits, as compared to 15.8% at December 31, 2003 and 10.4% at December 31, 2002. The Company
intends to continue these efforts at attracting deposits from business lending relationships in
order to reduce the cost of funds and improve the net interest margin. The growth of deposit accounts in the demand, NOW, and time deposit areas has primarily come from
new customers walking into a branch facility, previous customers well known to staff or management
bringing their relationships to Company, or as the result of calls made by staff, officers, or
directors to certain prospective or potential customers. The Company strives to establish both
deposit and loan relationships with all of the customers. As of December 31, 2004, the Company had $109.9 million of time deposits, consisting of $65.7
million with balances less than $100,000 and $44.2 million of jumbo certificates. Since December
31, 2001, the Company has reduced its reliance on time deposits and has been promoting its non-time
deposit products, which has proved successful in attracting a significant amount of such deposits.
At December 31, 2004, the non-time deposit accounts 27




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##### Table of Contents



totaled $126.3 million, or 53.5% of total
deposits, as compared to $101.4 million or 59.7% at December 31, 2003, $65.0 million or 46.4% at
December 31, 2002. Since December 31, 2001, the Company has increased its emphasis on attracting retail deposits from
both business and high net worth private client relationships. The money market deposit accounts
are obtained from both businesses and high net worth individuals, families, and trusts. The Company
has been successful in attracting deposits from the business lending relationships. These
businesses include property management companies, community associations, title and escrow
companies, law firms and other middle-market businesses. The Company intends to continue to focus
on such clients as well as middle market businesses in and around its market area. The following Table 10 reflects the average rates and average balance of deposit categories for the
periods indicated. Table 10
Average Rates and Average Balances of Deposits At Years Ended December 312004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageAverage
    
    
    Rate
    
    
    Average
    
    
    Rate
    
    
    Average
    
    
    RateBalance
    
    
    Paid
    
    
    Balance
    
    
    Paid
    
    
    Balance
    
    
    Paid(Dollars in thousands)Noninterest-bearing demand
deposits
    
    $
    40,877
    
    
    
    0.00
    %
    
    $
    19,369
    
    
    
    0.00
    %
    
    $
    11,529
    
    
    

    0.00
    %Interest-bearing demand deposits
    
    
    69,771
    
    
    
    0.90
    %
    
    
    56,504
    
    
    
    1.10
    %
    
    
    37,010
    
    
    
    1.59
    %Savings deposits
    
    
    11,629
    
    
    
    0.49
    %
    
    
    8,478
    
    
    
    0.83
    %
    
    
    6,135
    
    
    
    1.34
    %Time deposits $100,000 or more
    
    
    32,502
    
    
    
    2.24
    %
    
    
    29,617
    
    
    
    2.94
    %
    
    
    22,976
    
    
    
    3.71
    %Other time deposits
    
    
    51,439
    
    
    
    2.45
    %
    
    
    44,491
    
    
    
    3.13
    %
    
    
    40,193
    
    
    
    4.27
    %Total interest-bearing deposits
    
    
    165,341
    
    
    
    1.62
    %
    
    
    139,090
    
    
    
    2.12
    %
    
    
    106,314
    
    
    
    3.05
    %Total deposits
    
    $
    206,218
    
    
    
    1.30
    %
    
    $
    158,459
    
    
    
    1.86
    %
    
    $
    117,843
    
    
    
    2.75
    %
 28




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##### Table of Contents



The following Table 11 reflects deposit ending balances by category as of the dates indicated. Table 11
Deposits Distribution At December 31,2004
    
    
    2003
    
    
    2002Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofAmount
    
    
    Deposits
    
    
    Amount
    
    
    Deposits
    
    
    Amount
    
    
    Deposits(Dollars in thousands)Transaction accounts:Savings accounts
    
    $
    13,411
    
    
    
    5.68
    %
    
    $
    9,557
    
    
    
    5.63
    %
    
    $
    7,149
    
    
    
    5.11
    %Money market deposit accounts
    
    
    52,126
    
    
    
    22.07
    %
    
    
    50,194
    
    
    
    29.55
    %
    
    
    31,291
    
    
    
    22.35
    %NOW accounts
    
    
    18,102
    
    
    
    7.66
    %
    
    
    14,817
    
    
    
    8.73
    %
    
    
    11,908
    
    
    
    8.50
    %Noninterest-bearing demand
accounts
    
    
    42,664
    
    
    
    18.06
    %
    
    
    26,839
    
    
    
    15.81
    %
    
    
    14,610
    
    
    
    10.43
    %Total transaction accounts
    
    
    126,303
    
    
    
    53.47
    %
    
    
    101,407
    
    
    
    59.72
    %
    
    
    64,958
    
    
    
    46.39
    %Time Deposits:90-day
    
    
    721
    
    
    
    0.31
    %
    
    
    218
    
    
    
    0.13
    %
    
    
    67
    
    
    
    0.05
    %180-day
    
    
    3,114
    
    
    
    1.32
    %
    
    
    3,330
    
    
    
    1.96
    %
    
    
    3,450
    
    
    
    2.46
    %One-year
    
    
    81,170
    
    
    
    34.36
    %
    
    
    31,001
    
    
    
    18.26
    %
    
    
    37,127
    
    
    
    26.51
    %Over one year
    
    
    24,903
    
    
    
    10.54
    %
    
    
    33,842
    
    
    
    19.93
    %
    
    
    34,434
    
    
    
    24.59
    %Total time deposits
    
    
    109,908
    
    
    
    46.53
    %
    
    
    68,391
    
    
    
    40.28
    %
    
    
    75,078
    
    
    
    53.61
    %Total Deposits
    
    $
    236,211
    
    
    
    100.00
    %
    
    $
    169,798
    
    
    
    100.00
    %
    
    $
    140,036
    
    
    
    100.00
    %
 The following Table 12 sets forth the maturities of time deposits having principal amounts of
$100,000 or more at December 31, 2004. Table 12
Maturities Distribution of $100,000 or More Time Deposits Amount(Dollars in thousands)Time deposits maturing:Three months or less
    
    $
    16,007Over three through six months
    
    
    6,470Over six through twelve months
    
    
    20,236Over twelve months
    
    
    1,528Total
    
    $
    44,241
 Borrowings The Company may occasionally use the Fed funds line of credit and short-term Federal Discount
Window borrowings to support liquidity needs created by seasonal deposit flows, to temporarily
satisfy funding needs from increased loan demand, and for other short-term purposes. The borrowing
line at the Federal Discount Window is dependent on the level of pledged collateral. There was a
total of $11.6 million available from this source at December 31, 2004 and December 31, 2003. An
uncommitted line of credit of $6.0 million is available from a correspondent bank as of December
31, 2004. As of December 31, 2004, 2003 and 2002, no funds had been drawn from either of these
sources. Other borrowed funds as of December 31, 2004, consisted of a $467,000 note payable to a third
party, which the Company entered into in connection with the purchase of the Sahara Branch office
in Las Vegas. This note carries an interest rate of 7.13% with a remaining term of 8 years and 7
months. Since growth in core deposits may be at intervals different from loan demand, the Company may
follow a pattern of funding irregular growth in assets with overnight borrowings, which are then
replaced with core deposits. This temporary funding source is likely to be utilized for generally
short-term periods, although no assurance can be given that this will, in fact, occur. 29




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##### Table of Contents



Asset Quality The Company maintains a loan grading system consisting of eight different categories. The first
three are considered satisfactory. The other five grades range from a Watch category to a Loss
category. Grading is checked annually for the majority of the portfolio through an audit process
originated at the credit administration level of the Company, and by periodic audits by an
independent firm. This process insures a current assessment of the portfolio at the end of each
quarter. All loan commitments are reviewed or approved by the Loan Committee of the Board of Directors, or
by the Board as a whole. The Chief Credit Officer and Senior Credit Administration Officer review
all classified assets monthly to determine if the reserve allocated is sufficient based on the
heightened risk. The Board of Directors approves policy guidelines. Loan Delinquencies When a borrower fails to make a committed payment, the Company attempts to cure the deficiency by
contacting the borrower and seeking payment. Contact is generally made prior to the 15th day after
a payment is due, at which time a late payment is assessed. In most cases, deficiencies are cured
promptly. The loan is reported as past due when it exceeds 30 days delinquency. If the loan is
protected by collateral of sufficient value, the Company will generally wait 90 days following
delinquency to initiate foreclosure. If the loan is not protected by collateral of sufficient
value, the Company will initiate foreclosure, or take whatever steps are deemed necessary to
protect its interests, prior to 90 days following delinquency. Credit Risk Credit Risk is defined as the risk that borrowers or counter parties will not be able to repay
their obligations to the Company. Credit exposures reflect legally binding commitments for loans
and financial and standby letters of credit and overnight overdrafts. No individual or single group of related accounts is considered material in relation to the
Companys assets or deposits or in relation to the overall business. However, approximately 83% and
81% of the Companys loan portfolio at December 31, 2004 and 2003 consisted of real estate-secured
loans, including commercial loans secured by real estate, construction loans and real estate
mortgage loans, respectively. Moreover, the Companys business activities are currently focused in
the Clark and Nye County areas of Nevada, including Las Vegas. Consequently, its business is
dependent on the trends of this regional economy, and in particular, the commercial and residential
real estate markets. At December 31, 2004 the Company had 68 loans in excess of $1 million each,
totaling $127 million or 63.9% of the loan portfolio. At December 31, 2003 the Company had 65 loans
in excess of $1 million each, totaling $111 million or 63.2% of the loan portfolio. Approximately
3% and 4% of the Companys loan portfolio was unsecured at December 31, 2004 and 2003,
respectively. Non-performing Loans Non-performing loans are defined as non-accrual loans and loans 90 days or more overdue but still
accruing interest. Troubled debt restructurings are defined as loans that the Company has agreed to
modify by accepting below-market terms, either by granting interest rate concessions or by
deferring principal and/or interest payments. Loans are placed on non-accrual status when, in the
judgment of management, the probability of collection of interest is deemed to be insufficient to
warrant further accrual, which is generally when the loan becomes 90 days delinquent. When any such
loan is placed on non-accrual status, previously accrued but unpaid interest will be deducted from
interest income. At December 31, 2004, the Company had one non-accrual loan of $170,000. At
December 31, 2003, 2002, 2001, and 2000 the Company had non-performing loans of $804,000, $536,000,
$2.4 million, and $637,000, respectively. 30




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##### Table of Contents



Table 13 presents a five-year history of non-performing assets and accruing loans past due 90 days
or more. Table 13
Non-Performing Assets and Accruing Loans Past Due 90 Days or More Non-accrual, Past Due and Restructured LoansAt December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands)Non-accrual
    
    $
    170
    
    
    $
    704
    
    
    $
    465
    
    
    $
    2,265
    
    
    $
    637Past due 90 days or more
    
    
    
    
    
    
    100
    
    
    
    71
    
    
    
    116
    
    
    
    Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    170
    
    
    $
    804
    
    
    $
    536
    
    
    $
    2,381
    
    
    $
    637
 Table 14 presents foregone interest on non-accrual loans. Table 14
Foregone Interest on Non-Accrual Loans Gross interest income andRecognized interest incomeFor the Year EndedDecember 31, 2004Gross
    
    
    Recognized(Dollars in thousands)Nonaccrual
    
    $
    25
    
    
    $
    16Restructured loans
    
    
    
    
    
    
    Total
    
    $
    25
    
    
    $
    16
 Classified Assets Federal regulations require that each insured bank classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, federal examiners have authority
to identify problem assets, and, if appropriate, classify them. The Company has established four
classifications for potential problem assets:  
    Watch List.Generally these are assets with some moderate, short-term
weakness or suspected change in financial condition that should be
corrected within six months. The Company will either upgrade the
credit during that period, or downgrade the credit to a more severe
grade as appropriate.
    Special Mention.These assets have potential weaknesses that deserve
the attention of management, but the issues are not strong enough to
consider a more severe grade. Usually, this is a long-term problem
that is likely to remain, with significant improvement or
deterioration not expected. These loans have an adequate source of
repayment or are protected by collateral.
    Substandard.These assets have one or more defined weaknesses, and are
characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. These
assets are usually protected by collateral value, or tertiary support
from a guarantor. These assets are characterized by the distinct
possibility that the Company will sustain some loss if such weakness
or deficiency is not corrected. 31




