SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the transition period from                      to                     

Commission File Number: 000-50950

VALLEY BANCORP

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.

VALLEY BANCORP
2004 Annual Report on Form 10-K

Table of Contents

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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

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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.

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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

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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

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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

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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.

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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.

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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%.

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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.

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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.

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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

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

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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:

Item 6. Selected Financial Data

Summary of Selected Consolidated Financial Data

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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.

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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

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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.

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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.

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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

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Table 2
Analysis of Changes in Net Interest Income

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.

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Table 3 presents the major components of non-interest income.

Table 3
Non-Interest Income

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

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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.

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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.

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Table 5
Composition of the Securities Portfolio

Table 6
Securities Maturity Distribution and
Weighted-Average Yield to Maturity

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.

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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

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

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.

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Table 9
Fixed Rates and Adjustable Rates of Loan Portfolio
Due After One Year

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

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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