First Valley Bancorp (FVLY) 10QSB 2006 Q3 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

____________

FORM 10-QSB

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________

Commission file number 000 - 51408                                                           

FIRST VALLEY BANCORP, INC.

(Exact name of registrant as specified in its charter)

CONNECTICUT 04-3806732

(State or other jurisdicition of incorporation or organization) (IRS Employer Identification No.)

FOUR RIVERSIDE AVENUE, BRISTOL, CT, 06010

(Address of principal executive offices)

860-582-8868

(Issuer’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or 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 X No

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

Yes  __ No X          

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Acto YES

x NO

As of October 31, 2006, there were 1,194,550 shares of the registrant’s common stock outstanding.

Transitional Small Business Disclosure Format Yes ____No X          

Table of Contents

		Page
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Statements of Financial Condition as of September 30, 2006 and December 31, 2005	3
	Consolidated Statements of Income for the three and nine month periods ended September 30, 2006 and 2005	4
	Consolidated Statements of Cash Flows for the three and nine month periods ended September 30, 2006 and 2005	5
	Notes to Consolidated Financial Statements	6 - 9
Item 2.	Management’s Discussion and Analysis or Plan of Operation	10 - 20
Item 3.	Controls and Procedures	20
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 5.	Other Information
Item 6.	Exhibits	20
SIGNATURES		21
CERTIFICATIONS		22 - 27

2

FIRST VALLEY BANCORP, INC. AND SUBSIDIARY FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

Part 1   FINANCIAL INFORMATION

Item 1  Financial Statements:

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands except share data)
	September 30,			December 31,
	2006			2005
	(Unaudited)
ASSETS
Cash and due from depository institutions	$	6,471		$	3,447
Federal funds sold and money market accounts		16,666			9,220
Investment securities		27,225			33,907
Loans receivable, net		128,941			109,773
Premises and equipment, net		1,786			1,435
FHLBB Stock, at cost		931			855
Accrued income receivable		763			680
Deferred income taxes		838			904
Other assets		1,132			705
TOTAL ASSETS	$	184,753		$	160,926
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing	$	18,567		$	17,166
Interest bearing		142,705			112,034
Total deposits		161,272			129,200
Borrowed funds		11,527			19,117
Mortgagors' escrow accounts		81			176
Other liabilities		1,275			2,733
Total Liabilities		174,155			151,226
Commitments and contingencies
Stockholders' Equity:
Common stock, no par value; authorized 3,000,000 shares;
issued and outstanding 1,194,550 and 1,186,236 at
September 30, 2006 and December 31, 2005, respectively		899			892
Additional paid-in capital		8,273			8,194
Retained earnings		1,763			1,054
Accumulated other comprehensive loss		(337	)		(440	)
Total Stockholders' Equity		10,598			9,700
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	184,753		$	160,926
See notes to consolidated financial statements

3

FIRST VALLEY BANCORP, INC. AND SUBSIDIARY FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands except share data)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Interest income:		2006		2005		2006			2005
Interest on loans	$	2,373	$	1,510	$	6,535		$	4,228
Interest and dividends on investments		501		426		1,229			1,186
Total interest income		2,874		1,936		7,764			5,414
Interest expense:
Deposits and escrow		1,183		609		2,804			1,582
Borrowed funds		185		137		629			289
Total interest expense		1,368		746		3,433			1,871
Net interest income		1,506		1,190		4,331			3,543
Provision for loan losses		89		94		238			255
Net interest income after provision for loan losses		1,417		1,096		4,093			3,288
Noninterest income:
Service charges and other fees		138		99		330			290
Realized gains (losses) on investments		-		-		(86	)		-
Total noninterest income		138		99		244			290
Noninterest expenses:
Salaries		591		452		1,542			1,262
Employee benefits and taxes		107		85		300			253
Occupancy and equipment		205		165		570			494
Professional fees		52		35		152			110
Marketing		31		19		90			71
Office supplies		20		16		55			54
Outside service fees		41		63		143			170
Organizational costs		-		98		-			98
Other		112		77		303			247
Total noninterest expenses		1,159		1,010		3,155			2,759
Income before income tax expense		396		185		1,182			819
Income tax expense		150		57		473			308
NET INCOME	$	246	$	128	$	709		$	511
Basic income per share	$	0.21	$	0.11	$	0.60		$	0.43
Diluted income per share	$	0.20	$	0.10	$	0.57		$	0.41
Weighted-average shares outstanding - basic		1,194,118		1,186,061		1,189,827			1,184,450
Weighted-average shares outstanding - diluted		1,247,578		1,240,092		1,243,287			1,238,481
See notes to consolidated financial statements