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##### Table of Contents




    Doubtful.These assets have an extremely high possibility of loss,
which is not determinable as to the amount or timing. At the point
where a loss is identified, all or that portion deemed a loss is
immediately classified as Loss and charged off.
    Loss.These assets are considered uncollectable, and of such little
value that carrying the asset on the books is not warranted. This
classification does not mean that the asset has no eventual recovery
or salvage value, but rather that it is not practical or desirable to
defer writing off the asset, even though partial recovery may be
affected in the future. Internally classified loans at December 31, 2004 were composed of the following: (Dollars in thousands)Watch List
    
    $
    1,995Special Mention
    
    
    4,164Substandard
    
    
    Doubtful
    
    
    Loss
    
    
    Total
    
    $
    6,159
 Allowance for Loan Losses At December 31, 2004, the allowance for loan losses was $2.2 million as compared to $1.6 million at
December 31, 2003, an increase of $632,000, or 40.4%. The ratio of the allowance for loan losses to
total loans at December 31, 2004, 2003, 2002, 2001, and 2000 was 1.11%, 1.15%, 1.07%, 1.02% and
1.11%, respectively. The allowance for loan losses as a percentage of non-performing loans was
1,294.1% at December 31, 2004, compared to 194.5% at December 31, 2003. Management believes the
quality of the loan portfolio remains strong and that the allowance for loan losses is adequate in
relation to credit risk exposure levels. The provision for loan losses was $632,000, $478,000, and $1.6 million for the years ended December
31, 2004, 2003 and 2002, respectively. The significant provision for loan losses in 2002 is due to
a charge-off of one significant loan (see Note 7 of Notes to Consolidated Financial Statements).
Management believes the quality of the loan portfolio remains sound, the determination of the
provision for loan losses amount was primarily due to increased loans outstanding. The Company must maintain an adequate allowance for loan losses (ALL) based on a comprehensive
methodology that assesses the probable losses inherent in the loan portfolio. The appropriateness
of both the methodology and the adequacy of the allowance is the responsibility of the Chief Credit
Officer as mandated by the Board of Directors. Each quarter end, the Chief Credit Officer must assess the methodology and adequacy of the reserve,
representing that it meets banking regulations and generally accepted accounting standards. Like all financial institutions, the Company maintains an ALL based on a number of quantitative and
qualitative factors, including levels and trends of past due and non-accrual loans, asset
classifications, change in volume and mix of loans and collateral values. Provisions for loan
losses are provided on both a specific and general basis. Specific allowances are provided for
impaired credits for which the expected/anticipated loss is measurable. General valuation
allowances are based on collateral securing the credits, and the historical loss experience in the
banking system in those categories. Many of the graded loans and delinquencies experienced during the Companys history have been loans
bought as participations from other institutions. At present, the only industry that seems to be a
consistent problem for the Company is the hotel industry outside of Nevada. The Company has worked
out of the majority of the problem credits in the hotel industry. Participations are currently
limited to local/regional banks that lead the credit with a significant portion of the credit held
by them. 32




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##### Table of Contents



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 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. The allowance for loan losses reflects managements judgment of the level of allowance adequate to
absorb probable credit losses inherent in the Companys loan portfolio. The board of directors has
approved a policy formulated by management for a systematic analysis of the adequacy of the
allowance. The major elements of the policy are: (i) a quarterly analysis of the amounts; (ii)
approval by the board of directors of the quarterly analysis; and (iii) division of the reserve
into specific allocation and unspecified reserve portions. The analysis is based on managements
assessment of the historic rate of losses, within the portfolio as well as the industry, in
addition to concentration, segmentation, regional economic conditions, non-performing loan and
asset levels, past due status, composition of the portfolio, and other factors. Specific Allocations All classified loans are carefully evaluated for loss portions or potential loss exposure. The
evaluation occurs at the time the loan is classified and on a regular basis (at least every 90
days) thereafter. This evaluation is documented in a problem asset status report relating to a
specific loan or relationship. Specific allocation of reserves considers the value of collateral,
the financial condition of the borrower, and industry and current economic trends. The Company
reviews the collateral value, cash flow, and tertiary support on each classified credit. Any
deficiency outlined by the real estate collateral evaluation liquidation analysis, or cash flow
shortfall is accounted for through a specific allocation reserve calculation for the loan. General Allowances Because loss experience at the Company lacks the breadth and depth to establish a meaningful
migration analysis, the Company has relied on statistics provided by the FDIC to analyze the loss
potential. Using those factors, the Company has assigned a reserve factor to each type of
collateral. These factors are applied toward the different portions of the loan portfolio made up
of those different collateral types. The aggregate of those amounts measure the relative risk in
the portfolio pool based on collateral types. The Company assumes a homogenous loan portfolio
based on collateral. If a particular type of collateral or geographic area carries a heightened
risk, the Company evaluates all of the individual credits within that particular pool for the
amount of reserve needed. At least annually, every credit relationship over $750,000 gets reviewed for accuracy of grade
using the Significant Credit Annual Review report. During this review, updated financial
information is obtained and analyzed, and the collateral is scrutinized for any deterioration in
value. 33




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##### Table of Contents



The following Table 15 sets forth the activity in the allowance for loan losses for the periods
indicated. Table 15
Allowance for Loan Losses At or For the Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in thousands)Balance at the beginning of period
    
    $
    1,563
    
    
    $
    1,222
    
    
    $
    947
    
    
    $
    722
    
    
    $
    259Charge-offs:Construction and land development loans
    
    
    (169
    )
    
    
    
    
    
    
    
    
    
    
    (96
    )
    
    
    Raw land loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate loans (1)
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial and industrial loans
    
    
    (133
    )
    
    
    (138
    )
    
    
    (1,318
    )
    
    
    (19
    )
    
    
    Other loans
    
    
    (16
    )
    
    
    (12
    )
    
    
    (3
    )
    
    
    
    
    
    
    (1
    )Total charge-offs
    
    
    (468
    )
    
    
    (150
    )
    
    
    (1,321
    )
    
    
    (115
    )
    
    
    (1
    )Recoveries:Construction and land development loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Raw land loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate loans (1)
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial and industrial loans
    
    
    456
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Other loans
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    468
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Net (charge-offs)/recoveries
    
    
    
    
    
    
    (137
    )
    
    
    (1,321
    )
    
    
    (115
    )
    
    
    (1
    )Additions charge to operations
    
    
    632
    
    
    
    478
    
    
    
    1,596
    
    
    
    340
    
    
    
    464Balance at end of period
    

    $
    2,195
    
    
    $
    1,563
    
    
    $
    1,222
    
    
    $
    947
    
    
    $
    722Allowance for loan losses as a percent of total loans
    
    
    1.11
    %
    
    
    1.15
    %
    
    
    1.07
    %
    
    
    1.02
    %
    
    
    1.11
    %Ratio of net charge-offs/(recoveries) to average loans
    
    
    0.00
    %
    
    
    0.11
    %
    
    
    1.27
    %
    
    
    0.14
    %
    
    
    0.00
    %
   (1)
    
    Includes commercial real estate loans and commercial and industrial loans secured by real estate. 34




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##### Table of Contents



The following Table 16 sets forth information concerning the allocation of the allowance for
loan losses, which is maintained on the loan portfolio, by loan category at the dates indicated. Table 16
Allocation of Allowance for Loan Losses At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentof
    
    
    
    
    
    
    of
    
    
    
    
    
    
    of
    
    
    
    
    
    
    of
    
    
    
    
    
    
    ofLoans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    EachCategory
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Categoryto
    
    
    
    
    
    
    to
    
    
    
    
    
    
    to
    
    
    
    
    
    
    to
    
    
    
    
    
    
    toTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Construction and land
development loans
    
    $
    713
    
    
    
    21.83
    %
    
    $
    503
    
    
    
    15.70
    %
    
    $
    178
    
    
    
    15.55
    %
    
    $
    124
    
    
    
    11.16
    %
    
    $
    83
    
    
    
    17.53
    %Raw land loans
    
    
    143
    
    
    
    13.80
    %
    
    
    46
    
    
    
    13.57
    %
    
    
    107
    
    
    
    10.93
    %
    
    
    34
    
    
    
    4.21
    %
    
    
    24
    
    
    
    5.27
    %Commercial real estate loans (1)
    
    
    540
    
    
    
    45.45
    %
    
    
    548
    
    
    
    48.42
    %
    
    
    607
    
    
    
    43.62
    %
    
    
    495
    
    
    
    48.13
    %
    
    
    430
    
    
    
    42.14
    %Commercial and industrial loans
    
    
    741
    
    
    
    15.94
    %
    
    
    443
    
    
    
    18.32
    %
    
    
    264
    
    
    
    22.92
    %
    
    
    253
    
    
    
    31.30
    %
    
    
    172
    
    
    
    31.56
    %Other loans
    
    
    58
    
    
    
    2.98
    %
    
    
    23
    
    
    
    3.99
    %
    
    
    66
    
    
    
    6.98
    %
    
    
    41
    
    
    
    5.20
    %
    
    
    13
    
    
    
    3.50
    %Total
    
    $
    2,195
    
    
    
    100.00
    %
    
    $
    1,563
    
    
    
    100.00
    %
    
    $
    1,222
    
    
    
    100.00
    %
    
    $
    947
    
    
    
    100.00
    %
    
    $
    722
    
    
    
    100.00
    %
   (1)
    
    Includes commercial real estate loans and commercial and industrial loans secured by real estate. 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 outlook on interest rates, 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. 35




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##### Table of Contents



The following Table 17 presents the Companys repricing gap at December 31, 2004. The table
indicates that at December 31, 2004 the Company was liability sensitive up to twelve months. This
would indicate a decrease in earnings in a rising rate environment. Table 17
Gap Analysis More ThanWithin
    
    
    One YearTwelve
    
    
    to Five
    
    
    Over FiveMonths
    
    
    Years
    
    
    Years
    
    
    Total(Dollars in thousands)Rate-Sensitive Assets:Interest-bearing deposits at other financial institutions
    
    $
    9,244
    
    
    
    
    
    
    
    
    
    
    $
    9,244Fed funds sold
    
    
    17,850
    
    
    
    
    
    
    
    
    
    
    
    17,850Securities  all available for sale
    
    
    993
    
    
    
    32,746
    
    
    
    2,674
    
    
    
    36,413Construction and land development loans
    
    
    37,205
    
    
    
    4,672
    
    
    
    
    
    
    
    41,877Raw land loans
    
    
    26,385
    
    
    
    1,083
    
    
    
    
    
    
    
    27,468Commercial real estate loans (1)
    
    
    31,416
    
    
    
    59,622
    
    
    
    
    
    
    
    91,038Commercial and industrial loans
    
    
    23,283
    
    
    
    9,443
    
    
    
    
    
    
    
    32,726Other loans
    
    
    4,359
    
    
    
    1,731
    
    
    
    
    
    
    
    6,090Total Rate-Sensitive Assets
    
    
    150,735
    
    
    
    109,297
    
    
    
    2,674
    
    
    
    262,706Rate-Sensitive Liabilities:Interest-bearing demand deposits
    
    
    70,228
    
    
    
    
    
    
    
    
    
    
    
    70,228Savings deposits
    
    
    13,411
    
    
    
    
    
    
    
    
    
    
    
    13,411Time deposits
    
    
    106,565
    
    
    
    3,343
    
    
    
    
    
    
    
    109,908Note payable
    
    
    41
    
    
    
    199
    
    
    
    227
    
    
    
    467Total Rate-Sensitive Liabilities
    
    $
    190,245
    
    
    $
    3,542
    
    
    $
    227
    
    
    $
    194,014Excess (deficiency) of Rate-Sensitive Assets
over Rate-Sensitive Liabilities
    
    $
    (39,510
    )
    
    $
    105,755
    
    
    $
    2,447Cumulative Excess (deficiency) of Rate-Sensitive Assets
over Rate-Sensitive Liabilities
    
    $
    (39,510
    )
    
    $
    66,245
    
    
    $
    68,692Cumulative Excess (deficiency) of Rate-Sensitive Assets
over Rate-Sensitive Liabilities as a percentage of total assets
    
    
    (14.44
    )%
    
    
    24.21
    %
    
    
    25.10
    %
   (1)
    
    Includes commercial real estate loans and commercial and industrial loans secured by real estate. 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 decreases 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 December 31,
2004 is presented in Table 18
below. Table 18
Market Risk Exposures to Interest Rate Changes  Increase in
    
    Net Interest Change
    
    
    
