##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 Quarterly
Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended June 30, 2006
 Commission File Number: 000-50950
 VALLEY BANCORP
  Nevada
    
    88-0493760(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer I.D. Number)1300 S. Jones Blvd., Las Vegas, NV
    
    89146(Address of Principal Executive Offices)
    
    (Zip Code)
  
   Yes þ
    
    No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  Yes o
    
    No þ
  2,827,881




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##### 



VALLEY BANCORP
Form 10-Q Q2 06
   
 PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements  UnauditedConsolidated Balance Sheets at June 30, 2006 and December 31, 2005
    
    
    2Consolidated Statements of Income for the Three Months Ended June 30, 2006 and 2005
    
    
    3Consolidated Statements of Income for the Six Months Ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    26PART II
    
    OTHER INFORMATION
    
    
    27Item 1.
    
    Legal Proceedings
    
    
    27Item 1A.
    
    Risk Factors
    
    
    27Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3.
    
    Defaults Upon Senior Securities
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Item 5.
    
    Other Information
    
    
    27Item 6.
    
    Exhibits
    
    
    27Signatures
    
    
    
    
    28EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  1




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##### Table of Contents



Part I. Financial Information
 
 ITEM 1. FINANCIAL STATEMENTS
 Valley Bancorp And Subsidiary
 
 Consolidated Balance Sheets (Unaudited)
 June 30,
    
    
    December 31,2006
    
    
    2005AssetsCash and due from banks
    
    $
    6,965,280
    
    
    $
    5,821,323Federal funds sold
    
    
    52,860,000
    
    
    
    30,575,000Cash and cash equivalents
    
    
    59,825,280
    
    
    
    36,396,323Interest-bearing deposits at other financial institutions
    
    
    7,894,201
    
    
    
    9,221,217Securities available for sale at fair value
    
    
    33,829,201
    
    
    
    35,813,461Investment in FHLB stock, at cost
    
    
    997,900
    
    
    
    808,100Loans, net of allowance for loan losses of $3,317,181 and $3,022,708, respectively
    
    
    328,340,723
    
    
    
    299,263,562Premises and equipment, net
    
    
    7,259,413
    
    
    
    7,263,284Accrued interest receivable
    
    
    1,592,480
    
    
    
    1,557,815Deferred taxes, net
    
    
    731,355
    
    
    
    551,940Other assets
    
    
    193,465
    
    
    
    287,630Total assets
    
    $
    440,664,018
    
    
    $
    391,163,332Liabilities and Stockholders EquityDeposits:Non-interest bearing demand
    
    $
    51,886,317
    
    
    $
    46,030,326Interest bearing:Demand
    
    
    72,806,073
    
    
    
    93,898,937Savings
    
    
    57,684,254
    
    
    
    13,081,289Time, $100,000 and over
    
    
    95,376,485
    
    
    
    86,637,246Other time
    
    
    99,794,462
    
    
    
    92,788,699Total deposits
    
    
    377,547,591
    
    
    
    332,436,497Accrued interest payable and other liabilities
    
    
    2,278,416
    
    
    
    1,334,728Long-term debt
    
    
    15,403,545
    
    
    
    15,425,399Total liabilities
    
    
    395,229,552
    
    
    
    349,196,624Commitments and contingencies (Note 5)Stockholders equity:Preferred stock, $1.00 par value, 500,000 shares authorized; none issued or
outstanding
    
    
    
    
    
    
    Common stock, $0.73 par value; 10,000,000 shares authorized;
2,827,881 shares issued and outstanding as of June 30, 2006 and
2,827,681 shares issued and outstanding as of December 31, 2005
    
    
    2,064,353
    
    
    
    2,064,207Additional paid-in capital
    
    
    30,147,747
    
    
    
    30,106,603Retained earnings
    
    
    13,935,327
    
    
    
    10,295,664Accumulated other comprehensive loss
    
    
    (712,961
    )
    
    
    (499,766
    )Total stockholders equity
    
    
    45,434,466
    
    
    
    41,966,708Total liabilities and stockholders equity
    
    $
    440,664,018
    
    
    $
    391,163,332
  2




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##### Table of Contents



Valley Bancorp And Subsidiary
 
 Consolidated Statements Of Income (Unaudited)
 Three Months Ended June 30,2006
    
    
    2005Interest income on:Loans, including fees
    
    $
    7,605,800
    
    
    $
    4,721,819Securities available for sale
    
    
    336,591
    
    
    
    357,125Federal funds sold and interest-bearing deposits at other financial institutions
    
    
    512,258
    
    
    
    202,519Dividends from investment in Federal Home Loan Bank stock
    
    
    10,043
    
    
    
    Total interest income
    
    
    8,464,692
    
    
    
    5,281,463Interest expense on:Deposits
    
    
    2,827,490
    
    
    
    1,404,461Long-term debt and other borrowed funds
    
    
    160,460
    
    
    
    25,081Total interest expense
    
    
    2,987,950
    
    
    
    1,429,542Net interest income
    
    
    5,476,742
    
    
    
    3,851,921Provision for loan losses
    
    
    52,000
    
    
    
    229,000Net interest income after provision for loan losses
    
    
    5,424,742
    
    
    
