**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-QSB**

** **

**(mark one)**
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                                                                                                                                                                       |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | ** ** | **FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005**                                                                                                                                                                                                                                                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                 |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | ** ** | **For the Transition Period From                            To                            ** |

 

**Commission file number 000-50645**

 

**THE BANK HOLDINGS**

(Exact name of Registrant as specified in itscharter)

 
| **NEVADA**                                                            | ** ** | **90-0071778**                   |
|-----------------------------------------------------------------------|------------|----------------------------------|
| (State of Incorporation)                                              |       | (IRS Employer Identification No) |
|                                                                  |       |                             |
| **9990 Double R Boulevard, Reno, Nevada  89521**                 |
| (Address of principal executive offices)   (Zip  Code) |
|                                                                  |       |                             |
| **775-853-8600**                                                      |
| (Registrant’s telephone number, including  area code)            |

 

**Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15 (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 suchreports) and (2) has been subject to such filing requirements for the past 90days.**

 
| **YES** | ** ** | **ý** | ** ** | **NO** | **o** |   |
|---------|------------|------------|------------|--------|-------|--------|

 

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

 
| **YES** | ** ** | **o** | ** ** | **NO** | **ý** |   |
|---------|------------|-------|------------|--------|------------|--------|

 

**Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.**

 

**Common stock, $0.01 par value, 2,973,330shares outstanding as of August 10, 2005**

 

 

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Table of Contents

 
| **PART I. FINANCIAL INFORMATION** |                                                                                                |
|-----------------------------------|-----------------------------------------------------------------------------------------------------|
|                              | Item 1. Financial Statements (Unaudited):                                                           |   |
|                              | Consolidated  Balance Sheets                                                                        |   |
|                              | Consolidated  Statements of Operations and Comprehensive Income/(Loss)                              |   |
|                              | Consolidated  Statements of Cash Flows                                                              |   |
|                              | Notes  to Unaudited Consolidated Financial Statements                                               |   |
|                              |                                                                                                |   |
|                              | Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                              | Summary                                                                                             |   |
|                              | Results of  Operations                                                                              |   |
|                              |                                                                                                | Net Interest  Income |   |
|                              |                                                                                                | Provision and Allowance for  Loan Losses |   |
|                              |                                                                                                | Non-interest Income |   |
|                              |                                                                                                | Non-Interest Expense |   |
|                              |                                                                                                | Provision for Income Taxes |   |
|                              |                                                                                                | Comprehensive Income |   |
|                              | Financial  Condition                                                                                |   |
|                              |                                                                                                | Securities and Other Earning  Assets |   |
|                              |                                                                                                | Loans |   |
|                              |                                                                                                | Deposits |   |
|                              |                                                                                                | Other Funding Sources |   |
|                              |                                                                                                | Off Balance Sheet Arrangements |   |
|                              | Risk Management                                                                                     |   |
|                              |                                                                                                | Credit Risk Management |   |
|                              |                                                                                                | Nonperforming Assets |   |
|                              | Asset  Liability Management                                                                         |   |
|                              |                                                                                                | Interest Rate Risk |   |
|                              |                                                                                                | Market Risk |   |
|                              |                                                                                                | Liquidity |   |
|                              |                                                                                                | Capital Resources |   |
|                              |                                                                                                |   |   |
|                              | Item 3. Controls and Procedures                                                                     |   |
|                              |                                                                                                |   |
| **PART II. OTHER INFORMATION**    |                                                                                                |
|                              |                                                                                                |   |
|                              | Item 1. Legal Proceedings                                                                           |   |
|                              | Item 2. Unregistered sales of  equity securities and use of proceeds - None                         |   |
|                              | Item 3. Defaults upon senior  securities - None                                                     |   |
|                              | Item 4. Submission of matters  to a vote of security holders                                        |   |
|                              | Item 5. Other information - None                                                                    |   |
|                              | Item 6. Exhibits                                                                                    |   |
|                              |                                                                                                |
| **Signatures**                    |                                                                                                |
| **EXHIBITS**                      |                                                                                                |

 

2

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**PART I – FINANCIAL STATEMENTS**