    Decrease in
    
    Net Interest ChangeInterest Rates
    
    $
    
    
    %
    
    
    
    Interest Rates
    
    $
    
    
    %(Dollars in thousands)+1.00%
    
    
    $
    291
    
    
    
    2
    %
    
    
    -1.00%
    
    
    $
    (242
    )
    
    
    (2
    )%+2.00%
    
    
    $
    610
    
    
    
    5
    %
    
    
    -2.00%
    
    
    $
    (487
    )
    
    
    (4
    )%
 Accordingly, a rise of 1.00% in interest rates would result in an increase in the net interest
income of $291,000, while a decline of 1.00% in interest rates would result in a decrease of
$242,000 in the net interest income, in each case over the 12 months following December 31, 2004. 36




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##### Table of Contents



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. Liquidity and Capital Resources Liquidity The ability to have readily available funds sufficient to repay fully maturing liabilities is of
primary importance to depositors, creditors and regulators. The Companys liquidity, represented by
cash and due from banks, federal funds sold and interest-bearing deposits at other financial
institutions as well as its available-for-sale securities, is a result of its operating, investing
and financing activities and related cash flows. In order to ensure funds are available at all
times, the Company devotes resources to projecting on a monthly basis the amount of funds that will
be required and maintains relationships with a diversified customer base so funds are accessible.
Liquidity requirements can also be met through short-term borrowings or the disposition of
short-term assets that are generally matched to correspond to the maturity of liabilities. The
Company has a borrowing line at its primary correspondent bank in the amount of $6.0 million and a
borrowing line at the Federal Discount Window in the approximate amount of $11.6 million for a
total available of $17.6 million for short term funding. The Company has a formal liquidity policy in place, and in the opinion of management, its liquid
assets are considered adequate to meet its cash flow needs for loan funding and deposit cash
withdrawal for the next 60-90 days. At December 31, 2004, the Company had $71.5 million in liquid
assets comprised of $25.9 million in cash and cash equivalents, $9.2 million in interest-bearing
deposits at other financial institutions, and $36.4 million in available-for-sale securities. On a
long term basis, the Companys liquidity will be met by changing the relative distribution of its
asset portfolios, i.e., reducing investment or loan volumes, or selling or encumbering assets.
Further, it will increase liquidity by soliciting higher levels of deposit accounts through
promotional activities and/or borrowing from its correspondent bank as well as Federal Discount
Window through drawing on its lines of credit. The Company also intends to apply for a membership
with the Federal Home Loan Bank of San Francisco. At the current time, the long-term liquidity
needs of the Company primarily relate to funds required to support loan originations and
commitments and deposit withdrawals. All of these needs can currently be met by cash flows from
investment payments and maturities, and investment sales if the need arises. Valley Bancorp is a company separate and apart from Valley Bank. It must provide for its own
liquidity. At the current time, Valley Bancorp has no major liquidity needs of its own. However,
with the completion of the initial registered public offering at the end of the third quarter of
2004, Valley Bancorp has acquired an additional capital of $17.1 million with which it contributed
$15.5 million to Valley Bank as an additional paid-in capital. This offering allows both Valley
Bancorp and Valley Bank to enhance their capital and liquidity position. 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 2004 net cash provided by operating activities was
$3.5 million, compared to net cash provided by operating activities of $2.3 million for 2003. This
variance from the prior period was due primarily to an increase in net income. For 2002, net cash
provided by operating activities was $1.9 million. Net income adjusted for non-cash items was the
primary source of cash for all periods. The improvement in cash provided by operating activities
primarily as a result of the continued growth of the Company is expected to continue, although no
absolute assurance can be given, however, that this will occur. 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 2004, 2003, and 2002, the Company originated $166.7 million, $84.0 million, and
$55.7 million in loans, respectively. Net increases in loans for the same periods were $63.1
million, $21.4 million, and $21.9 million, respectively. Investment securities 37




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##### Table of Contents



increased to $36.4 million while interest-bearing deposits decreased to $9.2 million at December
31, 2004 from $19.0 million and $14.9 million at December 31, 2003, respectively. Investment
securities and interest-bearing deposits increased to $19.0 million and $14.9 million at December
31, 2003 from $3.0 million and $8.1 million at December 31, 2002, respectively. Net cash used in all investing activities for 2004, 2003, and 2002 was $74.9 million, $44.2
million, and $30.9 million, respectively. At December 31, 2004 the Company had outstanding loan
commitments of $66.5 million and outstanding letters of credit of $1.6 million. The Company
anticipates that it will have sufficient funds available to meet current loan commitments. Net cash provided by financing activities has been impacted significantly by increases in deposit
levels and the completion of the initial registered public offering. During the years ended
December 31, 2004, 2003 and 2002, deposits increased by $66.4 million, $29.8 million, and $46.1
million, respectively. During the year ended December 31, 2004 and 2003, proceeds from the issuance
of common stock also provided an additional $17.1 million and $3.3 million cash, respectively. Capital Resources At December 31, 2004, the Company had total stockholders equity of $36.3 million, comprised of
$31.6 million in common stock and surplus that included the additional $17.1 million raised in the
initial registered public offering completed in the third quarter of 2004, $4.7 million in
accumulated retained earnings, and $87,000 in accumulated other comprehensive loss. Total
stockholders equity at December 31, 2003 was $16.0 million with common stock and surplus equal to
$14.5 million and retained earnings of $1.5 million. At December 31, 2004 and 2003, Valley Bancorp and Valley Bank exceeded the regulatory minimums and
qualified as well-capitalized institutions under the regulations of Federal Reserve Bank and the
Federal Deposit Insurance Corporation. 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. The Federal Reserve Board has adopted capital guidelines governing the activities of bank holding
companies. These guidelines require the maintenance of an amount of capital based on risk-adjusted
assets so that categories of assets with potentially higher credit risk will require more capital
backing than assets with lower risk. In addition, banks and bank holding companies are required to
maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as
loan commitments. The capital guidelines classify capital into two tiers, referred to as Tier I and Tier II. Under
risk-based capital requirements, total capital consists of Tier I capital which is generally common
stockholders equity less goodwill and Tier II capital which is primarily a portion of the
allowance for credit losses and certain qualifying debt instruments. In determining risk-based
capital requirements, assets are assigned risk-weights of 0% to 100%, depending primarily on the
regulatory assigned levels of credit risk associated with such assets. Off-balance sheet items are
considered in the calculation of risk-adjusted assets through conversion factors established by the
regulators. The framework for calculating risk-based capital requires banks and bank holding
companies to meet the regulatory minimums of 4% Tier I and 8% total risk-based capital. In 1990
regulators added a leveraged computation to the capital requirements, comparing Tier I capital to
total average assets less goodwill. The Company uses a variety of measures to evaluate the capital adequacy, with risk-based capital
ratios calculated separately for Valley Bancorp and Valley Bank. Management reviews these capital
measurements on a quarterly basis and takes appropriate action to ensure that they are within
established internal and external guidelines. 38




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##### Table of Contents



The following Tables 19 and 20 reflect Valley Bancorps and Valley Banks actual levels of
regulatory capital as of December 31, 2004 and the applicable minimum regulatory capital
requirements as well as the regulatory capital requirements that apply to be deemed well
capitalized pursuant to the prompt corrective action requirements. Table 19 Valley Bancorps Equity Capital
 To be well capitalizedFor capital
    
    
    under prompt correctiveActual
    
    
    adequacy purposes
    
    
    action provisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)Tier 1 leverage capital to average assets (1)
    
    
    36,341
    
    
    
    14.17
    %
    
    
    10,256
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTier 1 capital to risk weighted assets (1)
    
    
    36,341
    
    
    
    16.00
    %
    
    
    9,086
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTotal capital to risk weighted assets (1)
    
    
    38,536
    
    
    
    16.97
    %
    
    
    18,171
    
    
    
    8.00
    %
    
    
    n/a
    
    
    
    n/a
   (1)
    
    Tier 1 leverage (or core) capital ratio is computed as a percentage of average total assets of $256.4 million.Risk-based capital ratios are computed as a percentage of risk-weighted assets of $227.1 million. Table 20
Valley Banks Equity Capital To be well capitalizedFor capital
    
    
    under prompt correctiveActual
    
    
    adequacy purposes
    
    
    action provisions (2)Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)Tier 1 leverage capital to average assets (1)
    
    
    34,305
    
    
    
    13.47
    %
    
    
    10,187
    
    
    
    4.00
    %
    
    
    12,734
    
    
    
    5.00
    %Tier 1 capital to risk weighted assets (1)
    
    
    34,305
    
    
    
    15.13
    %
    
    
    9,068
    
    
    
    4.00
    %
    
    
    13,602
    
    
    
    6.00
    %Total capital to risk weighted assets (1)
    
    
    36,500
    
    
    
    16.10
    %
    
    
    18,136
    
    
    
    8.00
    %
    
    
    22,670
    
    
    
    10.00
    %
   (1)
    
    Tier 1 leverage (or core) capital ratio is computed as a percentage of average total assets of $254.7 million.Risk-based capital ratios are computed as a percentage of risk-weighted assets of $226.7 million.(2)
    
    See Supervision and Regulation  Capital Adequacy  Prompt Corrective Action. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations The Company, in the conduct of ordinary business operations routinely enter into contracts for
services. These contracts may require payment for services to be provided in the future and may
also contain penalty clauses for the early termination of the contracts. The Company is also a
party to financial instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of the customers. These financial instruments include commitments to extend
credit and standby letters of credit. Management does not believe that these off-balance sheet
arrangements have a material current effect on the Companys financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources, but there can be no assurance that such arrangements will not have a future
effect. 39




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##### Table of Contents



The following Tables 21 and 22 present the contractual cash obligations and commercial commitments
as of December 31, 2004. Table 21 Off-Balance Sheet Arrangements
 Commitment Expiration Per PeriodUnfunded
    
    
    One Year
    
    
    One to
    
    
    AfterCommitments
    
    
    or less
    
    
    Five years
    
    
    Five Years(Dollars in thousands)Construction and land development loans
    
    $
    43,322
    
    
    $
    33,258
    
    
    $
    10,064
    
    
    
    Raw land loans
    
    
    3,229
    
    
    
    2,583
    
    
    
    646
    
    
    
    Commercial real estate loans (1)

    
    
    3,883
    
    
    
    2,865
    
    
    
    1,018
    
    
    
    Commercial and industrial loans
    
    
    15,430
    
    
    
    15,340
    
    
    
    90
    
    
    
    Other loans
    
    
    642
    
    
    
    514
    
    
    
    128
    
    
    
    Financial standby letters of credit
    
    
    1,639
    
    
    
    364
    
    
    
    1,275
    
    
    
    Total unused commitments
    
    $
    68,145
    
    
    $
    54,924
    
    
    $
    13,221
    
    
    
    
   (1)
    
    Includes commercial real estate loans and commercial and industrial loans secured by real estate. Table 22 Contractual Obligations
 Payment due periodOne Year
    
    
    One to
    
    
    AfterTotal
    
    
    or less
    
    
    Five Years
    
    
    Five Years(Dollars in thousands)Operating lease
    
    $
    110
    
    
    $
    94
    
    
    $
    16
    
    
    
    Note payable (1)
    
    
    467
    
    
    
    41
    
    
    
    199
    
    
    
    227Total contractual obligations
    
    $
    577
    
    
    $
    135
    
    
    $
    215
    
    
    $
    227
   (1)
    
    Excludes interest payments. See Note 8 of Notes to Consolidated Financial
Statements. 
 Item 7a. Qualitative and Quantitative Disclosures about Market Risk See the Market Risk section in the Managements Discussion and Analysis of Financial Condition
and Results of Operations of this report. 40




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm
    
    
    42Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    43Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002
    
    
    44Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003
and 2002
    
    
    45Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    47Notes to Consolidated Financial Statements for the years ended December 31, 2004, 2003 and 2002
    
    
    49
   41




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##### Table of Contents



(MCGLADREY & PULLEN LOGO) 
 Report of Independent Registered Public Accounting Firm To the Board of Directors
Valley Bancorp
Las Vegas, Nevada We have audited the consolidated balance sheets of Valley Bancorp and subsidiary as of December 31,
2004 and 2003, and the related consolidated statements of income, stockholders equity and cash
flows for each of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provided a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Valley Bancorp and subsidiary as of December 31, 2004
and 2003, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. /s/ MCGLADREY & PULLEN, LLPMcGladrey & Pullen, LLP
 Las Vegas, Nevada
February 4, 2005 McGladrey & Pullen, LLP is an independent member firm of
RSM International, an affiliation of independent accounting
and consulting firms. 42