    3,622,921Other income:Service charges on deposit accounts
    
    
    64,719
    
    
    
    45,609Other
    
    
    19,397
    
    
    
    15,62884,116
    
    
    
    61,237Other expense:Salaries and employee benefits
    
    
    1,232,287
    
    
    
    906,159Legal, professional and consulting
    
    
    273,119
    
    
    
    (1,510
    )Occupancy
    
    
    138,006
    
    
    
    85,787Data processing
    
    
    121,093
    
    
    
    106,807Equipment rentals, depreciation and maintenance
    
    
    102,282
    
    
    
    66,839Director fees
    
    
    91,050
    
    
    
    52,950Office supplies & printing
    
    
    85,283
    
    
    
    47,021Advertising and public relations
    
    
    81,218
    
    
    
    23,855Outside services
    
    
    74,689
    
    
    
    56,222Telephone
    
    
    41,518
    
    
    
    46,252Federal Reserve Bank & correspondent bank fees
    
    
    25,177
    
    
    
    25,555Other
    
    
    173,293
    
    
    
    137,7082,439,015
    
    
    
    1,553,645Income before income taxes
    
    
    3,069,843
    
    
    
    2,130,513Income tax expense
    
    
    1,064,610
    
    
    
    726,619Net income
    
    $
    2,005,233
    
    
    $
    1,403,894Comprehensive income
    
    $
    1,922,897
    
    
    $
    1,628,069Earnings per share:Basic
    
    $
    0.71
    
    
    $
    0.50Diluted
    
    $
    0.68
    
    
    $
    0.48
  3




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##### Table of Contents



Valley Bancorp And Subsidiary
 
 Consolidated Statements Of Income (Unaudited)
 Six Months Ended June 30,2006
    
    
    2005Interest income on:Loans, including fees
    
    $
    14,220,277
    
    
    $
    8,652,585Securities available for sale
    
    
    670,354
    
    
    
    711,072Federal funds sold and interest-bearing deposits at other financial institutions
    
    
    967,761
    
    
    
    380,050Dividends from investment in Federal Home Loan Bank stock
    
    
    19,501
    
    
    
    Total interest income
    
    
    15,877,893
    
    
    
    9,743,707Interest expense on:Deposits
    
    
    5,107,344
    
    
    
    2,485,640Long-term debt and other borrowed funds
    
    
    320,979
    
    
    
    33,343Total interest expense
    
    
    5,428,323
    
    
    
    2,518,983Net interest income
    
    
    10,449,570
    
    
    
    7,224,724Provision for loan losses
    
    
    279,000
    
    
    
    280,000Net interest income after provision for loan losses
    
    
    10,170,570
    
    
    
    6,944,724Other income:Service charges on deposit accounts
    
    
    121,367
    
    
    
    101,492Other
    
    
    24,197
    
    
    
    35,243145,564
    
    
    
    136,735Other expense:Salaries and employee benefits
    
    
    2,471,427
    
    
    
    1,806,982Legal, professional and consulting
    
    
    450,887
    
    
    
    109,919Occupancy
    
    
    272,363
    
    
    
    170,791Data processing
    
    
    238,320
    
    
    
    210,388Equipment rentals, depreciation and maintenance
    
    
    208,842
    
    
    
    152,698Office supplies & printing
    
    
    183,730
    
    
    
    117,284Director fees
    
    
    160,400
    
    
    
    104,050Advertising and public relations
    
    
    152,609
    
    
    
    70,026Outside services
    
    
    152,126
    
    
    
    120,738Telephone
    
    
    95,810
    
    
    
    92,068Federal Reserve Bank & correspondent bank fees
    
    
    55,572
    
    
    
    50,986Other
    
    
    327,548
    
    
    
    288,8654,769,634
    
    
    
    3,294,795Income before income taxes
    
    
    5,546,500
    
    
    
    3,786,664Income tax expense
    
    
    1,906,837
    
    
    
    1,290,573Net income
    
    $
    3,639,663
    
    
    $
    2,496,091Comprehensive income
    
    $
    3,426,468
    
    
    $
    2,378,318Earnings per share:Basic
    
    $
    1.29
    
    
    $
    0.89Diluted
    
    $
    1.23
    
    
    $
    0.85
  4




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##### Table of Contents



Valley Bancorp And Subsidiary
 
 Consolidated Statements Of Cash Flows (Unaudited)
 Six Months Ended June 30,2006
    
    
    2005Cash Flows from Operating Activities:Net income
    
    $
    3,639,663
    
    
    $
    2,496,091Adjustments to reconcile net income to net cash provided by operating
activitiesDepreciation of premises and equipment
    
    
    250,123
    
    
    
    180,454Share-based compensation expense
    
    
    5,190
    
    
    
    Loss on sale and disposition of equipment
    
    
    13,092
    
    
    
    Deferred taxes
    
    
    (69,587
    )
    
    
    (88,475
    )Tax benefit resulting from the exercise of nonqualified stock options
    
    
    
    
    
    
    89,234Excess tax benefits from share-based payment arrangements
    
    
    (10,822
    )
    
    
    Net accretion/amortization of investment discount/premium
    
    
    (3,446
    )
    
    
    (3,425
    )Provision for loan losses
    
    
    279,000
    
    
    