**Item 1**

THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data) 

 
| ** **                                                                                                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                                                                                                                                               | ** ** | **2005**     | ** ** | **2004**         | ** ** |
| **ASSETS**                                                                                                                                               |       |         |       |             |       |
| Cash and due from banks                                                                                                                                  |       | $            | 4,899      |             | $          | 4,737 |   |
| Liquid money market funds                                                                                                                                |       | 467          |       | 625              |       |
| Federal funds sold                                                                                                                                       |       | 3,595        |       | —           |       |
| Cash and cash equivalents                                                                                                                                |       | 8,961        |       | 5,362            |       |
| Securities available for sale                                                                                                                            |       | 15,664       |       | 15,540           |       |
| Securities held to maturity                                                                                                                              |       | 46,959       |       | 53,588           |       |
| Securities - trading                                                                                                                                     |       | 1,128        |       | 1,088            |       |
| Other equity securities, at cost                                                                                                                         |       | 1,762        |       | 1,734            |       |
| Loans, gross                                                                                                                                             |       | 201,850      |       | 160,708          |       |
| Allowance for loan losses                                                                                                                                |       | (1,986       | )          | (1,586           | )          |
| Deferred loan fees, net                                                                                                                                  |       | (985         | )          | (597             | )          |
| Loans, net                                                                                                                                               |       | 198,879      |       | 158,525          |       |
| Premises and equipment, net                                                                                                                              |       | 3,057        |       | 3,023            |       |
| Bank Owned Life Insurance                                                                                                                                |       | 6,000        |       | 6,000            |       |
| Intangible asset                                                                                                                                         |       | 500          |       | 500              |       |
| Other assets                                                                                                                                             |       | 1,634        |       | 1,482            |       |
| **TOTAL ASSETS**                                                                                                                                         |       | $            | 284,544    |             | $          | 246,842 |   |
|                                                                                                                                                     |       |         |       |             |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                            |       |         |       |             |       |
| Deposits:                                                                                                                                                |       |         |       |             |       |
| Non-interest bearing demand                                                                                                                              |       | $            | 34,319     |             | $          | 33,359 |   |
| Interest bearing demand                                                                                                                                  |       | 7,224        |       | 6,133            |       |
| Savings                                                                                                                                                  |       | 2,510        |       | 2,682            |       |
| Money Market                                                                                                                                             |       | 111,966      |       | 113,163          |       |
| IRA’s                                                                                                                                               |       | 1,104        |       | 878              |       |
| Time deposits < $100,000                                                                                                                              |       | 37,846       |       | 6,604            |       |
| Time deposits > $100,000                                                                                                                              |       | 32,798       |       | 25,522           |       |
| Total deposits                                                                                                                                           |       | 227,767      |       | 188,341          |       |
| Other borrowed funds                                                                                                                                     |       | 28,000       |       | 30,500           |       |
| Accrued expenses and other liabilities                                                                                                                   |       | 870          |       | 625              |       |
| Total Liabilities                                                                                                                                        |       | 256,637      |       | 219,466          |       |
|                                                                                                                                                     |       |         |       |             |       |
| Commitments and contingencies (Notes 1 and  8)                                                                                                           |       |         |       |             |       |
|                                                                                                                                                     |       |         |       |             |       |
| Shareholders’ equity:                                                                                                                               |       |         |       |             |       |
| Preferred stock, $.01 par value, 20,000,000  shares authorized; no shares issued or outstanding                                                          |       | —       |       | —           |       |
| Common stock, $.01 par value, 10,000,000  shares authorized; 2,973,330 issued and outstanding as of June 30, 2005 and  2,972,330 as of December 31, 2004 |       | 30           |       | 30               |       |
| Surplus                                                                                                                                                  |       | 30,364       |       | 30,326           |       |
| Accumulated deficit                                                                                                                                      |       | (2,165       | )          | (2,617           | )          |
| Accumulated other comprehensive  income/(loss)                                                                                                           |       | (322         | )          | (363             | )          |
| Total shareholders’ equity                                                                                                                          |       | 27,907       |       | 27,376           |       |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                      |       | $            | 284,544    |             | $          | 246,842 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