4

FIRST VALLEY BANCORP, INC. AND SUBSIDIARY FORM 10-QSB QUARTERLY REPORT
SEPTEMBER 30, 2006
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
	Nine Months Ended September 30,
Cash flows from operating activities			2006			2005
Net income		$	709		$	511
Adjustments to reconcile net income to
cash provided by operating activities:
Realized (gains) losses on investments			86			-
Depreciation			170			178
Provision for loan losses			238			255
Amortization of debt issuance costs			4			1
Amortization (accretion) of premiums (discounts), net			76			132
Common stock issued as compensation			40			73
Net Change in:
Accrued income receivable			(83	)		(1	)
Deferred loan fees			98			38
Other assets			(502	)		(359	)
Other liabilities			(1,458	)		988
Net cash provided (used) by operating activities			(622	)		1,816
Cash flows from investing activities
Proceeds from maturities, calls and paydowns
of available-for-sale securities			8,466			17,746
Proceeds from sales of available-for-sale securities			3,122			-
Purchase of available-for-sale securities			(4,900	)		(17,072	)
Loan originations net of principal payments			(19,504	)		(15,988	)
Purchases of premises and equipment			(521	)		(118	)
Net cash used by investing activities			(13,337	)		(15,432	)
Cash flows from financing activities
Change in DDA, NOW, money market and
savings accounts			23,471			3,661
Change in time deposit accounts			8,601			10,858
Proceeds from borrowed funds			19,000			10,439
Repayments of borrowed funds			(26,594	)		(9,000	)
Change in mortgagors' escrow accounts			(95	)		(67	)
Proceeds from issuance of common stock			46			-
Net cash provided by financing activities			24,429			15,891
Net change in cash and cash equivalents			10,470			2,275
Cash and cash equivalents at beginning of period			12,667			10,033
Cash and cash equivalents at end of period		$	23,137		$	12,308
Supplemental Disclosures
Cash paid during the period for:
Interest		$	3,495		$	1,751
Income taxes		$	655		$	514
See notes to consolidated financial statements

5

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Business

Effective July 1, 2005, Valley Bank (the “Bank”), a Connecticut state-chartered commercial bank located in Bristol, Connecticut, reorganized into a bank holding company structure. As a result, a new bank holding company called First Valley Bancorp, Inc. (the “Company”) was formed and the Bank became the wholly owned subsidiary of the Company. The Board believes that the reorganization will increase the corporate flexibility of the Bank, will allow the Bank to better take advantage of additional business opportunities, and will provide the Bank with operational and competitive benefits.

The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits in small business, real estate, residential and consumer loans. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation within prescribed limits. The Bank is subject to competition from other financial institutions throughout the region. The Bank is also subject to the regulations of certain state and federal agencies and undergoes periodic examinations by those regulatory authorities.

Note 2. Basis of presentation

The interim consolidated financial statements of the Company include those of the Company and its wholly owned subsidiary, Valley Bank. Inter-company transactions have been eliminated. The Company does not consolidate its subsidiary, FVB Capital Trust I, as described in Note 8. The accounting and reporting policies of the Company conform to generally accepted accounting principles in the United States of America and to general practices within the banking industry. Such policies have been followed on a consistent basis.

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and income and expenses for the period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for losses on loans. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in credit quality and economic conditions, particularly in Connecticut.

The data presented for the three and nine months ended September 30, 2006 and 2005 reflect, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for such interim periods.

6

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

Interim results at and for the three and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2006.

Note 3. Comprehensive Income

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” establishes standards for disclosure of comprehensive income, which includes net income and any changes in equity from non-owner sources that are not recorded in the income statement (such as changes in the net unrealized gains (losses) on securities).

The Company’s one source of other comprehensive income is the net unrealized gain (loss) on securities.

	Nine Months Ended
(in thousands)	September 30,
	2006		2005
Net Income	$	709	$	511
Other comprehensive income (loss):
Net unrealized holding gains (losses) on securities available for sale		82		(178	)
Reclassification adjustment for loss recognized in net income		86		-
Other comprehensive income (loss) before tax expense		168		(178	)
Income tax expense (benefit) related to items of other comprehensive income (loss)		65		(70	)
Other comprehensive income (loss) net of tax		103		(108	)
Total comprehensive income	$	812	$	403

Note 4. Income per Share

The Company has computed and presented income per share in accordance with Statement of Financial Accounting Standards No. 128.

Note 5. Commitment to Extend Credit

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial condition.