    280,000Increase in accrued interest receivable
    
    
    (34,665
    )
    
    
    (229,862
    )(Increase) decrease in other assets
    
    
    94,165
    
    
    
    (212,850
    )Increase in accrued interest payable and other liabilities
    
    
    954,510
    
    
    
    822,648Net cash provided by operating activities
    
    
    5,117,223
    
    
    
    3,333,815Cash Flows from Investing Activities:Net increase in loans
    
    
    (29,356,161
    )
    
    
    (49,616,404
    )Net decrease in interest bearing deposits at other financial institutions
    
    
    1,327,016
    
    
    
    1,270,296Purchase of securities available for sale
    
    
    (3,046,215
    )
    
    
    (3,034,632
    )Proceeds from the maturities of securities available for sale
    
    
    4,710,899
    
    
    
    880,548Purchase of Federal Home Loan Bank stock
    
    
    (189,800
    )
    
    
    (792,900
    )Proceeds from sale and disposition of equipment
    
    
    5,000
    
    
    
    Purchase of premises and equipment
    
    
    (264,345
    )
    
    
    (2,224,220
    )Net cash used in investing activities
    
    
    (26,813,606
    )
    
    
    (53,517,312
    )Cash Flows from Financing Activities:Net increase in deposits
    
    
    45,111,094
    
    
    
    42,648,872Principal payments on notes payable
    
    
    (21,854
    )
    
    
    (20,355
    )Proceeds from FHLB borrowings
    
    
    
    
    
    
    15,000,000Proceeds from stock options exercised
    
    
    2,600
    
    
    
    159,670Proceeds from forfeited short swing profit
    
    
    22,678
    
    
    
    Excess tax benefits from share-based payment arrangements
    
    
    10,822
    
    
    
    Net cash provided by financing activities
    
    
    45,125,340
    
    
    
    57,788,187Increase in cash and cash equivalents
    
    
    23,428,957
    
    
    
    7,604,690Cash and cash equivalents, beginning of period
    
    
    36,396,323
    
    
    
    25,904,489Cash and cash equivalents, end of period
    
    $
    59,825,280
    
    
    $
    33,509,179See Notes to Consolidated Financial Statements.
 5




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##### Table of Contents



Valley Bancorp
 
 Notes to Consolidated Financial Statements
 1. Nature of Business and Basis of Presentation
    2. Earnings Per Share
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    2,005,233
    
    
    $
    1,403,894
    
    
    $
    3,639,663
    
    
    $
    2,496,091Average number of common shares outstanding
    
    
    2,827,881
    
    
    
    2,798,203
    
    
    
    2,827,857
    
    
    
    2,794,518Effect of dilutive options
    
    
    141,699
    
    
    
    138,739
    
    
    
    140,230
    
    
    
    150,926Average number of common shares outstanding
used to
calculate diluted earnings per common share
    
    
    2,969,580
    
    
    
    2,936,942
    
    
    
    2,968,087
    
    
    
    2,945,444Basic EPS
    
    $
    0.71
    
    
    $
    0.50
    
    
    $
    1.29
    
    
    $
    0.89Diluted EPS
    
    $
    0.68
    
    
    $
    0.48
    
    
    $
    1.23
    
    
    $
    0.85
 6




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##### Table of Contents



3. Stock Options
   Share Based Payment Accounting for Stock Issued to Employees
 Accounting for Stock-Based Compensation
     7




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income as reported
    
    $
    2,005,233
    
    
    $
    1,403,894
    
    
    $
    3,639,663
    
    
    $
    2,496,091Deduct: Total Share-based employee compensation expense
determined under fair value based method for all awards
granted prior to the IPO, net of related tax effects
    
    
    (10,233
    )
    
    
    (18,894
    )
    
    
    (20,663
    )
    
    
    (35,091
    )Pro forma net income
    
    $
    1,995,000
    
    
    $
    1,385,000
    
    
    $
    3,619,000
    
    
    $
    2,461,000As reported:Basic earnings per share
    
    $
    0.71
    
    
    $
    0.50
    
    
    $
    1.29
    
    
    $
    0.89Diluted earnings per share
    
    $
    0.68
    
    
    $
    0.48
    
    
    $
    1.23
    
    
    $
    0.85Pro forma:Basic earnings per share
    
    $
    0.71
    
    
    $
    0.49
    
    
    $
    1.28
    
    
    $
    0.88Diluted earnings per share
    
    $
    0.67
    
    
    $
    0.47
    
    
    $
    1.22
    
    
    $
    0.84
  Options Granted in 2005Incentive
    
    NonqualifiedStock Options
    
    Stock OptionsWeighted average grant-date fair value per optional share
    
    $
    10.38
    
    
    
    Expected term (in years)
    
    
    5
    
    
    
    Expected volatility factor
    
    
    32
    %
    
    
    Risk-free interest rate
    
    
    3.77
    %
    
    
    Expected dividends
    
    None
    
    
    
    Weighted-AverageNumber of
    
    
    Weighted-Average
    
    
    RemainingShares
    
    
    Exercise Price
    
    
    Contract LifeOutstanding options at January 1, 2006
    
    
    205,957
    
    
    $
    10.38Exercised
    
    
    (200
    )
    