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##### Table of Contents



Valley Bancorp And Subsidiary
 
 Consolidated Balance Sheets
As of December 31, 2004 and 2003
 2004
    
    
    2003AssetsCash and due from banks
    
    $
    8,054,489
    
    
    $
    4,951,928Federal funds sold
    
    
    17,850,000
    
    
    
    8,875,000Cash and cash equivalents
    
    
    25,904,489
    
    
    
    13,826,928Interest-bearing deposits at other financial institutions
    
    
    9,244,160
    
    
    
    14,865,406Securities available for sale at fair value (Note 2)
    
    
    36,412,828
    
    
    
    19,006,189Loans, net of allowance for loan losses of $2,194,693 and
$1,563,112, respectively (Notes 3, 7, 8 and 11)
    
    
    196,075,210
    
    
    
    133,794,739Loans held for sale
    
    
    163,829
    
    
    
    Premises and equipment, net (Notes 4 and 8)
    
    
    4,382,860
    
    
    
    4,456,897Other real estate owned
    
    
    
    
    
    
    228,173Accrued interest receivable
    
    
    863,912
    
    
    
    564,549Deferred taxes, net (Note 6)
    
    
    189,391
    
    
    
    23,551Other assets
    
    
    387,180
    
    
    
    149,618Total assets
    
    $
    273,623,859
    
    
    $
    186,916,050Liabilities and Stockholders EquityDeposits:Non-interest bearing demand
    
    $
    42,664,063
    
    
    $
    26,838,976Interest bearing:Demand
    
    
    70,228,073
    
    
    
    65,010,797Savings
    
    
    13,411,583
    
    
    
    9,556,595Time, $100,000 and over (Note 5)
    
    
    44,241,115
    
    
    
    26,516,444Other time (Note 5)
    
    
    65,666,600
    
    
    
    41,874,873Total deposits
    
    
    236,211,434
    
    
    
    169,797,685Accrued interest payable and other liabilities
    
    
    691,471
    
    
    
    615,431Long-term debt (Note 8)
    
    
    466,845
    
    
    
    505,447Total liabilities
    
    
    237,369,750
    
    
    
    170,918,563Commitments and contingencies (Note 7)Stockholders equity: (Notes 9, 10 and 12)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 and
2,790,748 shares issued and outstanding as of December 31,
2004; 2,750,000 shares authorized and 1,725,478 shares issued
and outstanding as of December 31, 2003
    
    
    2,037,246
    
    
    
    1,259,599Additional paid-in capital
    
    
    29,616,955
    
    
    
    13,243,845Retained earnings
    
    
    4,687,220
    
    
    
    1,476,325Accumulated other comprehensive income (loss)
    
    
    (87,312
    )
    
    
    17,718Total stockholders equity
    
    
    36,254,109
    
    
    
    15,997,487Total liabilities and stockholders equity
    
    $
    273,623,859
    
    
    $
    186,916,050
 See Notes to Consolidated Financial Statements. 43




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##### Table of Contents



Valley Bancorp And Subsidiary
 
 Consolidated Statements Of Income
For the Years ended December 31, 2004, 2003, and 2002
 2004
    
    
    2003
    
    
    2002Interest income on:Loans, including fees
    
    $
    12,562,589
    
    
    $
    9,349,508
    
    
    $
    8,223,899Securities available for sale
    
    
    393,812
    
    
    
    228,465
    
    
    
    36,067Federal funds sold and interest-bearing deposits at other
financial institutions
    
    
    501,526
    
    
    
    428,440
    
    
    
    341,597Total interest income
    
    
    13,457,927
    
    
    
    10,006,413
    
    
    
    8,601,563Interest expense on:Deposits
    
    
    2,671,813
    
    
    
    2,954,656
    
    
    
    3,241,926Long-term debt and other borrowed funds (Note 8)
    
    
    36,327
    
    
    
    37,442
    
    
    
    7,574Total interest expense
    
    
    2,708,140
    
    
    
    2,992,098
    
    
    
    3,249,500Net interest income
    
    
    10,749,787
    
    
    
    7,014,315
    
    
    
    5,352,063Provision for loan losses (Note 3)
    
    
    632,000
    
    
    
    478,168
    
    
    
    1,596,093Net interest income after provision for
loan losses
    
    
    10,117,787
    
    
    
    6,536,147
    
    
    
    3,755,970Other income:Service charges on deposit accounts
    
    
    255,047
    
    
    
    236,091
    
    
    
    150,674Net gain (loss) on sale of available for sale securities (Note 2)
    
    
    (6,155
    )
    
    
    18,339
    
    
    
    17,185Other
    
    
    46,341
    
    
    
    41,384
    
    
    
    42,340Total other income
    
    
    295,233
    
    
    
    295,814
    
    
    
    210,199Other expense:Salaries and employee benefits (Note 13)
    
    
    3,129,950
    
    
    
    2,520,915
    
    
    
    1,918,470Equipment rentals, depreciation and maintenance
    
    
    241,398
    
    
    
    250,748
    
    
    
    303,651Occupancy (Note 7)
    
    
    331,436
    
    
    
    338,736
    
    
    
    266,079Data processing
    
    
    346,634
    
    
    
    311,178
    
    
    
    254,417Legal, professional and consulting
    
    
    258,012
    
    
    
    299,660
    
    
    
    244,925Advertising and public relations
    
    
    137,874
    
    
    
    133,033
    
    
    
    125,549Outside services
    
    
    251,341
    
    
    
    226,979
    
    
    
    163,339Federal Reserve Bank & correspondent bank fees
    
    
    112,209
    
    
    
    80,695
    
    
    
    64,035Telephone
    
    
    158,397
    
    
    
    123,186
    
    
    
    81,664Office supplies & printing
    
    
    154,113
    
    
    
    127,394
    
    
    
    109,984Director fees
    
    
    113,925
    
    
    
    88,725
    
    
    
    67,985Other
    
    
    307,642
    
    
    
    224,229
    
    
    
    171,948Total other expense
    
    
    5,542,931
    
    
    
    4,725,478
    
    
    
    3,772,046Income before income taxes
    
    
    4,870,089
    
    
    
    2,106,483
    
    
    
    194,123Income tax expense (Note 6)
    
    
    1,659,194
    
    
    
    707,491
    
    
    
    71,978Net income
    
    $
    3,210,895
    
    
    $
    1,398,992
    
    
    $
    122,145Earnings per share:Basic
    
    $
    1.59
    
    
    $
    0.84
    
    
    $
    0.09Diluted
    
    $
    1.53
    
    
    $
    0.81
    
    
    $
    0.08
 See Notes to Consolidated Financial Statements. 44




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##### Table of Contents



VALLEY BANCORP AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2004, 2003, and 2002
 Retained
    
    
    AccumulatedAdditional
    
    
    Earnings
    
    
    OtherComprehensive
    
    
    Common Stock
    
    
    Paid-in
    
    
    (Accumulated
    
    
    ComprehensiveDescription
    
    Income
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit)
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2001
    
    
    
    
    
    
    1,429,880
    
    
    $
    1,039,935
    
    
    $
    10,032,766
    
    
    $
    (44,812
    )
    
    $
    10,244
    
    
    $
    11,038,133Comprehensive income:Net income
    
    $
    122,145
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122,145
    
    
    
    
    
    
    
    122,145Other comprehensive income
(loss):Unrealized gain on
securities net of
tax of $4,000
    
    
    7,544Less reclassification
adjustment for
gains included in net
income, net
of tax of $5,885
    
    
    (11,300
    )Net unrealized loss
    
    
    (3,756
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,756
    )
    
    
    (3,756
    )$
    118,389Stock options exercised, including
related
tax benefit of $13,688 (Note 12)
    
    
    
    
    
    
    8,250
    
    
    
    9,900
    
    
    
    69,788
    
    
    
    
    
    
    
    
    
    
    
    79,688Balance, December 31, 2002
    
    
    
    
    
    
    1,438,130
    
    
    
    1,049,835
    
    
    
    10,102,554
    
    
    
    77,333
    
    
    
    6,488
    
    
    
    11,236,210Proceeds from issuance of 252,473
shares of common stock at $12.50 per
share, net of offering costs of $107,573
    
    
    
    
    
    
    252,473
    
    
    
    184,305
    
    
    
    2,864,035
    
    
    
    
    
    
    
    
    
    
    
    3,048,340Comprehensive income:Net income
    
    $
    1,398,992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,398,992
    
    
    
    
    
    
    
    1,398,992Other comprehensive income:Unrealized gain on
securities net of
tax of $12,020
    
    
    23,333Less reclassification
adjustment for
gains included in net
income, net
of tax of $6,236
    
    
    (12,103
    )Net unrealized gain
    
    
    11,230
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,230
    
    
    
    11,230$
    1,410,222Stock options exercised, including
related
tax benefit of $23,715 (Note 12)
    
    
    
    
    
    
    34,875
    
    
    
    25,459
    
    
    
    277,256
    
    
    
    
    
    
    
    
    
    
    
    302,715Balance, December 31, 2003
    
    
    
    
    
    
    1,725,478
    
    
    
    1,259,599
    
    
    
    13,243,845
    
    
    
    1,476,325
    
    
    
    17,718
    
    
    
    15,997,487
 45




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##### Table of Contents



VALLEY BANCORP AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2004, 2003, and 2002 (Continued)
 Retained
    
    
    AccumulatedAdditional
    
    
    Earnings
    
    
    OtherComprehensive
    
    
    Common Stock
    
    
    Paid-in
    
    
    (Accumulated
    
    
    ComprehensiveDescription
    
    Income
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit)
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2003
    
    
    
    
    
    
    1,725,478
    
    
    
    1,259,599
    
    
    
    13,243,845
    
    
    
    1,476,325
    
    
    
    17,718
    
    
    
    15,997,487Proceeds from issuance of 1,063,750
shares of common stock at $18.00 per
share, net of offering costs of
$2,011,936
    
    
    
    
    
    
    1,063,750
    
    
    
    776,537
    
    
    
    16,359,027
    
    
    
    
    
    
    
    
    
    
    
    17,135,564Comprehensive income:Net income
    
    $
    3,210,895
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,210,895
    
    
    
    
    
    
    
    3,210,895Other comprehensive income:Unrealized loss on
securities net of
tax of $56,199
    
    
    (109,092
    )Less reclassification
adjustment for
losses included in net
income,
net of tax of $2,093
    
    
    4,062Net unrealized loss
    
    
    (105,030
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105,030
    )
    
    
    (105,030
    )$
    3,105,865Stock options exercised (Note 12)
    
    
    
    
    
    
    1,520
    
    
    
    1,110
    
    
    
    14,083
    
    
    
    
    
    
    
    
    
    
    
    15,193Balance, December 31, 2004
    
    
    
    
    
    
    2,790,748
    
    
    $
    2,037,246
    
    
    $
    29,616,955
    
    
    $
    4,687,220
    
    
    $
    (87,312
    )
    
    $
    36,254,109
 See Notes to Consolidated Financial Statements. 46




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##### Table of Contents



Valley Bancorp And Subsidiary
 
 Consolidated Statements Of Cash Flows
 For the Years ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Cash Flows from Operating Activities:Net income
    
    $
    3,210,895
    
    
    $
    1,398,992
    
    
    $
    122,145Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation of premises and equipment
    
    
    285,017
    
    
    
    293,989
    
    
    
    233,636(Gain) loss on sale of other real estate owned
    
    
    7,547
    
    
    
    
    
    
    
    (2,000
    )(Gain) loss on sale of securities available for sale
    
    
    6,155
    
    
    
    (18,339
    )
    
    
    (17,185
    )Deferred taxes
    
    
    (111,734
    )
    
    
    (17,077
    )
    
    
    168,572Tax benefit resulting from the exercise of nonqualified stock options
    
    
    
    
    
    
    23,715
    
    
    
    13,688Net accretion/amortization of investment discount/premium
    
    
    (2,309
    )
    
    
    21,960
    
    
    
    (19,496
    )Provision for loan losses
    
    
    632,000
    
    
    
    478,168
    
    
    
    1,596,093(Increase) in accrued interest receivable
    
    
    (299,363
    )
    
    
    (129,690
    )
    
    
    (43,505
    )(Increase) decrease in other assets
    
    
    (237,562
    )
    