The contractual amounts of outstanding commitments at September 30, 2006 and December 31, 2005 were as follows:

(in thousands)
	September 30, 2006			December 31, 2005
Commitments to extend credit:
Loan commitments		$	3,926	$	11,684
Unadvanced lines of credit			22,203		21,931
Standby letters of credit			2,139		1,089
Outstanding commitments		$	28,268	$	34,704

7

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

Note 6. Stock Based Compensation

The Company has a long-term incentive plan authorizing various types of market and performance based incentive awards that may be granted to directors, officers and employees. Information regarding stock options as of September 30, 2006 is summarized below:

	Number of shares		Weighted Average Exercise Price
Outstanding at December 31, 2005		124,050	$	8.21
Granted		-		-
Exercised		5,808		8.00
Forfeited		-		-
Outstanding at September 30, 2006		118,242	$	8.22
Options exercisable at September 30, 2006		118,242	$	8.22

In December 2004, the Financial Accounting Standards Board revised Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123R”). This Statement eliminated the alternative intrinsic value method of accounting, as permitted by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” for recognizing the cost of employee services received in share-based payment transactions, thereby reflecting the economic consequences of those transactions in the financial statements. SFAS 123R requires all entities to follow the same accounting standard and account for such transactions using the fair-value-based method. SFAS 123R is effective for small business filers as of the first interim or annual period that begins after December 31, 2005.

On January 1, 2006, the Company adopted the provision of SFAS 123R using the modified prospective transition method. Under this transition method, compensation expense is recognized currently for all outstanding options not yet vested. All of the Company’s outstanding options were fully vested as of the effective date and therefore no compensation expense has been recognized. Previously, the Company applied APB Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its long-term incentive plan.

The following table illustrates the effect on net income and earnings per share as if the fair value based method described in SFAS No. 123R, “Accounting for Stock-Based Compensation” had been applied to the Bank’s long-term incentive plan prior to January 1, 2006.

8

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

	9 Months
	Ended
(in thousands except share data)	9/30/05
Net income, as reported	$	511
Stock-based employee compensation
included in net income		-
Total stock-based employee compensation
expense determined under the fair value
based method for all awards		-
Pro forma net income	$	511
Earnings per share:
Basic, as reported	$	0.43
Diluted, as reported	$	0.41
Basic, pro forma	$	0.43
Diluted, pro forma	$	0.41

Note 7. Recent Accounting Pronouncements

 In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”). SFAS 156 requires an entity to recognize a servicing asset or liability measured at fair value. Additionally, SFAS 156 specifies that an entity must elect whether to measure servicing assets and liabilities in subsequent periods at fair value or amortize the asset or liability in proportion to and over the life of the servicing asset or liability. The statement is effective at the beginning of an entity’s fiscal year beginning after September 15, 2006. At this time, the Company does not expect that this statement will have a material effect on its financial statements.

Note 8. Long Term Debt

In July 2005, the Company formed FVB Capital Trust I (the “Trust”). The Trust has no independent assets or operations and was created for the sole purpose of issuing trust preferred securities and investing the proceeds thereof in an equivalent amount of junior subordinated debentures issued by the Company.

Trust preferred securities issued by the statutory trust are considered regulatory capital for purposes of determining the Company’s Tier I capital ratio and the Bank’s Tier I capital ratio to the extent that the trust preferred proceeds have been invested in the Bank’s capital.

The subordinated debentures, which bear an interest rate fixed at 6.42% for the first five years and a floating interest rate set at three-month LIBOR plus 190 basis points thereafter, mature on August 23, 2035 and can be redeemed at the Company’s option in an amount equal to 100% of the principal amount of the debt securities beginning in 2010 and thereafter. The trust securities have identical terms except the duration of the trust is 35 years.

9

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

Part I.  -  FINANCIAL INFORMATION

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

Cautionary Statement

Reports issued by First Valley Bancorp, Inc. including this quarterly report on Form 10-QSB contain statements relating to future results of the Company that are considered “forward looking” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, expectations concerning loan demand, growth and performance, simulated changes in interest rates and the adequacy of the Company’s allowance for loan losses. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including but not limited to, changes in political and economic conditions, interest rate fluctuations, personal and corporate customers’ bankruptcies, inflation, acquisitions and integrations of acquired businesses, results from branch expansion, technological fluctuations, success in gaining regulatory approvals when required as well as other risks and uncertainties reported from time to time in the Company’s filings with the SEC.

(a)Plan of Operation

Not applicable since the Company had revenues from operations in each of the last two fiscal years.

(b)Management's Discussion and Analysis of Financial Condition and Results of Operation

Overview

The Company is the holding company for Valley Bank (the “Bank”), a Connecticut state-chartered commercial bank located in Bristol, Connecticut. The Bank, which has its main office in Bristol, a second full-service office in the Terryville section of Plymouth, and a loan production office in Southington that opened in January 2005, provides banking services to commercial and individual customers primarily in the town of Bristol and the neighboring communities of Burlington, Farmington, Plainville, Plymouth, Southington and Wolcott. The Bank offers to its business customers demand, savings and time deposit accounts and the granting of various types of commercial loans and commercial real estate loans.

The services provided by the Bank to consumers include checking, savings and time deposit accounts, as well as mortgage loans, consumer loans and investment services.