    $
    13.00Outstanding options at June 30, 2006
    
    
    205,757
    
    
    $
    10.38
    
    
    4.26 YrsOptions exercisable at June 30, 2006
    
    
    180,757
    
    
    $
    9.64
    
    
    3.79 Yrs
 8




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##### Table of Contents



Number of
    
    
    Weighted-AverageShares
    
    
    Grant-Date Fair ValueNonvested options at January 1, 2006
    
    
    32,551
    
    
    $
    4.91Vested
    
    
    (7,551
    )
    
    $
    5.04Nonvested options at June 30, 2006
    
    
    25,000
    
    
    $
    5.21
 4. Loans
  At June 30,
    
    
    At December 31,2006
    
    
    2005Commercial, financial and industrial
    
    $
    30,416,899
    
    
    $
    33,605,477Real Estate:Commercial
    
    
    100,889,868
    
    
    
    90,944,361Construction, raw land and land development
    
    
    195,326,678
    
    
    
    172,155,563Residential
    
    
    5,665,397
    
    
    
    4,662,172Consumer
    
    
    751,515
    
    
    
    1,978,744333,050,357
    
    
    
    303,346,317Deduct:Unearned net loan fees
    
    
    (1,392,453
    )
    
    
    (1,060,047
    )Allowance for loan losses
    
    
    (3,317,181
    )
    
    
    (3,022,708
    )Net loans
    
    $
    328,340,723
    
    
    $
    299,263,562
  9




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##### Table of Contents



5. Commitments and Contingencies
 Contingencies
   Financial instruments with off-balance-sheet risk
    At June 30,
    
    
    At December 31,2006
    
    
    2005Commitments to extend credit, of which approximately $7,218,000 and
$4,972,000
are unsecured at June 30, 2006 and December 31, 2005, respectively
    
    $
    87,041,000
    
    
    $
    83,109,000Standby letters of credit, of which approximately $25,000 are unsecured
at June 30, 2006 and December 31, 2005
    
    
    3,135,000
    
    
    
    3,135,000$
    90,176,000
    
    
    $
    86,244,000
 Commitments to extend credit
  Standby letters of credit
  10




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##### Table of Contents



Lease commitments
   Financial instruments with concentrations of credit risk
 Concentration by geographic location
   Employment and severance agreements
  6. Significant Event
  11




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview of Operating Results for the Three and Six Months Ended June 30, 2006 and 2005
   Critical Accounting Policies
  Allowance for Loan Loss Methodology.
 12




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Comparison of Financial Condition at June 30, 2006 and December 31, 2005
 Total Assets
   At June 30, 2006
    
    
    At December 31, 2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Construction, raw land and land development loans
    
    $
    195,326
    
    
    
    58.68
    %
    
    $
    172,156
    
    
    
    56.75
    %Commercial real estate loans
    
    
    100,890
    
    
    
    30.29
    %
    
    
    90,944
    
    
    
    29.98
    %Commercial and industrial loans
    
    
    30,417
    
    
    
    9.10
    %
    
    
    33,605
    
    
    
    11.08
    %Other loans
    
    
    6,417
    
    
    
    1.93
    %
    
    
    6,641
    
    
    
    2.19
    %Total loans
    
    
    333,050
    
    
    
    100.00
    %
    
    
    303,346
    
    
    
    100.00
    %Allowance for loan losses
    
    
    (3,317
    )
    
    
    
    
    
    
    (3,022
    )Unearned net loan fees
    
    
    (1,392
    )
    
    
    
    
    
    
    (1,060
    )Net loans
    
    $
    328,341
    
    
    
    
    
    
    $
    299,264
 13




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##### Table of Contents



June 30, 2006
    
    
    December 31, 2005(Dollars in thousands)US Government agency securities
    
    $
    27,273
    
    
    $
    28,452Mortgage backed securities
    
    
    5,383
    
    
    
    6,007Collateralized mortgage obligations
    
    
    1,173
    
    
    
    1,354Total
    
    $
    33,829
    
    
    $
    35,813
 Deposits
  At June 30, 2006
    
    
    At December 31, 2005Percent of
    
    
    
    
    
    
    Percent ofAmount
    
    
    Deposits
    
    
    Amount
    
    
    Deposits(Dollars in thousands)Transaction accounts:Savings accounts
    
    $
    57,684
    
    
    
    15.28
    %
    
    $
    13,081
    
    
    
    3.93
    %Money market deposit accounts
    
    
    56,497
    
    
    
    14.96
    %
    
    
    77,159
    
    
    
    23.21
    %NOW accounts
    
    
    16,310
    
    
    
    4.32
    %
    
    
    16,740
    
    
    
    5.04
    %Noninterest-bearing demand accounts
    
    
    51,886
    
    
    
    13.75
    %
    
    
    46,030
    
    
    
    13.85
    %Total transaction accounts
    
    
    182,377
    
    
    
    48.31
    %
    
    
    153,010
    
    
    
    46.03
    %Time Deposits:$100,000 and over
    
    
    95,377
    
    
    
    25.26
    %
    
    
    86,637
    
    
    
    26.06
    %Other time
    
    
    99,794
    
    
    
    26.43
    %
    
    
    92,789
    
    
    