    
    147,247
    
    
    
    (198,185
    )Increase in accrued interest payable and other liabilities
    
    
    76,040
    
    
    
    56,421
    
    
    
    55,724Net cash provided by operating activities
    
    
    3,566,686
    
    
    
    2,255,386
    
    
    
    1,909,487Cash Flows from Investing Activities:Net increase in loans
    
    
    (63,076,300
    )
    
    
    (21,421,974
    )
    
    
    (21,850,218
    )Net (increase) decrease in interest bearing deposits at other financial
institutions
    
    
    5,621,246
    
    
    
    (6,755,406
    )
    
    
    (5,436,000
    )Purchase of securities available for sale
    
    
    (33,750,330
    )
    
    
    (24,010,789
    )
    
    
    (4,000,000
    )Proceeds from the maturities of securities available for sale
    
    
    2,192,967
    
    
    
    3,000,000
    
    
    
    1,000,000Proceeds from the sale of securities available for sale
    
    
    13,987,742
    
    
    
    5,047,320
    
    
    
    729,729Proceeds from the sale of other real estate
    
    
    220,626
    
    
    
    
    
    
    
    Purchase of premises and equipment
    
    
    (210,980
    )
    
    
    (101,214
    )
    
    
    (1,372,651
    )Net cash used in investing activities
    
    
    (75,015,029
    )
    
    
    (44,242,063
    )
    
    
    (30,929,140
    )Cash Flows from Financing Activities:Net increase in deposits
    
    
    66,413,749
    
    
    
    29,762,031
    
    
    
    46,087,036Principal payments on notes payable
    
    
    (38,602
    )
    
    
    (35,953
    )
    
    
    (8,600
    )Proceeds from issuance of common stock, net
    
    
    17,135,564
    
    
    
    3,048,340
    
    
    
    Proceeds from stock options exercised
    
    
    15,193
    
    
    
    279,000
    
    
    
    66,000Net cash provided by financing activities
    
    
    83,525,904
    
    
    
    33,053,418
    
    
    
    46,144,436Increase (decrease) in cash and cash equivalents
    
    
    12,077,561
    
    
    
    (8,933,259
    )
    
    
    17,124,783Cash and cash equivalents, beginning of year
    
    
    13,826,928
    
    
    
    22,760,187
    
    
    
    5,635,404Cash and cash equivalents, end of year
    
    $
    25,904,489
    
    
    $
    13,826,928
    
    
    $
    22,760,187
 47




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Valley Bancorp And Subsidiary
 Consolidated Statements Of Cash Flows
 For the Years ended December 31, 2004, 2003 and 2002 (Continued) 2004
    
    
    2003
    
    
    2002Supplemental Disclosure of Cash Flow InformationCash payments for interest
    
    $
    2,589,657
    
    
    $
    3,081,044
    
    
    $
    3,236,785Cash payments for taxes
    
    $
    1,750,000
    
    
    $
    645,000
    
    
    $
    64,357Supplemental Disclosure of Noncash ActivityProperty acquired through assumption of note payable
    
    
    
    
    
    
    
    
    
    $
    550,000Other real estate sold through issuance of loans
    
    
    
    
    
    
    
    
    
    $
    650,000Other real estate acquired in settlement of loans
    
    
    
    
    
    $
    228,173
    
    
    
    
 See Notes to Consolidated Financial Statements. 48




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002 Note 1. Nature of Business and Summary of Significant Accounting Policies Nature of business Valley Bancorp (the Bancorp) is a bank holding company whose 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. A summary of the significant accounting policies utilized by the Company is as follows: Use of estimates in the preparation of financial statements 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. Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiary, Valley Bank. All significant intercompany balances and transactions have been
eliminated in consolidation. Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due
from banks (including cash items in process of clearing) and federal funds sold. Cash flows from
loans originated by the Company and deposits are reported net. The Company maintains amounts due from banks, which at times may exceed federally insured limits.
The Company has not experienced any losses in such accounts. The Company is required to maintain reserve balances in cash or on deposit with correspondent
banks, based on percentage of deposits. The total of those reserve balances was approximately
$2,101,000 and $835,000 at December 31, 2004 and 2003, respectively. 49




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Securities available for sale Securities classified as available for sale are debt securities that the Company intends to hold
for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including significant movements
in interest rates, changes in the maturity mix of the Companys assets and liabilities, liquidity
needs, regulatory capital considerations and other similar factors. Securities available for sale
are carried at fair value. Unrealized gains or losses are reported as a separate component of
other comprehensive income (loss), net of the related deferred tax effect. The amortization of
premiums and accretion of discounts are recognized in interest income over their contractual lives.
Realized gains or losses, determined on the basis of the cost of specific securities sold, are
included in earnings. Declines in the fair value of individual securities classified as available for sale below their
amortized cost that are determined to be other than temporary result in write-downs of the
individual securities to their fair value with the resulting write-downs included in current
earnings as realized losses. In determining other-than-temporary losses, management considers (1)
the length of time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Loans Loans are stated at the amount of unpaid principal, reduced by net deferred loan fees and an
allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when management believes that
collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the
allowance. The allowance is an amount that management believes will be adequate to absorb estimated losses
relating to specifically identified loans, as well as probable credit losses inherent in the
balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and
prior loss experience and peer bank loss experience. This evaluation also takes into consideration
such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may affect the borrowers
ability to pay. While management uses the best information available to make its evaluation,
future adjustments to the allowance may be necessary if there are significant changes in economic
conditions. In addition, regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for loan losses, and may require the Company to make
additions to the allowance based on their judgment about information available to them at the time
of their examinations. The allowance consists of specific and general components. The specific component relates to loans
that are classified as either doubtful, substandard or special mention. For such loans that are
also classified as impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers non-classified loans and is based on historical loss
experience and peer bank loss experience adjusted for qualitative and environmental factors. A loan is impaired when it is probable, based on current information and events, the Company will
be unable to collect all contractual principal and interest payments due in accordance with the
terms of the loan agreement. Impaired loans are measured on an individual basis (significant
nonhomogenous loans) based on the present value of expected future cash flows discounted at the
loans effective interest rate or, as a practical expedient, at the loans observable market price
or the fair value of the collateral if the loan is collateral dependent. The amount of impairment,
if any, and any subsequent changes are included in the allowance for loan losses. 50




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Large groups of smaller balance homogenous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer and residential loans for
impairment disclosures. Interest and fees on loans Interest on loans is recognized over the terms of the loans and is calculated using the
effective-interest method. The accrual of interest on impaired loans is discontinued when, in
managements opinion, the borrower may be unable to meet payments as they become due. The Company determines a loan to be delinquent when payments have not been made according to
contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. The
accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the
credit is well-secured and in the process of collection. All interest accrued, but not collected, for loans that are placed on nonaccrual status or charged
off are reversed against interest income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to
accrual status when all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured. Loan origination and commitment fees and certain direct loan origination costs are deferred and the
net amount amortized as an adjustment of the related loans yield. The Company is generally
amortizing these amounts over the contractual life of the loan. Premises and equipment Land is stated at cost. Building, equipment and furniture and fixtures are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which is generally five to ten years for equipment and
furniture and fixtures and 40 years for the building. Other real estate owned Other real estate owned (OREO) is held for sale and is carried at the lower of cost or fair value
less estimated costs of disposal. Any write-down to fair value at the time of transfer to OREO is
charged to the allowance for loan losses. Property is evaluated regularly to ensure the recorded
amount is supported by its current fair value and valuation allowances to reduce the carrying
amount to fair value less estimated costs to dispose are recorded as necessary. Revenue and
expense from the operations of OREO and changes in the valuation allowance are included in other
expense. Transfers of financial assets Transfers of financial assets are accounted for as sales, when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have
been isolated from the Company, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and
(3) the Company does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity. Income taxes Deferred taxes are provided on an asset and liability method whereby deferred tax assets are
recognized for deductible temporary differences; and operating loss and tax credit carryforwards
and deferred tax liabilities are 51




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recognized for taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. Stock option plans The Company has two stock-based compensation plans, which are described more fully in Note 12. 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: Years Ended December 31,2004
    
    
    2003
    
    
    2002Net Income as reported
    
    $
    3,210,895
    
    
    $
    1,398,992
    
    
    $
    122,145Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects on nonqualified
stock options
    
    
    (62,895
    )
    
    
    (162,992
    )
    
    
    (100,145
    )Proforma net income
    
    $
    3,148,000
    
    
    $
    1,236,000
    
    
    $
    22,000Basic earnings per share  As reported
    
    $
    1.59
    
    
    $
    0.84
    
    
    $
    0.09Basic earnings per share  Pro forma
    
    $
    1.56
    
    
    $
    0.74
    
    
    $
    0.02Diluted earnings per share  As reported
    
    $
    1.53
    
    
    $
    0.81
    
    
    $
    0.08Diluted earnings per share  Pro forma
    
    $
    1.50
    
    
    $
    0.72
    
    
    $
    0.02
 The proforma compensation cost was estimated using the minimum value method for options
granted with the following assumptions: Options Granted in 2003Incentive
    
    NonqualifiedStock Options
    
    Stock OptionsFair value per optional share
    
    $4.22
    
    $2.23Expected life (years)
    
    10
    
    5Risk-free interest rate
    
    4.00%
    
    4.00%Dividends rate
    
    None
    
    None
 52




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Earnings per common 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: Years Ended December 31,2004
    
    
    2003
    
    
    2002Net income
    
    $
    3,210,895
    
    
    $
    1,398,992
    
    
    $
    122,145Average number of common shares outstanding
    
    
    2,017,094
    
    
    
    1,659,750
    
    
    
    1,432,871Effect of dilutive options
    
    
    86,830
    
    
    
    56,994
    
    
    
    24,164Average number of common shares outstanding
used to
calculate diluted earnings per common share
    
    
    2,103,924
    
    
    
    1,716,744
    
    
    
    1,457,035Basic EPS
    
    $
    1.59
    
    
    $
    0.84
    
    
    $
    0.09Diluted EPS
    
    $
    1.53
    
    
    $
    0.81
    
    
    $
    0.08
 Comprehensive income Accounting principles generally require that recognized revenue, expenses, gains and losses be
included in net income. Although certain changes in assets and liabilities, such as unrealized
gains and losses on available for sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are components of
comprehensive income. Comprehensive income for the years ended December 31, 2004, 2003 and 2002 is
reflected in the consolidated statements of stockholders equity. Off-balance-sheet instruments In the ordinary course of business, the Company has entered into off-balance-sheet financial
instruments consisting of commitments to extend credit. Such financial instruments are recorded in
the financial statements when they are funded. Stock split On January 15, 2002, the Companys Board of Directors approved an 11-for-10 common stock split that
reduced the par value of the Companys common stock from $0.80 per share to $0.73 per share and
resulted in the issuance of 129,711 additional shares. All share and per share information has
been retroactively adjusted to reflect this stock split. Fair value of financial instruments Financial Accounting Standards Board (FASB) Statement No. 107, Disclosures About Fair Value of
Financial Instruments,requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to estimate that value. 53




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Management uses its best judgment in estimating the fair value of the Companys financial
instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for
substantially all financial instruments, the fair value estimates presented herein are not
necessarily indicative of the amounts the Company could have realized in a sales transaction at
December 31, 2004 or 2003. The estimated fair value amounts for 2004 and 2003 have been measured
as of their year-end, and have not been reevaluated or updated for purposes of these financial
statements subsequent to those dates. As such, the estimated fair values of these financial
instruments subsequent to the reporting date may be different than the amounts reported at
year-end. The information in Note 14 should not be interpreted as an estimate of the fair value of the entire
Company since a fair value calculation is only required for a limited portion of the Companys
assets. Due to the wide range of valuation techniques and the degree of subjectivity used in making the
estimate, comparisons between the Companys disclosures and those of other companies or banks may
not be meaningful. The following methods and assumptions were used by the Company in estimating the fair values of its
financial instruments: Cash and cash equivalents and interest-bearing deposits at other financial institutions The carrying amounts reported in the balance sheet for cash and due from banks, federal funds
sold and interest-bearing deposits at other financial institutions approximate their fair value. Securities available for sale Fair value for securities available for sale are based on quoted market prices where available
or on quoted markets for similar securities in the absence of quoted prices on the specific
security. Loans For variable rate loans that reprice frequently and that have experienced no significant
change in credit risk, fair value is based on carrying value. Variable rate loans comprised
approximately 89% and 88% of the loan portfolio at December 31, 2004 and 2003, respectively. Fair
value of all other loans is estimated based on discounted cash flows using interest rates currently
being offered for loans with similar terms to borrowers with similar credit quality. Prepayments
prior to the repricing date are not expected to be significant. Loans are expected to be held to
maturity and any unrealized gains or losses are not expected to be realized. Accrued interest receivable and payable The carrying amounts reported in the balance sheet for accrued interest receivable and payable
approximate their fair value. Deposit liabilities The fair value disclosed for demand and savings deposits approximate their carrying amounts,
which represent the amount payable on demand. The carrying amounts for variable rate certificates
of deposit 54