In January 2006, the Bank (d/b/a Riverside Investment Services) began to provide full-time access to advisory and investment services to consumers and businesses on retirement planning, individual investment portfolios, and strategic asset management. Riverside Investment Services offers mutual funds, life insurance options, tax planning, estate planning and investment portfolio analysis.  In January 2006, the Bank's Board of Directors approved these new services provided by the Bank (d/b/a Riverside Investment Services).

10

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

The Bank entered into a broker/dealer relationship with LPL (Linsco/Private Ledger) in Boston. In April 2006, the Bank appointed Thomas O. Barnes, Jr. as Manager of Riverside Investment Services. Melissa Ballash of Bristol was hired as administrative assistant. Riverside Investment Services is located on the second floor of the Bank’s main office on Four Riverside Avenue, Bristol, Connecticut.

Prior April 2006, the Bank had offered its customers investment services on a part-time basis through a relationship with Tracy Driscoll, Inc., a local insurance agency, and Bannon, Ohanesian & Lecours, Inc., a full-service, independent broker/dealer headquartered in West Hartford, Connecticut.

The Bank has plans to open two additional full service branches over the next six months. In April 2004, the Bank closed on the purchase of land and a building located at 888 Farmington Avenue, Bristol, Connecticut, 06010. The building, which prior to the purchase had served as a branch office of North American Bank and Trust, is currently being leased by the Bank to Bristol Travel, Inc. The Bank is currently in the process of filing an application with the Department of Banking to operate the site as a full service branch office in the fourth quarter of 2006 or the first quarter of 2007. It is anticipated that the new branch will be staffed with 5 full-time equivalent employees (“FTE’s”).

In January 2005, the Bank opened a loan production office in Southington. In January 2006, the Bank filed an application with the Department of Banking for a full service branch office in Southington. In February 2006, the Bank received approval from the Department of Banking to open the full service branch in Southington. The new full service branch, which will replace the existing loan production office, is expected to open in the last quarter of 2006. It is anticipated that the new branch will be staffed with 5 FTE’s.

In July 2005, the Company announced that Mark A. Gibson, President of Quality Coils, Inc. and Dynalock Corporation, had been elected a director of First Valley Bancorp, Inc. Mr. Gibson has also been elected a director of the Bank.

In July 2005, the Company raised approximately $4.1 million through a trust-preferred offering that closed on July 28, 2005. These funds will support additional growth by the Bank. See Note 8 for additional information.

First Valley Bancorp, Inc. lists its stock on the Over The Counter Bulletin Board at www.otcbb.com under the symbol “FVLY”.

The following discussion and analysis presents a review of the operating results and financial condition of the Company, for the three and six month periods ended September 30, 2006 and 2005. The discussion below should be read in conjunction with the financial statements and other financial data presented elsewhere herein.

11

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

FINANCIAL CONDITION

General

Total assets increased by $16.3 million, or 9.7%, during the third quarter of 2006, and have grown by $23.8 million, or 14.8% on a year-to-date basis. Total loans grew by $4.0 million, or 3.2%, for the quarter, while total investment securities declined by $0.5 million, or 2.0%. Total deposits increased by $21.3 million, or 15.2%, in the third quarter of 2006 and total borrowed funds balances declined by $4.7 million, or 29.0%, for the quarter. On a year-to-date basis, loans have increased by $ 19.2 million, or 17.5%, while total investment securities have declined by $6.7 million, or 19.7%. Deposits have increased by $32.1 million, or 24.8%, year-to-date, while borrowed funds balances have declined by $7.6 million, or 39.7%.

Investment Securities

The carrying value and estimated market values of investment securities are as follows:

(in thousands)

September 30, 2006
Available-for-sale securities:	Amortized		Gross Unrealized					Estimated
Debt securities:	Cost			Gains		Losses		Market Value
U.S. agency obligations:
Due in less than one year	$	4,002	$	-	$	(47	)	$	3,955
Due from one through five years		3,999		-		(86	)		3,913
		8,001		-		(133	)		7,868
Corporate bonds:
Due in less than one year		511		-		(6	)		505
Due from one through five years		1,558		-		(53	)		1,505
		2,069		-		(59	)		2,010
Municipal bonds:
Due from five through ten years		1,179		-		(5	)		1,174
Due after ten years		1,383		1		-			1,384
		2,562		1		(5	)		2,558
Mortgage-backed securities		13,742		-		(353	)		13,389
Total debt securities		26,374		1		(550	)		25,825
Equity securities:
Variable rate preferred securities:		1,400		-		-			1,400
Total available-for-sale securities	$	27,774	$	1	$	(550	)	$	27,225

December 31, 2005
Available-for-sale securities:	Amortized		Gross Unrealized					Estimated
Debt securities:	Cost		Gains		Losses			Market Value
U.S. agency obligations:
Due in less than one year	$	1,509	$	-	$	(23	)	$	1,486
Due from one through five years		7,499		-		(168	)		7,331
		9,008		-		(191	)		8,817
Corporate bonds:
Due from one through five years		2,095		-		(75	)		2,020
Municipal bonds:
Due after ten years		2,564		-		(15	)		2,549

12

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

Mortgage-backed securities		20,456		1		(436	)		20,021
Total debt securities		34,123		1		(717	)		33,407
Equity securities:
Variable rate preferred securities:		500		-		-			500
Total available-for-sale securities	$	34,623	$	1	$	(717	)	$	33,907

The Company had no realized gains or losses on investment securities during the three months ended September 30, 2006, and has had $86,000 of realized losses and no realized gains on a year-to-date basis in 2006. There were no realized gains or losses on investment securities during the first nine months of 2005.