    27.91
    %Total time deposits
    
    
    195,171
    
    
    
    51.69
    %
    
    
    179,426
    
    
    
    53.97
    %Total Deposits
    
    $
    377,548
    
    
    
    100.00
    %
    
    $
    332,436
    
    
    
    100.00
    %
 Stockholders Equity
 14




---



##### Table of Contents



Non-Performing Assets
  At June 30, 2006
    
    
    At December 31, 2005Percent of
    
    
    
    
    
    
    Percent ofLoans in
    
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    
    EachCategory to
    
    
    
    
    
    
    Category toAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans(Dollars in thousands)Construction, raw land and
land development loans
    
    $
    957
    
    
    
    58.68
    %
    
    $
    706
    
    
    
    56.75
    %Commercial real estate loans
    
    
    754
    
    
    
    30.29
    %
    
    
    636
    
    
    
    29.98
    %Commercial and industrial loans
    
    
    1,501
    
    
    
    9.10
    %
    
    
    1,547
    
    
    
    11.08
    %Other loans
    
    
    105
    
    
    
    1.93
    %
    
    
    133
    
    
    
    2.19
    %Total
    
    $
    3,317
    
    
    
    100.00
    %
    
    $
    3,022
    
    
    
    100.00
    %
 Comparison of Operating Results for the Three and Six Months Ended June 30, 2006 and 2005.
 Net Income
  Net Interest Income
  15




---



##### Table of Contents



Three Months Ended June 30,2006
    
    
    2005Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance (1)
    
    
    Expense
    
    
    Cost (2)
    
    
    Balance (1)
    
    
    Expense
    
    
    Cost (2)(Dollars in thousands)AssetsEarning assets:Loans (3) (4) (5)
    
    $
    333,243
    
    
    $
    7,606
    
    
    
    9.15
    %
    
    $
    240,560
    
    
    $
    4,722
    
    
    
    7.87
    %Federal funds sold (6)
    
    
    36,141
    
    
    
    435
    
    
    
    4.83
    %
    
    
    16,270
    
    
    
    119
    
    
    
    2.93
    %Interest bearing deposits (6)
    
    
    6,196
    
    
    
    77
    
    
    
    4.98
    %
    
    
    10,682
    
    
    
    84
    
    
    
    3.15
    %Investment securities (6)
    
    
    34,815
    
    
    
    347
    
    
    
    4.00
    %
    
    
    39,101
    
    
    
    357
    
    
    
    3.66
    %Total earning assets and interest income
    
    
    410,395
    
    
    
    8,465
    
    
    
    8.27
    %
    
    
    306,613
    
    
    
    5,282
    
    
    
    6.91
    %Non-interest earning assets:Cash and due from banks
    
    
    9,197
    
    
    
    
    
    
    
    
    
    
    
    7,141Premises and equipment
    
    
    7,326
    
    
    
    
    
    
    
    
    
    
    
    6,282Other assets
    
    
    2,626
    
    
    
    
    
    
    
    
    
    
    
    2,392Allowance for credit losses
    
    
    (3,340
    )
    
    
    
    
    
    
    
    
    
    
    (2,374
    )Total assets
    
    $
    426,204
    
    
    
    
    
    
    
    
    
    
    $
    320,054Liabilities and Stockholders EquityInterest bearing liabilities:Interest bearing demand deposits
    
    $
    84,003
    
    
    $
    345
    
    
    
    1.65
    %
    
    $
    75,394
    
    
    $
    262
    
    
    
    1.39
    %Savings deposits
    
    
    35,599
    
    
    
    310
    
    
    
    3.49
    %
    
    
    11,768
    
    
    
    22
    
    
    
    0.75
    %Time deposits $100,000 or more
    
    
    93,385
    
    
    
    1,035
    
    
    
    4.45
    %
    
    
    61,741
    
    
    
    457
    
    
    
    2.97
    %Other time deposits
    
    
    99,538
    
    
    
    1,137
    
    
    
    4.58
    %
    
    
    82,522
    
    
    
    664
    
    
    
    3.23
    %Long-term borrowings
    
    
    15,410
    
    
    
    161
    
    
    
    4.19
    %
    
    
    2,101
    
    
    
    25
    
    
    
    4.77
    %Total interest bearing liabilities
    
    
    327,935
    
    
    
    2,988
    
    
    
    3.65
    %
    
    
    233,526
    
    
    
    1,430
    
    
    
    2.46
    %Noninterest-bearing liabilities:Demand deposits
    
    
    50,770
    
    
    
    
    
    
    
    
    
    
    
    46,959Other liabilities
    
    
    2,711
    
    
    
    
    
    
    
    
    
    
    
    1,554Stockholders equity
    
    
    44,788
    
    
    
    
    
    
    
    
    
    
    
    38,015Total liabilities and stockholders equity
    
    $
    426,204
    
    
    
    
    
    
    
    
    
    
    $
    320,054Net Interest Spread (7)
    
    
    
    
    
    
    
    
    
    
    4.62
    %
    
    
    
    
    
    
    
    
    
    
    4.45
    %Net interest income/margin (8)
    
    
    
    
    
    $
    5,477
    
    
    
    5.35
    %
    
    
    
    
    