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##### Table of Contents



approximate their fair value. Fair values for fixed rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently being offered on
certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits.
Early withdrawals of fixed rate certificates of deposit are not expected to be significant. Long-term debt The carrying amount in the balance sheets for long-term debt approximates its fair value. Off-balance-sheet instruments Fair value for off-balance-sheet instruments (lending commitments and standby letters of
credit) are based on quoted fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties credit standing. 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 third quarter of 2005. 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 2005 and beyond will depend upon various factors,
among them being the future compensation strategy. The pro forma compensation costs presented (in
the table above) and in prior filings for the Company have been calculated using a minimum value
method and may not be indicative of amounts which should be expected in future periods. 55




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Note 2. Securities Available for Sale Carrying amounts and the estimated fair value of securities available for sale have been
summarized as follows: December 31, 2004Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueU.S. Government Agencies
    
    $
    29,940,475
    
    
    $
    66,992
    
    
    $
    (144,757
    )
    
    $
    29,862,710Mortgage-backed Securities
    
    
    4,673,383
    
    
    
    
    
    
    
    (48,463
    )
    
    
    4,624,920Collateralized Mortgage Obligations
    
    
    1,931,261
    
    
    
    802
    
    
    
    (6,865
    )
    
    
    1,925,198Total
    
    $
    36,545,119
    
    
    $
    67,794
    
    
    $
    (200,085
    )
    
    $
    36,412,828
 December 31, 2003Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueU.S. Government Agencies
    
    $
    18,979,344
    
    
    $
    38,236
    
    
    $
    (11,391
    )
    
    $
    19,006,189
 Information pertaining to securities with gross unrealized losses at December 31, 2004, aggregated
by investment category and length of time that individual securities have been in a continuous loss
position follows: Less Than Twelve Months
    
    
    Over Twelve MonthsGross
    
    
    
    
    
    
    GrossUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    FairLosses
    
    
    Value
    
    
    Losses
    
    
    ValueU.S. Government Agencies
    
    $
    119,931
    
    
    $
    13,875,410
    
    
    $
    24,826
    
    
    $
    1,963,500Mortgage-backed Securities
    
    
    48,463
    
    
    
    4,624,920
    
    
    
    
    
    
    
    Collateralized Mortgage Obligations
    
    
    6,865
    
    
    
    931,288
    
    
    
    
    
    
    
    Total
    
    $
    175,259
    
    
    $
    19,431,618
    
    
    $
    24,826
    
    
    $
    1,963,500
 As of December 31, 2003, no investments had material continuous losses existing greater than twelve
months. Management evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such evaluation. Consideration
is given to (1) the length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability
of the Company to retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. At December 31, 2004, twenty-two debt securities have unrealized losses with aggregate depreciation
of approximately 1% from the Companys amortized cost-basis. These unrealized losses relate
primarily to fluctuations in the current interest rate environment. In analyzing an issuers
financial condition, management considers whether the securities are issued by the federal
government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts reports. As management has the ability to
hold debt securities for the foreseeable future, no declines are deemed to be other than temporary. 56




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The amortized cost and fair value of securities available for sale as of December 31, 2004 by
contractual maturities are shown below. Maturities may differ from contractual maturities in
mortgage-backed securities and collateralized mortgage obligations because the mortgages underlying
the securities may be called or repaid without any penalties. Therefore, these securities are also
not included in the maturity categories in the following summary: At December 31, 2004Amortized
    
    
    FairCost
    
    
    ValueDue within one year
    
    $
    1,001,383
    
    
    $
    992,660Due after one year through five years
    
    
    25,945,078
    
    
    
    25,871,450Due after five years through ten years
    
    
    2,994,014
    
    
    
    2,998,600Mortgage-backed Securities
    
    
    4,673,383
    
    
    
    4,624,920Collateralized Mortgage Obligations
    
    
    1,931,261
    
    
    
    1,925,198Total
    
    $
    36,545,119
    
    
    $
    36,412,828
 Gross realized gains and losses on sales of securities were $25,346 and $31,501, respectively, for
the year ended December 31, 2004. There were gross realized gains on sales of securities of
$18,339 and $17,185 for the years ended December 31, 2003 and 2002 respectively. Note 3. Loans The composition of the Companys loan portfolio was as follows: At December 31,2004
    
    
    2003Commercial and industrial
    
    $
    31,726,393
    
    
    $
    24,899,966Real Estate:Commercial
    
    
    90,454,931
    
    
    
    65,793,033Construction, raw land and land development
    
    
    70,928,073
    
    
    
    39,769,746Residential
    
    
    4,520,612
    
    
    
    4,375,179Consumer
    
    
    1,404,676
    
    
    
    1,045,075199,034,685
    
    
    
    135,882,999Deduct:Unearned net loan fees
    
    
    (764,782
    )
    
    
    (525,148
    )Allowance for loan losses
    
    
    (2,194,693
    )
    
    
    (1,563,112
    )Net loans
    
    $
    196,075,210
    
    
    $
    133,794,739
 57




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Changes in the allowance for loan losses were as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Balance, beginning
    
    $
    1,563,112
    
    
    $
    1,221,813
    
    
    $
    946,929Provision For Loan Losses
    
    
    632,000
    
    
    
    478,168
    
    
    
    1,596,093Amounts Recovered (Notes 7)
    
    
    468,110
    
    
    
    12,654
    
    
    
    Less Amounts Charged Off (Note 7)
    
    
    (468,529
    )
    
    
    (149,523
    )
    
    
    (1,321,209
    )Balance, ending
    
    $
    2,194,693
    
    
    $
    1,563,112
    
    
    $
    1,221,813
 Information about impaired and nonaccrual loans as of and for the years ended December 31, 2004,
2003 and 2002 was as follows. December 31,2004
    
    
    2003
    
    
    2002Impaired loans with a valuation allowance
    
    $
    
    
    
    $
    2,162,215
    
    
    $
    323,540Impaired loans without a valuation allowance
    
    
    169,589
    
    
    
    141,377
    
    
    
    141,377Total impaired loans
    
    $
    169,589
    
    
    $
    2,303,592
    
    
    $
    464,917Related allowance for loan losses on impaired loans
    
    $
    
    
    
    $
    500,000
    
    
    $
    104,494Nonaccrual loans
    
    
    169,589
    
    
    
    703,593
    
    
    
    464,917Loans past due 90 days or more and still accruing
    
    
    
    
    
    
    100,000
    
    
    
    71,276Average balance during the year on impaired loans
(based on quarter-end balances)
    
    
    215,077
    
    
    
    2,303,720
    
    
    
    1,027,042Interest income recognized on impaired loans
    
    
    
    
    
    
    97,665
    
    
    
    31,458
 Note 4. Premises and Equipment The major classes of premises and equipment and the total accumulated depreciation at December
31, 2004 and 2003 were as follows: At December 31,2004
    
    
    2003Land
    
    $
    1,410,635
    
    
    $
    1,410,635Building and improvements
    
    
    2,495,471
    
    
    
    2,467,874Equipment
    
    
    1,126,782
    
    
    
    947,357Furniture, fixtures and other
    
    
    594,866
    
    
    
    590,9085,627,754
    
    
    
    5,416,774Less accumulated depreciation
    
    
    (1,244,894
    )
    
    
    (959,877
    )Total premises and equipment
    
    $
    4,382,860
    
    
    $
    4,456,897
 58




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Note 5. Deposits At December 31, 2004 the scheduled maturities of time certificates were as follows: At December 31,2004Three months or less
    
    $
    36,879,299Over three months through one year
    
    
    69,785,463Over one year through three years
    
    
    3,231,667Over three years
    
    
    11,286$
    109,907,715
 Note 6. Income Tax Matters The provision for federal income taxes is comprised of the following for the years ended
December 31, 2004, 2003 and 2002: Years Ended December 31,2004
    
    
    2003
    
    
    2002Current
    
    $
    1,770,928
    
    
    $
    724,568
    
    
    $
    (96,594
    )Deferred taxes
    
    
    (111,734
    )
    
    
    (17,077
    )
    
    
    168,572$
    1,659,194
    
    
    $
    707,491
    
    
    $
    71,978
 The cumulative tax effects of the primary temporary differences that created deferred tax assets
and liabilities at December 31, 2004 and 2003 are as follows: At December 31,2004
    
    
    2003Deferred tax assets:Allowance for loan losses
    
    $
    582,000
    
    
    $
    367,000Securities available for sale
    
    
    44,979
    
    
    
    Other
    
    
    59,412
    
    
    
    21,678Total deferred tax assets
    
    
    686,391
    
    
    
    388,678Deferred tax liabilities:Premises and equipment
    
    
    247,000
    
    
    
    220,000Securities available for sale
    
    
    
    
    
    
    9,127Deferred loan costs
    
    
    250,000
    
    
    
    136,000Total deferred tax liabilities
    
    
    497,000
    
    
    
    365,127Net deferred tax asset
    
    $
    189,391
    
    
    $
    23,551
 59




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Note 7. 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 December
31, 2004 and 2003 is as follows: At December 31,2004
    
    
    2003Commitments to extend credit, of which approximately
$6,237,000 and $5,653,000 are unsecured at
December 31, 2004 and 2003, respectively
    
    $
    66,506,000
    
    
    $
    29,754,000Standby letters of credit, of which approximately
$275,000 and $0 are unsecured at December 31,
2004 and 2003, respectively
    
    
    1,639,000
    
    
    
    1,000,000$
    68,145,000
    
    
    $
    30,754,000
 60




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##### Table of Contents



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. Essentially
all letters of credit issued have expiration dates within one year. Lease commitments In 2001, the Company entered into a non-cancelable operating lease expiring in five years. The
lease includes two renewal option periods for five years each. The agreement requires monthly
rental payments of approximately $7,120 for the first year with an escalation clause for the
subsequent years. Total rental expense from this operating lease for the years ended December 31, 2004, 2003 and 2002
was approximately $89,000, $87,000 and $84,000, respectively. At December 31, 2004, the future
annual minimum lease payments under this operating lease are as follows: Years Ending December 31:2005
    
    
    
    
    
    $
    94,0902006
    
    
    
    
    
    
    15,754$
    109,844
 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 December 31, 2004 and 2003, real estate loans
accounted for approximately 83% and 81%, 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 3% and 4% of the Companys loan portfolio was unsecured at
December 31, 2004 and 2003, respectively. A substantial portion of the Companys customers ability to honor their contracts is dependent on
the economy in the area. The Companys goal is to continue to maintain a diversified loan
portfolio, which requires the loans to be well collateralized and supported by cash flows. 61




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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 entered into severance agreements with three executive officers, whereby upon change in
control of the Company, the Company may be liable for a payment as outlined in the severance
agreements. Note 8. Long-term Debt and Other Borrowed Funds The Company has entered into an agreement under which it can purchase up to $6,000,000 of
Federal funds. The interest rate charged on borrowings is determined by the lending institution at
the time of borrowings. The line is unsecured and the agreement can be terminated by the lending
institution at any time. There were no balances outstanding under this agreement at December 31,
2004 or 2003. The Company has also entered into an agreement under which it can obtain short term advances from
the Federal Reserve Bank. The interest rate charged on advances is determined by the Federal
Reserve Bank at the time of the advances. Advances are collateralized by 60% of certain qualifying
commercial real estate loans. Loans available for collateralization totaled approximately
$19,448,000 and $19,817,000 at December 31, 2004 and 2003, respectively. The agreement can be
terminated by the Federal Reserve Bank at any time. There were no balances outstanding under this
agreement at December 31, 2004 or 2003. 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 $467,000 and $505,000 at December 31, 2004 and 2003,
respectively. Note 9. Stockholders Equity During the year ended December 31, 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 $837,000 which resulted
in an increase in stockholders equity of $17.1 million. The Company also increased the number of
authorized common shares from 2,750,000 to 10,000,000 during the year ended December 31, 2004. Note 10. Regulatory Capital Requirements The Company is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -
and possibly additional discretionary  actions by regulators that, if undertaken, could have a
direct material effect on the Companys financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures of the Companys
assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. 62