3

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THE BANK HOLDINGS AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except per share data)

 
| ** **                                                                                  | ** ** | **For the Three Month Period** | ** ** | **For the Six Month Period** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                                                  | ** ** | **Ended June 30,**             | ** ** | **Ended June 30,**           | ** ** |
| ** **                                                                                  | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Interest income:**                                                                        |       |                           |       |                         |       |   |   |   |   |
| Federal funds sold and other                                                                |       | $                              | 36         |                         | $          | 11 |   | $ | 72 |   | $ | 55 |   |
| Debt securities, taxable                                                                    |       | 542                            |       | 791                          |       | 1,132 |   | 1,492 |   |
| Dividends                                                                                   |       | 35                             |       | 4                            |       | 40 |   | 7 |   |
| Loans, including fees                                                                       |       | 3,251                          |       | 1,652                        |       | 5,986 |   | 3,043 |   |
| **Total interest and dividend income**                                                      |       | 3,864                          |       | 2,458                        |       | 7,230 |   | 4,597 |   |
|                                                                                        |       |                           |       |                         |       |   |   |   |   |
| **Interest expense:**                                                                       |       |                           |       |                         |       |   |   |   |   |
| Deposits                                                                                    |       | 1,377                          |       | 793                          |       | 2,488 |   | 1,547 |   |
| Other borrowed funds                                                                        |       | 156                            |       | 32                           |       | 261 |   | 95 |   |
| **Total interest expense**                                                                  |       | 1,533                          |       | 825                          |       | 2,749 |   | 1,642 |   |
|                                                                                        |       |                           |       |                         |       |   |   |   |   |
| **Net interest income**                                                                     |       | 2,331                          |       | 1,633                        |       | 4,481 |   | 2,955 |   |
|                                                                                        |       |                           |       |                         |       |   |   |   |   |
| Provision for loan losses                                                                   |       | 186                            |       | 170                          |       | 400 |   | 390 |   |
| Net interest income, after provision for  loan losses                                       |       | 2,145                          |       | 1,463                        |       | 4,081 |   | 2,565 |   |
|                                                                                        |       |                           |       |                         |       |   |   |   |   |
| **Non-interest income:**                                                                    |       |                           |       |                         |       |   |   |   |   |
| Service charges on deposit accounts                                                         |       | 53                             |       | 33                           |       | 99 |   | 61 |   |
| Other service charges, commissions and fees                                                 |       | 48                             |       | 30                           |       | 86 |   | 68 |   |
| Pre-underwriting fees                                                                       |       | 8                              |       | 83                           |       | 25 |   | 139 |   |
| Unrealized loss on trading securities                                                       |       | (10                            | )          | —                       |       | (3 | ) | — |   |
| Realized (loss)/gain on sale of  investments, net                                           |       | (2                             | )          | (24                          | )          | 36 |   | 9 |   |
| **Total non-interest income**                                                               |       | 97                             |       | 122                          |       | 243 |   | 277 |   |
|                                                                                        |       |                           |       |                         |       |   |   |   |   |
| **Non-interest expense:**                                                                   |       |                           |       |                         |       |   |   |   |   |
| Salaries and employee benefits                                                              |       | 797                            |       | 666                          |       | 1,592 |   | 1,270 |   |
| Occupancy and equipment                                                                     |       | 368                            |       | 290                          |       | 753 |   | 544 |   |
| Data processing                                                                             |       | 214                            |       | 76                           |       | 444 |   | 158 |   |
| Deposit servicing costs                                                                     |       | 66                             |       | 49                           |       | 121 |   | 92 |   |
| Accounting, legal and tax                                                                   |       | 139                            |       | 78                           |       | 223 |   | 186 |   |
| Other professional services                                                                 |       | 89                             |       | 103                          |       | 178 |   | 121 |   |
| Telephone and data communications                                                           |       | 40                             |       | 31                           |       | 72 |   | 65 |   |
| Other                                                                                       |       | 254                            |       | 206                          |       | 489 |   | 315 |   |
| **Total non-interest expense**                                                              |       | 1,967                          |       | 1,499                        |       | 3,872 |   | 2,751 |   |
|                                                                                        |       |                           |       |                         |       |   |   |   |   |
| **NET INCOME**                                                                              |       | $                              | 275        |                         | $          | 86 |   | $ | 452 |   | $ | 91 |   |
|                                                                                        |       |                           |       |                         |       |   |   |   |   |
| Other comprehensive income/(loss),  unrealized gain/(loss) on securities available for sale |       | $                              | 266        |                         | $          | (1,409 | ) | $ | 41 |   | $ | (990 | ) |
| **Comprehensive Income/(Loss)**                                                             |       | $                              | 541        |                         | $          | (1,323 | ) | $ | 493 |   | $ | (899 | ) |
|                                                                                        |       |                           |       |                         |       |   |   |   |   |
| Net earnings per share:                                                                     |       |                           |       |                         |       |   |   |   |   |
| Basic                                                                                       |       | 0.09                           |       | 0.03                         |       | 0.15 |   | 0.04 |   |
| Diluted                                                                                     |       | 0.09                           |       | 0.03                         |       | 0.14 |   | 0.04 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