    $
    3,852
    
    
    
    5.04
    %
 16




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##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance (1)
    
    
    Expense
    
    
    Cost (2)
    
    
    Balance (1)
    
    
    Expense
    
    
    Cost (2)(Dollars in thousands)AssetsEarning assets:Loans (3) (4) (5)
    
    $
    320,670
    
    
    $
    14,220
    
    
    
    8.94
    %
    
    $
    224,521
    
    
    $
    8,653
    
    
    
    7.77
    %Federal funds sold (6)
    
    
    34,173
    
    
    
    793
    
    
    
    4.68
    %
    
    
    17,939
    
    
    
    240
    
    
    
    2.70
    %Interest bearing deposits (6)
    
    
    7,548
    
    
    
    175
    
    
    
    4.68
    %
    
    
    9,898
    
    
    
    140
    
    
    
    2.85
    %Investment securities (6)
    
    
    35,150
    
    
    
    690
    
    
    
    3.96
    %
    
    
    38,764
    
    
    
    711
    
    
    
    3.70
    %Total earning assets and interest income
    
    
    397,541
    
    
    
    15,878
    
    
    
    8.05
    %
    
    
    291,122
    
    
    
    9,744
    
    
    
    6.75
    %Non-interest earning assets:Cash and due from banks
    
    
    9,586
    
    
    
    
    
    
    
    
    
    
    
    7,379Premises and equipment
    
    
    7,334
    
    
    
    
    
    
    
    
    
    
    
    6,042Other assets
    
    
    2,489
    
    
    
    
    
    
    
    
    
    
    
    2,207Allowance for credit losses
    
    
    (3,202
    )
    
    
    
    
    
    
    
    
    
    
    (2,310
    )Total assets
    
    $
    413,748
    
    
    
    
    
    
    
    
    
    
    $
    304,440Liabilities and Stockholders EquityInterest bearing liabilities:Interest bearing demand deposits
    
    $
    89,970
    
    
    $
    750
    
    
    
    1.68
    %
    
    $
    74,300
    
    
    $
    475
    
    
    
    1.29
    %Savings deposits
    
    
    26,432
    
    
    
    391
    
    
    
    2.98
    %
    
    
    12,192
    
    
    
    40
    
    
    
    0.66
    %Time deposits $100,000 or more
    
    
    89,610
    
    
    
    1,904
    
    
    
    4.28
    %
    
    
    56,098
    
    
    
    781
    
    
    
    2.81
    %Other time deposits
    
    
    95,070
    
    
    
    2,062
    
    
    
    4.37
    %
    
    
    77,105
    
    
    
    1,190
    
    
    
    3.11
    %Long-term borrowings
    
    
    15,416
    
    
    
    321
    
    
    
    4.20
    %
    
    
    1,287
    
    
    
    33
    
    
    
    5.17
    %Total interest bearing liabilities
    
    
    316,498
    
    
    
    5,428
    
    
    
    3.46
    %
    
    
    220,982
    
    
    
    2,519
    
    
    
    2.30
    %Noninterest-bearing liabilities:Demand deposits
    
    
    50,943
    
    
    
    
    
    
    
    
    
    
    
    44,739Other liabilities
    
    
    2,360
    
    
    
    
    
    
    
    
    
    
    
    1,288Stockholders equity
    
    
    43,947
    
    
    
    
    
    
    
    
    
    
    
    37,431Total liabilities and stockholders equity
    
    $
    413,748
    
    
    
    
    
    
    
    
    
    
    $
    304,440Net Interest Spread (7)
    
    
    
    
    
    
    
    
    
    
    4.59
    %
    
    
    
    
    
    
    
    
    
    
    4.45
    %Net interest income/margin (8)
    
    
    
    
    
    $
    10,450
    
    
    
    5.30
    %
    
    
    
    
    
    $
    7,225
    
    
    
    5.00
    %
 17




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##### Table of Contents



(1)
    
    Average balances are obtained from the best available daily data.(2)
    
    Annualized.(3)
    
    Loans are gross of allowance for credit losses but after unearned fees.(4)
    
    Non-accruing loans are included in the average balances.(5)
    
    Fee income is included in interest income.(6)
    
    All investments are taxable.(7)
    
    Represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities(8)
    
    Net interest margin represents net interest income as a percentage of average interest-earning assets. Interest Income
  Interest Expense
  Provision for Loan Losses
 18




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##### Table of Contents



At or For the
    
    
    At or For theThree Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)
    
    
    (Dollars in thousands)Balance at the beginning of period
    
    $
    3,289
    
    
    $
    2,248
    
    
    $
    3,022
    
    
    $
    2,113Charge-offs:Commercial and industrial loans
    
    
    (25
    )
    
    
    
    
    
    
    (25
    )
    
    
    Total charge-offs
    
    
    (25
    )
    
    
    
    
    
    
    (25
    )
    
    
    Recoveries:Commercial and industrial loans
    
    
    1
    
    
    
    20
    
    
    
    41
    
    
    
    110Total recoveries
    
    
    1
    
    
    
    20
    
    
    
    41
    
    
    
    110Net (charge-offs)/recoveries
    
    
    (24
    )
    
    
    20
    
    
    
    16
    
    
    