Loans

The Company’s loan portfolio has increased by $19.2 million, or 17.5%, during the first nine months of 2006. The majority of growth was in commercial and consumer real estate loans. At September 30, 2006 and December 31, 2005, the composition of the Company’s loan portfolio was as follows (dollars in thousands):

	AT			AT
	September 30, 2006			December 31, 2005
Commercial mortgages	$	67,919		$	54,653
Commercial loans		27,193			22,726
Residential mortgages		23,133			22,848
Consumer and home equity loans		12,797			11,317
		131,042			111,544
Less:
Deferred loan origination fees		323			225
Allowance for loan losses		1,778			1,546
Loans receivable, net	$	128,941		$	109,773
Weighted average yield		7.16	%		6.66	%

Critical Accounting Policies

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to reporting results of operations and financial condition in preparing its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes the following discussion addresses the Company's only critical accounting policy, which is the policy that is most important to the presentation of the Company's financial results. This policy requires management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

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FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

Allowance for Loan Losses

The allowance for loan losses is established by a provision charged to earnings and is maintained at a level considered adequate to provide for potential loan losses based on management’s evaluation of known and inherent risks in the loan portfolio. When a loan or portion of a loan is considered uncollectable, it is charged against the allowance for loan losses. Recoveries of loan previously charged off are credited to the allowance when collected.

Management makes regular evaluations of the loan portfolio to determine the adequacy of the level of the allowance for loan losses. Numerous factors are considered in the evaluation, including a review of certain borrowers’ current financial status and credit standing, available collateral, loss experience in relation to outstanding loans, the overall loan portfolio quality, management’s judgment regarding prevailing and anticipated economic conditions, and other relevant factors.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

The following summarizes the changes in allowance for loan losses for the nine months ended September 30, 2006 (dollars in thousands):

Balance, beginning of period	$	1,546
Provision for loan losses		238
Chargeoffs		(10	)
Recoveries		4
Balance, end of period	$	1,778

At September 30, 2006, the Bank had $257,000 of loans on nonaccrual status. The loans are considered impaired. At December 31, 2005, the Company had $337,000 loans on nonaccrual status and considered impaired.

Deposits

Deposits have grown by $32.1 million, or 24.8%, during the first nine months of 2006. The growth was almost entirely in time deposit balances, while balances in NOW accounts, money market savings and regular savings, declined. The shift in composition reflects a general transfer of savings deposits by consumers into time deposits to take advantage of higher interest rates.

14

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

At September 30, 2006 and December 31, 2005, the Company’s deposit balances were as follows (dollars in thousands):

	AT September 30, 2006					AT December 31, 2005
			Weighted					Weighted
			Average					Average
	Amount		Rate			Amount		Rate
Non-interest checking	$	18,567		0.00	%	$	17,166		0.00	%
Regular savings		19,776		0.99	%		22,575		0.77	%
Money market savings		19,745		2.92	%		23,154		2.23	%
NOW accounts		4,220		1.37	%		4,707		0.47	%
		62,308		1.33	%		67,602		1.05	%
Time deposits		98,964		4.54	%		61,598		3.52	%
Total Deposits	$	161,272		3.30	%	$	129,200		2.23	%

Borrowed Funds

At September 30, 2006 and December 31, 2005, the Company had $11.5 million and $19.1 million, respectively, in borrowed funds. The Company has used excess deposit flows during the year to repay maturing Federal Home Loan Bank of Boston ("FHLBB") Advances. The weighted average rates on borrowed funds at September 30, 2006 and December 31, 2005 were 5.17% and 4.79%, respectively.

Liquidity and Capital Resources

At September 30, 2006, approximately 27% of the Company’s assets were held in cash, cash equivalents and securities and 70% of the Company’s assets were held in loans. The Company’s ratio of loans to deposits, which is used as a general guideline in managing the Company’s asset/liability mix, was 80% at September 30, 2006.

The Company has other liquidity related policy targets and thresholds which are reviewed on a regular basis by the Asset/Liability Committee (“ALCO”). The Company reviews and sets deposit rates weekly based upon its need for funds, competition in the market area, and the availability and pricing of other funding sources.