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##### Table of Contents



Quantitative measures established by regulation to ensure capital adequacy require the Company to
maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31, 2004 and 2003,
that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2004, the most recent notification from the FDIC (as of September 30, 2004)
categorized Valley Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, Valley Bank must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since notification that management believes have changed the Banks category. Valley Bancorps consolidated capital amounts and ratios and Valley Banks actual capital amounts
and ratios are presented in the following table. For Capital
    
    
    To be Well Capitalized UnderAdequacy
    
    
    Prompt Corrective ActionActual
    
    
    Purposes
    
    
    ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of December 31, 2004:Valley BancorpTotal Capital (to Risk Weighted
Assets)
    
    $
    38,536,000
    
    
    
    16.97
    %
    
    $
    18,171,000
    
    
    
    8.00
    %
    
    
    n/a
    
    
    
    n/aTier I Capital (to Risk Weighted
Assets)
    
    
    36,341,000
    
    
    
    16.00
    %
    
    
    9,086,000
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTier I Capital (to Average Assets)
    
    
    36,341,000
    
    
    
    14.17
    %
    
    
    10,256,000
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aValley BankTotal Capital (to Risk Weighted
Assets)
    
    $
    36,500,000
    
    
    
    16.10
    %
    
    $
    18,136,000
    
    
    
    8.00
    %
    
    $
    22,670,000
    
    
    
    10.00
    %Tier I Capital (to Risk Weighted
Assets)
    
    
    34,305,000
    
    
    
    15.13
    %
    
    
    9,068,000
    
    
    
    4.00
    %
    
    
    13,602,000
    
    
    
    6.00
    %Tier I Capital (to Average Assets)
    
    
    34,305,000
    
    
    
    13.47
    %
    
    
    10,187,000
    
    
    
    4.00
    %
    
    
    12,734,000
    
    
    
    5.00
    %As of December 31, 2003:Valley BancorpTotal Capital (to Risk Weighted
Assets)
    
    $
    17,543,000
    
    
    
    11.72
    %
    
    $
    11,978,000
    
    
    
    8.00
    %
    
    
    n/a
    
    
    
    n/aTier I Capital (to Risk Weighted
Assets)
    
    
    15,980,000
    
    
    
    10.67
    %
    
    
    5,989,000
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTier I Capital (to Average Assets)
    
    
    15,980,000
    
    
    
    8.59
    %
    
    
    7,445,000
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aValley BankTotal Capital (to Risk Weighted
Assets)
    
    $
    17,335,000
    
    
    
    11.58
    %
    
    $
    11,974,000
    
    
    
    8.00
    %
    
    $
    14,968,000
    
    
    
    10.00
    %Tier I Capital (to Risk Weighted
Assets)
    
    
    15,772,000
    
    
    
    10.54
    %
    
    
    5,987,000
    
    
    
    4.00
    %
    
    
    8,981,000
    
    
    
    6.00
    %Tier I Capital (to Average Assets)
    
    
    15,772,000
    
    
    
    8.48
    %
    
    
    7,443,000
    
    
    
    4.00
    %
    
    
    9,304,000
    
    
    
    5.00
    %
 Additionally, State of Nevada banking regulations restrict distribution of the net assets of
the Bank because such regulations require the sum of the Banks stockholders equity and allowance
for loan losses to be at least 6% of the average of the Banks total daily deposit liabilities for
the preceding 60 days. As a result of these regulations, approximately $13,335,000 and $10,365,000
of the Banks stockholders equity was restricted at December 31, 2004 and 2003, respectively. 63




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##### Table of Contents



Note 11. Transactions with Related Parties The Company has had and may be expected to have in the future, banking transactions in the
ordinary course of business with directors, significant stockholders, principal officers, their
immediate families and affiliated companies in which they are principal stockholders (commonly
referred to as related parties). In managements opinion, these loans and transactions were on the
same terms as those for comparable loans and transactions with non-related parties. Aggregate loan transactions with related parties during the years ended December 31, 2004 and 2003
were as follows: 2004
    
    
    2003Balance, beginning
    
    $
    3,277,657
    
    
    $
    2,942,626New loans
    
    
    
    
    
    
    592,114Repayments
    
    
    (1,013,214
    )
    
    
    (257,083
    )Balance, ending
    
    $
    2,264,443
    
    
    $
    3,277,657
 None of these loans are past due, nonaccrual or restructured to provide a reduction or deferral of
interest or principal because of deterioration in the financial position of the borrower. There
were no loans to related parties that were considered classified loans at December 31, 2004 and
2003. Note 12. Stock Option Plans During the year ended December 31, 2000, the Company adopted an Incentive Stock Option Plan
and a Nonqualified Stock Option Plan (the Plans) under which options to acquire common stock of
the Company may be granted to employees, officers or directors at the discretion of the Board of
Directors. The Plans, as amended in 2002, allow for the granting of 210,000 incentive and 90,000
nonqualifying options as those terms are defined in the Internal Revenue Code. The Plans provide for the exercise price and term of each option to be determined by the Board at
the date of grant, provided that no options have a term greater than ten years and an exercise
price not less than the fair market value of the stock on the date of grant. 64




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A summary of stock option activity for the years ended December 31, 2004, 2003 and 2002 follows: 2004
    
    
    2003
    
    
    2002Incentive
    
    
    
    
    
    Incentive
    
    
    
    
    
    IncentiveStock
    
    
    Nonqualifying
    
    
    Stock
    
    
    Nonqualifying
    
    
    Stock
    
    
    NonqualifyingOptions
    
    
    Stock Options
    
    
    Options
    
    
    Stock Options
    
    
    Options
    
    
    Stock OptionsOutstanding options, beginning of period
    
    
    210,000
    
    
    
    40,000
    
    
    
    165,000
    
    
    
    38,500
    
    
    
    165,000
    
    
    
    46,750Granted
    
    
    
    
    
    
    
    
    
    
    45,000
    
    
    
    40,000
    
    
    
    
    
    
    
    Exercised
    
    
    (1,520
    )
    
    
    
    
    
    
    
    
    
    
    (34,875
    )
    
    
    
    
    
    
    (8,250
    )Forfeited
    
    
    (3,380
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,625
    )
    
    
    
    
    
    
    Outstanding options, end of period
    
    
    205,100
    
    
    
    40,000
    
    
    
    210,000
    
    
    
    40,000
    
    
    
    165,000
    
    
    
    38,500Options exercisable, end of period
    
    
    155,178
    
    
    
    40,000
    
    
    
    139,797
    
    
    
    40,000
    
    
    
    82,198
    
    
    
    38,500Available to grant, end of period
    
    
    3,380
    
    
    
    4,125
    
    
    
    
    
    
    
    4,125
    
    
    
    45,000
    
    
    
    40,500Weighted-average exercise price:Outstanding options, end of period
    
    $
    9.33
    
    
    $
    12.50
    
    
    $
    9.38
    
    
    $
    12.50
    
    
    $
    8.39
    
    
    $
    8.00Options granted, during the period
    
    
    
    
    
    
    
    
    
    $
    13.00
    
    
    $
    12.50
    
    
    
    
    
    
    
    Options exercised, during the period
    
    $
    10.00
    
    
    
    
    
    
    
    
    
    
    $
    8.00
    
    
    
    
    
    
    $
    8.00Options forfeited, during the period
    
    $
    12.10
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    Options expired, during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8.00
    
    
    
    
    
    
    
    Options exercisable, end of period
    
    $
    8.50
    
    
    $
    12.50
    
    
    $
    8.19
    
    
    $
    12.50
    
    
    $
    8.62
    
    
    $
    8.00Weighted-average expiration (in years)
    
    
    6.0
    
    
    
    3.7
    
    
    
    7.1
    
    
    
    4.7
    
    
    
    7.3
    
    
    
    0.1
 There were no stock options granted during the years ended December 31, 2004 and 2002. All
incentive options granted during the year ended December 31, 2003 expire ten years after the date
of grant and have exercise prices of $13.00. All nonqualified options granted during the year
ended December 31, 2003 expire five years after the date of grant and have exercise prices of
$12.50. Incentive stock options vest and become exercisable over a period of five years and nonqualified
stock options are immediately exercisable upon grant. Incentive stock options outstanding at December 31, 2004 are further summarized as follows: NumberExercise
    
    Number of
    
    
    Remaining Contract
    
    
    Exercisable atPrice
    
    Options
    
    
    Life
    
    
    December 31,2004$8.00
    
    122,995
    
    
    
    5
    
    
    
    122,995$9.54
    
    39,805
    
    
    
    6
    
    
    
    23,883$13.00
    
    42,300
    
    
    
    9
    
    
    
    8,300
 Note 13. Employee Benefit Plan The Company has a qualified 401(k) employee benefit plan for all eligible employees.
Participants are able to defer between 1% and 100% of their annual compensation to a limit of
$13,000. Participants who are at least 50 years of age by the end of the tax year are permitted to
make additional catch-up contributions up to $3,000. The Company may match a portion of the
employees contribution. Total expense was approximately $50,800, $34,500 and $32,500 for the
years ended December 31, 2004, 2003 and 2002, respectively. The plan also provides a profit sharing component where the Company can make a discretionary
contribution to the plan, which is allocated based on the compensation of eligible employees. The
Company made no discretionary contributions to the plan during the years ended December 31, 2004,
2003 and 2002. 65




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Note 14. Fair Value of Financial Instruments The estimated fair values of the Companys financial instruments at December 31, 2004 and 2003
were as follows: 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash and due from banks
    
    $
    8,054,489
    
    
    $
    8,054,000
    
    
    $
    4,951,928
    
    
    $
    4,952,000Federal funds sold
    
    
    17,850,000
    
    
    
    17,850,000
    
    
    
    8,875,000
    
    
    
    8,875,000Interest-bearing deposits at
other
financial institutions
    
    
    9,244,160
    
    
    
    9,244,000
    
    
    
    14,865,406
    
    
    
    14,865,000Securities available for sale
    
    
    36,412,828
    
    
    
    36,413,000
    
    
    
    19,006,189
    
    
    
    19,006,000Loans, net
    
    
    196,075,210
    
    
    
    196,089,000
    
    
    
    133,794,739
    
    
    
    134,076,000Loans held for sale
    
    
    163,829
    
    
    
    164,000
    
    
    
    
    
    
    
    Accrued interest receivable
    
    
    863,912
    
    
    
    864,000
    
    
    
    564,549
    
    
    
    565,000Financial liabilities:Deposits
    
    
    236,211,434
    
    
    
    237,011,000
    
    
    
    169,797,685
    
    
    
    170,748,000Accrued interest payable
    
    
    325,482
    
    
    
    325,000
    
    
    
    206,999
    
    
    
    207,000Other borrowed funds
    
    
    466,845
    
    
    
    467,000
    
    
    
    505,447
    
    
    
    505,000
 Interest rate risk The Company assumes interest rate risk (the risk that general interest rate levels will change) as
a result of its normal operations. As a result, the fair values of the Companys financial
instruments will change when interest rate levels change and that change may be either favorable or
unfavorable to the Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate
obligations are less likely to prepay in a rising rate environment and more likely to prepay in a
falling rate environment. Also, depositors who are receiving fixed rates are more likely to
withdraw funds before maturity in a rising rate environment and less likely to do so in a falling
rate environment. Management monitors rates and maturities of assets and liabilities and attempts
to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in
securities with terms that mitigate the Companys overall interest rate risk. Fair value of commitments Loan commitments on which the committed fixed interest rate is less than the current market rate
were also insignificant at December 31, 2004 and 2003. 66




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Note 15. Condensed Financial Statements of Parent Company The following Valley Bancorp (parent Company only) information should be read in conjunction
with the other notes to the consolidated financial statements: Valley Bancorp OnlyBalance Sheets
 December 31,2004
    
    
    2003AssetsAssets
Cash and due from banks
    
    $
    224,786
    
    
    $
    161,756Investment in common stock of Valley Bank
    
    
    34,218,559
    
    
    
    15,790,148Interest-bearing deposits at other financial institutions
    
    
    1,683,000
    
    
    