    110Additions charge to operations
    
    
    52
    
    
    
    229
    
    
    
    279
    
    
    
    280Unfunded commitment reserve adjustments (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Balance at end of period
    
    $
    3,317
    
    
    $
    2,497
    
    
    $
    3,317
    
    
    $
    2,497Allowance for loan losses as a percent of total loans
    
    
    1.00
    %
    
    
    1.01
    %
    
    
    1.00
    %
    
    
    1.01
    %Ratio of net charge-offs/(recoveries) to average loans -
annualized
    
    
    0.03
    %
    
    
    (0.03
    )%
    
    
    (0.01
    )%
    
    
    (0.10
    )%
 
 (1)
    
    Unfunded commitments reserve included in other liabilities was $90,000 at June 30, 2006 and $80,000 at June 30, 2005. 19




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##### Table of Contents



Non-Interest Income
  Noninterest Income
    
    
    Noninterest IncomeFor the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in thousands)
    
    
    (Dollars in thousands)Banking and service charge fees
    
    $
    65
    
    
    $
    46
    
    
    $
    122
    
    
    $
    102Other income
    
    
    19
    
    
    
    16
    
    
    
    24
    
    
    
    35Total noninterest income
    
    $
    84
    
    
    $
    62
    
    
    $
    146
    
    
    $
    137
 Non-Interest Expense
  Noninterest ExpenseFor the Three MonthsEnded June 30,2006
    
    
    2005(Dollars in thousands)Salaries and employee benefits
    
    $
    1,232
    
    
    $
    906Legal, professional and consulting
    
    
    273
    
    
    
    (2
    )Occupancy and equipment
    
    
    241
    
    
    
    153Data processing
    
    
    121
    
    
    
    107Director fees
    
    
    91
    
    
    
    53Office supplies & printing
    
    
    85
    
    
    
    47Advertising and public relations
    
    
    81
    
    
    
    24Outside services
    
    
    75
    
    
    
    56Telephone
    
    
    42
    
    
    
    46Federal Reserve Bank & correspondent bank fees
    
    
    25
    
    
    
    26Other
    
    
    173
    
    
    
    138Total noninterest expense
    
    $
    2,439
    
    
    $
    1,554As a % of average earning assets  annualized
    
    
    2.38
    %
    
    
    2.03
    %Efficiency Ratio
    
    
    43.85
    %
    
    
    39.70
    %Average earning assets
    
    $
    410,395
    
    
    $
    306,613
 20




---



##### Table of Contents



Noninterest ExpenseFor the Six MonthsEnded June 30,2006
    
    
    2005(Dollars in thousands)Salaries and employee benefits
    
    $
    2,471
    
    
    $
    1,807Occupancy and equipment
    
    
    481
    
    
    
    324Legal, professional and consulting
    
    
    451
    
    
    
    110Data processing
    
    
    238
    
    
    
    210Office supplies & printing
    
    
    184
    
    
    
    117Director fees
    
    
    160
    
    
    
    104Advertising and public relations
    
    
    153
    
    
    
    70Outside services
    
    
    152
    
    
    
    121Telephone
    
    
    96
    
    
    
    92Federal Reserve Bank & correspondent bank fees
    
    
    56
    
    
    
    51Other
    
    
    328
    
    
    
    289Total noninterest expense
    
    $
    4,770
    
    
    $
    3,295As a % of average earning assets  annualized
    
    
    2.40
    %
    
    
    2.26
    %Efficiency Ratio
    
    
    45.02
    %
    
    
    44.76
    %Average earning assets
    
    $
    397,541
    
    
    $
    291,122
 Liquidity and Capital Resources
  21




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##### Table of Contents



Valley BancorpsCapital Ratios At June 30, 2006To 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)
    
    $
    46,147
    
    
    
    10.83
    %
    
    $
    17,048
    
    
    
    4.00
    %
    
    n/a
    
    n/aTier 1 capital to risk weighted assets (1)
    
    
    46,147
    
    
    
    12.16
    %
    
    
    15,181
    
    
    
    4.00
    %
    
    n/a
    
    n/aTotal capital to risk weighted assets (1)
    
    
    49,554
    
    
    
    13.06
    %
    
    
    30,362
    
    
    
    8.00
    %
    
    n/a
    
    n/a
 22




---



##### Table of Contents



(1)
    
    Tier 1 leverage (or core) capital ratio is computed as a percentage of average total assets of $426.2 million.Risk-based capital ratios are computed as a percentage of risk-weighted assets of $379.5 million.(2)
    
    See Supervision and Regulation  Capital Adequacy  Prompt Corrective Action. Valley BanksCapital Ratios At June 30, 2006To 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)
    
    $
    44,306
    
    
    
    10.43
    %
    
    $
    16,992
    
    
    
    4.00
    %
    
    $
    21,240
    
    
    
    5.00
    %Tier 1 capital to risk weighted assets (1)
    
    
    44,306
    
    
    
    11.68
    %
    
    
    15,170
    
    
    
    4.00
    %
    
    
    22,756
    
    
    
    6.00
    %Total capital to risk weighted assets (1)
    
    
    47,713
    
    
    
    12.58
    %
    
    
    30,341
    
    
    