The Bank is also a member of the FHLBB, which provides an alternative funding source for the Bank’s liquidity needs. The Bank currently has approximately $27 million of additional borrowing capacity at the FHLBB.

Each of the Company’s sources of liquidity is vulnerable to various uncertainties beyond the control of the Company. Scheduled loan and security payments are a relatively stable source of funds, but prepayments in loans and securities, securities calls, and deposit flows can all vary widely in reaction to market conditions, primarily prevailing interest rates. The Company’s financial condition is also affected by its ability at attractive rates and other market conditions.

15

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

The Company considers its sources of liquidity to be adequate to provide for expected and unexpected balance sheet fluctuations and to provide funds for growth. Management closely monitors its liquidity/cash flow position and is not currently aware of any trends or uncertainties that would create liquidity problems in the near future.

The Company is subject to capital adequacy rules and guidelines issued by the Federal Reserve Bank, and the Bank is subject to capital adequacy rules and guidelines issued by the FDIC. The substantially parallel rules and guidelines require the Company to maintain certain minimum ratios of capital to adjusted total assets and/or risk-weighted assets.

The Bank’s regulatory capital ratios at September 30, 2006 were a total risk-based capital ratio of 11.6% and a Tier 1 capital ratio of 8.0%. Those capital ratios at December 31, 2005 were 12.9% and 8.8%, respectively. The Company’s regulatory capital ratios at September 30, 2006 and December 31, 2005 were similar to the Bank’s ratios. Both the Company’s and the Bank’s capital ratios at September 30, 2006 were considered well capitalized for regulatory purposes.

RESULTS OF OPERATIONS

Comparison of the three and nine month periods ended September 30, 2006 and 2005

Net Income

Net income for the three-month period ended September 30, 2006 was $246,000, or $0.21 basic income per share and $0.20 diluted income per share, compared to net income of $128,000, or $0.11 basic income per share and $0.10 diluted income per share, for the three-month period ended September 30, 2005. For the nine-month period ended September 30, 2006 net income was $709,000, or $0.60 basic income per share and $0.57 diluted income per share. That compares with net income of $511,000, or $0.43 basic income per share and $0.41 diluted income per share for the first nine months of 2005. The increase in net income in both the third quarter of 2006 and year-to-date 2006 is due primarily to strong growth in net interest income which more than offset higher non-interest expenses.

Net Interest Income

Net interest income for the three months ended September 30, 2006 was $1,506,000 compared to $1,190,000 for the same period in 2005. For the first nine months of 2006, net interest income was $4,331,000 versus $3,543,000 for the same period in 2005. The increase for the three-month period is due to growth in interest-earning assets and a small increase in the average net interest margin, which was 3.49% for the quarter ended September 30, 2006 compared to 3.45% for the same quarter in 2005. The increase in net interest income for the nine months ended September 30, 2006 is due to growth in interest-earning assets which more than offset a decline in the Company’s net interest margin from 3.67% to 3.62%.

16

Interest Income

Total interest income for the three-month periods ended September 30, 2006 and 2005 was $2,874,000 and $1,936,000, respectively. For the first nine months of 2006 and 2005, total interest income was $7,764,000 and $5,414,000, respectively. The average rate on interest-earning assets was higher by 105 basis points in the third quarter of 2006 versus the third quarter of 2005 while for the first nine months of 2006, the average rate on interest-earning assets was higher by 87 basis points compared to the first nine months of the prior year. The increase in interest income for both the third quarter of 2006 and year-to-date 2006 reflects generally higher short term interest rates and strong growth in the loan portfolio and consequently in interest earning assets. The average balance of total interest earning assets increased by $34.3 million and $31.1 million for the third quarter of 2006 and the first nine months of 2006, respectively, compared with the same periods in 2005.

Interest Expense

Total interest expense for the three-month periods ended September 30, 2006 and 2005 was $1,368,000 and $746,000, respectively. For the first nine months of 2006 and 2005, total interest expense was $3,433,000 and $1,871,000, respectively. The average rate on deposits and borrowings was 3.65% in the third quarter of 2006 compared to 2.53% in the same quarter of 2005, an increase of 112 basis points. Year to date through September 30, 2006, the average rate on deposits and borrowings was higher by 105 basis points compared to the first nine months of the prior year. The increase in the average rate reflects the general increase in short-term interest rates, a shift of savings and money market deposits into time deposits, and growth in borrowed money including the added cost of junior subordinated debt. The higher interest expense in both the current quarter and the first nine months of the current year reflects the higher average rate as well as strong growth in average interest-bearing liabilities which increased by $31.6 and $28.4 million, respectively, in the third quarter of 2006 and the first nine months of 2006 compared to the same periods in 2005.