    Other assets
    
    
    158,433
    
    
    
    48,802Total assets
    
    $
    36,284,778
    
    
    $
    16,000,706Liabilities and Stockholders EquityAccrued expenses and other liabilities
    
    $
    30,669
    
    
    $
    3,219Stockholders equity
    
    
    36,254,109
    
    
    
    15,997,487Total liabilities and stockholders equity
    
    $
    36,284,778
    
    
    $
    16,000,706
 Valley Bancorp OnlyStatements Of Income
 Years Ended December 31,2004
    
    
    2003
    
    
    2002Income
    
    $
    9,461
    
    
    $
    
    
    
    $
    Operating expenses
    
    
    119,356
    
    
    
    11,053
    

    
    
    18,997Loss before income taxes and equity in
undistributed net income of Valley Bank
    
    
    (109,895
    )
    
    
    (11,053
    )
    
    
    (18,997
    )Income tax (benefit)
    
    
    (37,349
    )
    
    
    (3,758
    )
    
    
    (4,329
    )(72,546
    )
    
    
    (7,295
    )
    
    
    (14,668
    )Equity in net income of Valley Bank
    
    
    3,283,441
    
    
    
    1,406,287
    
    
    
    136,813Net income
    
    $
    3,210,895
    
    
    $
    1,398,992
    
    
    $
    122,145
 67




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Valley Bancorp OnlyStatements Of Cash Flows
 Years Ended December 31,2004
    
    
    2003
    
    
    2002Cash Flows from Operating Activities:Net income
    
    $
    3,210,895
    
    
    $
    1,398,992
    
    
    $
    122,145Adjustments to reconcile net income to net cash provided by (used in)
operating activities:Equity in net (income) of Valley Bank
    
    
    (3,283,441
    )
    
    
    (1,406,287
    )
    
    
    (136,813
    )Deferred taxes
    
    
    4,139
    
    
    
    3,626
    
    
    
    3,000Increase (decrease) in other assets
    
    
    (113,770
    )
    
    
    49,825
    
    
    
    (50,850
    )Increase (decrease) in accrued interest payable and other liabilities
    
    
    27,450
    
    
    
    (239
    )
    
    
    (542
    )Net cash provided by (used in) operating activities
    
    
    (154,727
    )
    
    
    45,917
    
    
    
    (63,060
    )Provided by Cash Flows from Investing Activities:Payments for investment in Valley Bank
    
    
    (15,500,000
    )
    
    
    (3,240,000
    )
    
    
    Net increase in interest bearing deposits at other financial institutions
    
    
    (1,683,000
    )
    
    
    
    
    
    
    Cash dividends received on investment in Valley Bank
    
    
    250,000
    
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (16,933,000
    )
    
    
    (3,240,000
    )
    
    
    Cash Flows from Financing Activities:Proceeds from issuance of common stock
    
    
    17,135,564
    
    
    
    3,048,340
    
    
    
    Proceeds from stock options exercised
    
    
    15,193
    
    
    
    279,000
    
    
    
    66,000Net cash provided by financing activities
    
    
    17,150,757
    
    
    
    3,327,340
    
    
    
    66,000Increase in cash and cash equivalents
    
    
    63,030
    
    
    
    133,257
    
    
    
    2,940Cash and cash equivalents, beginning of period
    
    
    161,756
    
    
    
    28,499
    
    
    
    25,559Cash and cash equivalents, end of period
    
    $
    224,786
    
    
    $
    161,756
    
    
    $
    28,499
 68




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Note 16. Quarterly Data (Unaudited) (Dollars in thousands) 2004
    
    
    2003Fourth
    
    
    Third
    
    
    Second
    
    
    First
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal interest income
    
    $
    3,922
    
    
    $
    3,474
    
    
    $
    3,239
    
    
    $
    2,823
    
    
    $
    2,628
    
    
    $
    2,571
    
    
    $
    2,476
    
    
    $
    2,331Total interest expense
    
    
    (726
    )
    
    
    (670
    )
    
    
    (669
    )
    
    
    (643
    )
    
    
    (630
    )
    
    
    (700
    )
    
    
    (819
    )
    
    
    (843
    )Net interest income
    
    
    3,196
    
    
    
    2,804
    
    
    
    2,570
    
    
    
    2,180
    
    
    
    1,998
    
    
    
    1,871
    
    
    
    1,657
    
    
    
    1,488Provision for loan losses
    
    
    (126
    )
    
    
    (120
    )
    
    
    (281
    )
    
    
    (105
    )
    
    
    (172
    )
    
    
    (113
    )
    
    
    (116
    )
    
    
    (77
    )Net interest income after
provision for loan losses
    
    
    3,070
    
    
    
    2,684
    
    
    
    2,289
    
    
    
    2,075
    
    
    
    1,826
    
    
    
    1,758
    
    
    
    1,541
    
    
    
    1,411Other income
    
    
    71
    
    
    
    62
    
    
    
    61
    
    
    
    101
    
    
    
    80
    
    
    
    91
    
    
    
    68
    
    
    
    57Other expense
    
    
    (1,597
    )
    
    
    (1,414
    )
    
    
    (1,301
    )
    
    
    (1,231
    )
    
    
    (1,213
    )
    
    
    (1,222
    )
    
    
    (1,169
    )
    
    
    (1,121
    )Net income before income taxes
    
    
    1,544
    
    
    
    1,332
    
    
    
    1,049
    
    
    
    945
    
    
    
    693
    
    
    
    627
    
    
    
    440
    
    
    
    347Income tax expense
    
    
    (525
    )
    
    
    (453
    )
    
    
    (358
    )
    
    
    (323
    )
    
    
    (247
    )
    
    
    (214
    )
    
    
    (129
    )
    
    
    (118
    )Net income
    
    $
    1,019
    
    
    $
    879
    
    
    $
    691
    
    
    $
    622
    
    
    $
    446
    
    
    $
    413
    
    
    $
    311
    
    
    $
    229Earnings per share:Basic
    
    $
    0.37
    
    
    $
    0.48
    
    
    $
    0.40
    
    
    $
    0.36
    
    
    $
    0.26
    
    
    $
    0.24
    
    
    $
    0.19
    
    
    $
    0.16Diluted
    
    $
    0.35
    
    
    $
    0.47
    
    
    $
    0.39
    
    
    $
    0.35
    
    
    $
    0.25
    
    
    $
    0.24
    
    
    $
    0.18
    
    
    $
    0.15
 Note 17. Subsequent Events Subsequent to December 31, 2004, the company announced that Valley Bank has purchased a new
9,960 square foot two-story office building at the corner of Jones and Charleston Boulevard in Las
Vegas, Nevada. The purchase price was $1.8 million. After tenant improvements are completed,
occupancy is tentatively scheduled for the second quarter of 2005. 69




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9a. Controls and Procedures The Companys management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of December 31, 2004. Based on
this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective. There were no significant changes in
the Companys internal controls over financial reporting that occurred during the quarter ended
December 31, 2004 that have materially affected or are reasonably likely to materially affect the
Companys internal control over financial reporting. 
 Item 9b. Other Information None. 70




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##### Table of Contents



PART III The information required by Part III of this Annual Report on Form 10-K is incorporated herein by
reference from various sections of the Companys Proxy Statement for its Annual Meeting of
Stockholders to be held on April 19, 2005 (Proxy Statement) as summarized below: 
 Item 10. Directors and Executive Officers of the Registrant The information regarding Directors and Executive Officers of the Registrant of the Bank is
incorporated by reference from the sections entitled BUSINESS OF THE MEETING  Proposal No. 1 
Election of Directors  Director Nominees and Continuing Directors, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT and COMPLIANCE WITH SECTION 16(a) FILING REQUIREMENTS of the
Companys Proxy Statement. Audit Committee Financial Expert Information regarding the Companys Audit Committee financial expert appears under the section
entitled MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS  Committee Membership in the Companys
Proxy Statement and is incorporated by reference. Code of Ethics The Company has adopted a written code of ethics within the meaning of Item 406 of Regulation S-X
that applies to its executive officers, including its Chief Executive Officer and Chief Financial
Officer. A copy of the code of ethics is filed as an Exhibit 14 to this Annual Report on Form 10-K
and is also available on the Companys website,http://www.valleybancorp.com/. 
 Item 11. Executive Compensation The information regarding Executive Compensation is incorporated by reference from the
sections entitled MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS  Compensation of Directors,
and EXECUTIVE COMPENSATION of the Proxy Statement. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management The information regarding Security Ownership of Certain Beneficial Owners and Management is
incorporated by reference from the sections entitled SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT of the Proxy Statement. 
 Item 13. Certain Relationships and Related Transactions The information regarding Certain Relationships and Related Transactions is incorporated by
reference from the section entitled TRANSACTIONS WITH MANAGEMENT of the Proxy Statement. 
 Item 14. Principal Accounting Fees and Services For information concerning principal accountant fees and services as well as related
pre-approval policies, see AUDITORS  Fees Paid to Independent Auditor in the Companys Proxy
Statement, which is incorporated by reference. 71




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PART IV 
 Item 15. Exhibits and Financial Statement Schedules (a) List of Documents filed as a part of the report 1. Financial Statements The following Consolidated Financial Statements of Valley Bancorp and Subsidiaries are included in
Item 8 of this report: PageReport of Independent Registered Public Accounting Firm
    
    
    42Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    43Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002
    
    
    44Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003
and 2002
    
    
    45Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    47Notes to Consolidated Financial Statements for the years ended December 31, 2004, 2003 and 2002
    
    
    49
 2. Financial Schedules All schedules are omitted because either they are inapplicable or not required, or because the
information required therein is included in the Consolidated Financial Statements and Notes
thereto. 3. Exhibits 72




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EXHIBIT INDEX Exhibit Number
    
    Description3.1
    
    Articles of Incorporation13.2
    
    Bylaws14.1
    
    Specimen Common Stock Certificate 210.1
    
    1999 Employee Stock Option Plan, as amended110.2
    
    Form of 1999 Employee Stock Option Plan Option Agreement110.3
    
    1999 Nonqualified Stock Option Plan, as amended110.4
    
    Form of 1999 Nonqualified Stock Option Plan Option Agreement110.5
    
    Lease Agreement, Pahrump branch office, dated February 1, 2001110.6*
    
    Employment Agreement between Valley Bancorp and Barry L. Hulin110.7*
    
    Change in Control Severance Agreement between Valley Bancorp and Steve Gilbert110.8*
    
    Change in Control Severance Agreement between Valley Bancorp and Dick Holtzclaw110.9*
    
    Change in Control Severance Agreement between Valley Bancorp and Sue Garland110.10
    
    Form of Director Indemnification Agreement110.11
    
    Agreement for the Purchase and Sale of Real Property dated December 1, 200414.1
    
    Code of Ethics21.1
    
    The sole subsidiary of the registrant is Valley Bank, a Nevada state-chartered bank23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 200232.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
   *
    
    Indicated management contract or compensatory plan, contract or arrangement.1Incorporated by reference from the Registration Statement on Form S-1 (File No.
333-117312) filed by the Company on July 12, 2004, and amended August 26 and September 10, 2004.2Incorporated by reference from the Registration Statement on Form 8-A (File No.
000-50950) filed by the Company on September 21, 2004. (b) Exhibits Exhibits required by Section 601 of Regulation S-K (see (a) above). (c) Financial Statement Schedules See the notes to the Consolidated Financial Statements included in this report. 73




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. Date: March 24, 2005
    
    VALLEY BANCORPBy:
    
    /s/ Barry L. HulinBarry L. Hulin,President and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant in the capacities and on the date
indicated. Date: March 24, 2005 /s/  Thomas J. Krob
    
    /s/  Barry L. HulinThomas J. Krob,
    
    Barry L. Hulin,Chairman of the Board
    
    President, Chief Executive
Officer and Director(Principal Executive Officer)/s/  James A. McKellar, Sr.
    
    /s/  Dick L. RottmanJames A. McKellar, Sr., Director
    
    Dick L. Rottman, Director/s/  George A. Brizendine
    
    /s/  Don HamiltonGeorge A. Brizendine, Director
    
    Don Hamilton, Director/s/  Mary E. Hausch
    
    /s/  William E. SnyderMary E. Hausch, Director
    
    William E. Snyder, Director/s/  Dan Stewart
    
    /s/  Gary VauseDan Stewart, Director
    
    Gary Vause, Director/s/  Dick HoltzclawDick Holtzclaw,Executive Vice President,Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
 74