    8.00
    %
    
    
    37,926
    
    
    
    10.00
    %
 
 (1)
    
    Tier 1 leverage (or core) capital ratio is computed as a percentage of average total assets of $424.9 million.Risk-based capital ratios are computed as a percentage of risk-weighted assets of $379.3 million.(2)
    
    See Supervision and Regulation  Capital Adequacy  Prompt Corrective Action.  23




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##### Table of Contents



Impact of Inflation and Changing Prices
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
    24




---



##### Table of Contents



At June 30,2006More ThanWithin
    
    
    One YearTwelve
    
    
    to Five
    
    
    Over FiveMonths
    
    
    Years
    
    
    Years
    
    
    Total(Dollars in thousands)Rate-Sensitive Assets:Interest-bearing deposits at other financial institutions
    
    $
    7,894
    
    
    
    
    
    
    
    
    
    
    $
    7,894Fed funds sold
    
    
    52,860
    
    
    
    
    
    
    
    
    
    
    
    52,860Securities  all available for sale
    
    
    5,950
    
    
    
    25,095
    
    
    
    2,784
    
    
    
    33,829Construction, raw land and land development loans
    
    
    180,126
    
    
    
    15,200
    
    
    
    
    
    
    
    195,326Commercial real estate loans
    
    
    20,159
    
    
    
    80,731
    
    
    
    
    
    
    
    100,890Commercial and industrial loans
    
    
    23,593
    
    
    
    6,824
    
    
    
    
    
    
    
    30,417Other loans
    
    
    3,554
    
    
    
    2,863
    
    
    
    
    
    
    
    6,417Total Rate-Sensitive Assets
    
    
    294,136
    
    
    
    130,713
    
    
    
    2,784
    
    
    
    427,633Rate-Sensitive Liabilities:Interest-bearing demand deposits
    
    
    72,806
    
    
    
    
    
    
    
    
    
    
    
    72,806Savings deposits
    
    
    57,684
    
    
    
    
    
    
    
    
    
    
    
    57,684Time deposits
    
    
    194,390
    
    
    
    781
    
    
    
    
    
    
    
    195,171Long-term debt
    
    
    46
    
    
    
    15,221
    
    
    
    137
    
    
    
    15,404Total Rate-Sensitive Liabilities
    
    $
    324,926
    
    
    $
    16,002
    
    
    $
    137
    
    
    $
    341,065Excess (deficiency) of Rate-Sensitive Assets
over Rate-Sensitive Liabilities
    
    $
    (30,790
    )
    
    $
    114,711
    
    
    $
    2,647Cumulative Excess (deficiency) of Rate-Sensitive Assets
over Rate-Sensitive Liabilities
    
    $
    (30,790
    )
    
    $
    83,921
    
    
    $
    86,568Cumulative Excess (deficiency) of Rate-Sensitive Assets
over Rate-Sensitive Liabilities as a percentage of total assets
    
    
    (6.99
    )%
    
    
    19.04
    %
    
    
    19.64
    %
    Increase in
    
    Net Interest Change
    
    Decrease in
    
    Net Interest ChangeInterest Rates
    
    $
    
    %
    
    Interest Rates
    
    $
    
    %(Dollars in thousands)+1.00%
    
    $
    729
    
    
    
    3
    %
    
    -1.00%
    
    $
    (808
    )
    
    
    (4
    )%+2.00%
    
    $
    1,496
    
    
    
    7
    %
    
    -2.00%
    
    $
    (1,704
    )
    
    
    (8
    )%+3.00%
    
    $
    2,299
    
    
    
    10
    %
    
    -3.00%
    
    $
    (2,686
    )
    
    
    (12
    )%
   25




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Changes in Internal Controls
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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    The Annual Shareholders Meeting was held on Tuesday, April 18, 2006 at 10:00am. Total shares outstanding amounted to 2,827,881. A total of 2,164,615 shares (76.55%) were
represented by shareholders in attendance at the meeting or by proxy.(b)
    
    Directors elected at the meeting were: Don Hamilton, William E. Snyder and Dan H.
Stewart to serve as directors for 3-year terms.(c)
    
    The only matter presented at the meeting was the election of directors.
  Votes CastFor
    
    Withheld
    
    TotalDon Hamilton
    
    2,145,647
    
    18,968
    
    2,164,615William E. Snyder
    
    2,162,829
    
    1,786
    
    2,164,615Dan H. Stewart
    
    2,163,925
    
    690
    
    2,164,615
 
 Item 5. Other Information
  
 Item 6. Exhibits
 31.1
    
    CEO Certification Pursuant Rule 13a-14(a)/15d-14(a)31.2
    
    CFO Certification Pursuant Rule 13a-14(a)/15d-14(a)32
    
    CEO and CFO Certification Pursuant 18 U.S.C. Section 1350, as adopted pursuant to section
906 of the Sarbanes  Oxley Act of 2002
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VALLEY BANCORPDate: August 11, 2006
    
    By:
    
    /s/ Barry L. HulinBarry L. HulinPresident and Chief Executive OfficerDate: August 11, 2006
    
    By:
    
    /s/ Dick HoltzclawDick HoltzclawExecutive Vice President andChief Financial Officer(Principal Financial and AccountingOfficer)
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