The tables below shows the major categories of average assets and average liabilities together with their respective interest income or expense and the rates earned and paid by the Company (dollars in thousands):

	For Three Months Ended
	September 30, 2006							September 30, 2005
Interest-Earning Assets:	Average		Income/		Average			Average		Income/		Average
Federal funds sold and money		Balance		Expense		Rate			Balance		Expense		Rate
market accounts	$	13,540	$	171		5.02	%	$	8,438	$	70		3.29	%
Investment securities		29,672		330		4.41	%		38,186		356		3.70	%
Loans		127,899		2,373		7.36	%		90,199		1,510		6.64	%
Total interest-earnings assets		171,110		2,874		6.66	%		136,823		1,936		5.61	%
Non-interest-earning assets		7,901							6,543
Total assets	$	179,011						$	143,366

17

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

Interest-Bearing Liabilities:
NOW accounts		3,407		8		0.93	%		2,963		4		0.54	%
Savings and money market accounts		40,763		194		1.89	%		43,735		154		1.40	%
Time deposits		89,867		982		4.33	%		56,359		451		3.17	%
Borrowed money		14,434		185		5.08	%		13,810		137		3.94	%
Total interest-bearing liabilities		148,471		1,368		3.65	%		116,867		746		2.53	%
Non-interest-bearing demand deposits		19,091							15,132
Other non-interest-bearing liabilities		1, 091							1,815
Capital accounts		10,358							9,552
Total liabilities and capital accounts	$	179,011						$	143,366
Net interest income			$	1,506						$	1,190
Net interest margin				3.49	%						3.45	%
Interest rate spread				3.01	%						3.08	%

	For Nine Months Ended
	September 30, 2006							September 30, 2005
Interest-Earning Assets:		Average		Income/		Average			Average		Income/		Average
Federal funds sold and money		Balance		Expense		Rate			Balance		Expense		Rate
market accounts	$	8,381	$	296		4.72	%	$	5,453	$	121		2.97	%
Investment securities		30,103		933		4.14	%		37,991		1,065		3.75	%
Loans		121,691		6,535		7.18	%		85,615		4,228		6.60	%
Total interest-earnings assets		160,175		7,764		6.48	%		129,059		5,414		5.61	%
Non-interest-earning assets		6,745							6,791
Total assets	$	166,920						$	135,850
Interest-Bearing Liabilities:
NOW accounts		3,131		18		0.76	%		3,042		15		0.66	%
Savings and money market accounts		41,237		519		1.68	%		43,716		407		1.24	%
Time deposits		76,641		2,267		3.96	%		52,271		1,160		2.97	%
Borrowed money		16,874		629		4.98	%		10,473		289		3.69	%
Total interest-bearing liabilities		137,883		3,433		3.33	%		109,502		1,871		2.28	%
Non-interest-bearing demand deposits		17,879							14,366
Other non-interest-bearing liabilities		1,074							2,601
Capital accounts		10,084							9,381
Total liabilities and capital accounts	$	166,920						$	135,850
Net interest income			$	4,331						$	3,543
Net interest margin				3.62	%						3.67	%
Interest rate spread				3.15	%						3.32	%

18

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

Net interest income can be analyzed in terms of the impact of changing rates and changing volumes. The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by the prior rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume), and (iii) the net change (dollars in thousands):

	For the 3 Months Ended									For the 9 Months Ended
	September 30, 2006 versus 2005									September 30, 2006 versus 2005
Interest Income:	Increase (Decrease) Due to									Increase (Decrease) Due to
Federal funds sold and money		Rate			Volume			Total			Rate			Volume			Total
market accounts	$	47		$	54		$	101		$	92		$	83		$	175
Investment securities		61			(87	)		(26	)		55			(187	)		(132	)
Loans		178			685			863			396			1,911			2,307
Total interest income		286			652			938			543			1,807			2,350
Interest Expense:
NOW accounts		3			1			4			2			-			2
Savings and money market accounts		51			(11	)		40			123			(11	)		112
Time deposits		200			330			530			461			647			1,108
Borrowed money		42			6			48			124			216			340
Total interest expense		296			326			622			710			852			1,562
Change in Net interest income	$	(10	)	$	326		$	316		$	(167	)	$	955		$	788

Provision for Loan Losses

The Company’s provision for loan losses was $89,000 in the third quarter of 2006 compared with $94,000 for the third quarter of 2005. For the first nine months of 2006 the provision for loan losses was $238,000 compared to $255,000 for the same period in 2005. Management performs a quarterly review of the loan portfolio and based on this review sets the level of provision necessary to maintain an adequate loan loss allowance. At September 30, 2006, the allowance for loan losses totaled $1,778,000, or 1.36% of total gross loans outstanding, compared to $1,546,000, or 1.39% of total loans outstanding, at December 31, 2005.

At September 30, 2006 and December 31, 2005, the Bank had nonperforming loans totaling $257,000 and $337,000, respectively.

Noninterest Income

The Company had $138,000 of service charges and other fees for the three months ended September 30, 2006 compared to $99,000 for the same period in 2005. For the first nine months of 2006 and 2005, service charges and other fees totaled $330,000 and $290,000, respectively. The first quarter of 2006 also includes an $86,000 net realized loss on investment securities.

19

FIRST VALLEY BANCORP, INC. FORM 10-QSB QUARTERLY REPORT

SEPTEMBER 30, 2006

Noninterest Expense

Total noninterest expenses in the third quarter of 2006 were $1,159,000 versus $1,010,000 in the third quarter of 2005, an increase of $149,000. Expenses in the 2005 quarter include $98,000 of one-time organizational costs related to the formation of the holding company, First Valley Bancorp, Inc. Total noninterest expenses for the first nine months of 2006 were $3,155,000 versus $2,759,000 for the same period in 2005, an increase of $396,000. The growth in expenses in 2006 is primarily due to higher expenses for salaries and employee benefits, some of which are attributable to new staff for Riverside Investment Services and the Southington office. The Bank had 46 full-time equivalent employees at September 30, 2006 versus 38 full-time equivalent employees at December 31, 2005.

Income Taxes

Total income tax expense for the three-month periods ended September 30, 2006 and 2005 was $150,000 and $57,000, respectively. The effective income tax rates for the respective quarters were 37.9% and 30.8%. For the first nine months of 2006 and 2005, income tax expense was $473,000 and $308,000, with an effective income tax rate of 40.0% and 37.6%, respectively. The lower effective rates in 2005 are due in part to a lower State income tax rate.

(c)Off Balance Sheet Arrangements

There have been no significant changes in the Company's off balance sheet arrangements, which primairly consist of commitments to lend, during the quarter ended September 30, 2006.

Item 3. Controls and Procedures

Based upon an evaluation as of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Part II. - OTHER INFORMATION

Item 1.	Legal Proceedings - Not applicable
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds - Not applicable
Item 3.	Defaults Upon Senior Securities - Not applicable
Item 4.	Submission of Matters to a Vote of Security Holders - Not applicable
Item 5.	Other Information - Not applicable
Item 6.	Exhibits -

(a) Exhibits

3.1	Certificate of Incorporation of First Valley Bancorp, Inc., incorporated herein by reference to Registrant's July 2005 Form 8-A
3.2	Bylaws of First Valley Bancorp, Inc., incorporated herein by reference to Registrant's July 2005 Form 8-A
4.1	Form of Common Stock Certificate of First Valley Bancorp, Inc., incorporated herein by reference to Registrant's July 2005 Form 8-A
10.1	Lease between Valley Bank and The Carpenter Realty Co., Inc. and the S. Carpenter Construction Co. & Bristol Holding, LLC dated October 4, 1999, incorporated herein by reference to Registrant's July 2005 Form 8-A
10.2	Lease between 888 Farmington Avenue, LLC and Bristol Travel, Inc. dba Global Travel Service dated April 6, 2004, incorporated herein by reference to Registrant's July 2005 Form 8-A
10.3	Lease between Valley Bank and Forpicus, LLC dated October 12, 2004, incorporated herein by reference to Registrant's July 2005 Form 8-A
10.4	Employment Agreement between Valley Bank and Robert L. Messier, Jr. dated July 1, 2004, as amended November 1, 2004, incorporated herein by reference to Registrant's July 2005 Form 8-A
10.5	Valley Bank Amended and Restated 1999 Stock Option and Stock Compensation Plan, incorporated herein by reference to Registrant's July 2005 Form 8-A
10.6	Change of Control Agreement between Valley Bank and Mark J. Blum dated October 1, 2004, incorporated herein by reference to Registrant's July 2005 Form 8-A
10.7	Change of Control Agreement between Valley Bank and Anthony M. Mattioli dated October 1, 2004, incorporated herein by reference to Registrant's July 2005 Form 8-A
10.8	Change of Control Agreement between Valley Bank and Robert L. Messier, Jr. dated October 1, 2004, incorporated herein by reference to Registrant's July 2005 Form 8-A
10.9	Lease between Forpicus, LLC and Valley Bank dated February 14, 2006, incorporated herein by reference to Registrant's 10-QSB filed August 11, 2006.
10.10	Change in Control Agreement between Valley Bank and Arnaldo Marinelli dated July 31, 2006.
10.11	Change in Control Agreement between Valley Bank and Donald G. LoRusso dated July 31, 2006.

31.1	Chief Executive Officer Certification pursuant to 17 CFR 240.13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Chief Financial Officer Certification pursuant to 17 CFR 240.13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

20

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	FIRST VALLEY BANCORP, INC.
	(Registrant)
Date:  November 10, 2006	/s/ Robert L. Messier, Jr.
	Robert L. Messier, Jr.
	President and Chief Executive
	Officer
Date:  November 10, 2006	Mark J. Blum
	Mark J. Blum
	Executive Vice President, Treasurer
	and Chief Financial Officer

21