4

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share data) 

 
| ** **                                                | ** ** | **For the Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                | ** ** | **June 30,**                 | ** ** |
| ** **                                                | ** ** | **2005**                     | ** ** | **2004** | ** ** |
|                                                      |       |                         |       |   |   |
| **Cash flows from operating activities:**                 |       |                         |       |   |   |
| Net Income                                                |       | $                            | 452        |   | $ | 91 |   |
| Adjustments to reconcile net income to cash               |       |                         |       |   |   |
| Provided by (used in) operating activities:               |       |                         |       |   |   |
| Provision for loan losses                                 |       | 400                          |       | 390 |   |
| Stock option compensation expense                         |       | 28                           |       | — |   |
| Net amortization of securities                            |       | 212                          |       | 435 |   |
| Depreciation                                              |       | 223                          |       | 201 |   |
| Unrealized losses on trading securities                   |       | 3                            |       | — |   |
| Activity in equity securities held for  trading, net      |       | (40                          | )          | — |   |
| Realized gain on sales of investments, net                |       | (36                          | )          | (9 | ) |
| Net change in:                                            |       |                         |       |   |   |
| Other assets and liabilities, net                         |       | 93                           |       | (141 | ) |
| **Net cash provided by operating activities**             |       | 1,335                        |       | 967 |   |
|                                                      |       |                         |       |   |   |
| **Cash flows from investing activities:**                 |       |                         |       |   |   |
| Activity in available for sale securities:                |       |                         |       |   |   |
| Proceeds from sales, maturities,  prepayments and calls   |       | 71                           |       | 27,431 |   |
| Purchases                                                 |       | (167                         | )          | (41,399 | ) |
| Activity in securities held to maturity:                  |       |                         |       |   |   |
| Proceeds from maturities, prepayments and  calls          |       | 6,427                        |       | 14,435 |   |
| Purchases                                                 |       | —                       |       | (31,978 | ) |
| Activity in equity securities, net                        |       | 28                           |       | (604 | ) |
| Loan originations and principal  collections, net         |       | (40,754                      | )          | (36,802 | ) |
| Purchases of premises and equipment                       |       | (277                         | )          | (734 | ) |
| **Net cash used in investing activities**                 |       | (34,672                      | )          | (69,651 | ) |
|                                                      |       |                         |       |   |   |
| **Cash flows from financing activities:**                 |       |                         |       |   |   |
| Net increase in deposits                                  |       | 39,426                       |       | 47,418 |   |
| Activity in other borrowed funds, net                     |       | (2,500                       | )          | 10,875 |   |
| Net proceeds from issuance of common stock                |       | 10                           |       | 16,141 |   |
| **Net cash provided by financing activities**             |       | 36,936                       |       | 74,434 |   |
|                                                      |       |                         |       |   |   |
| **Net change in cash and cash equivalents**               |       | 3,599                        |       | 5,750 |   |
|                                                      |       |                         |       |   |   |
| **Cash and cash equivalents at beginning of  the period** |       | 5,362                        |       | 5,960 |   |
| **Cash and cash equivalents at end of the  period**       |       | $                            | 8,961      |   | $ | 11,710 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

5

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**THE BANK HOLDINGS**

**Notes to Unaudited Consolidated FinancialStatements**

**June 30, 2005**

 

**NOTE – 1 THE BUSINESS OF THE BANK HOLDINGS**

 

***Nature of Banking Activities***

 

The Bank Holdings is a bank holding company, which provides a fullrange of banking services to commercial and consumer customers through its whollyowned subsidiary, Nevada Security Bank (“the Bank”).  The Bank has four branches. There are two offices in Reno, one at LakeTahoe in Incline Village, Nevada and one in Roseville, California.  The Mae Anne branch was opened on October 11,2004 in the growing northwest region of Reno. The Roseville branch, which is operated as Silverado Bank, was opened onMarch 18, 2005.  In addition, this branchalso focuses on government guaranteed loans through the Small BusinessAdministration, or SBA.

 

These entities are collectively referred to herein as the Company.  At the present time, the Company has nooperating subsidiaries other than Nevada Security Bank.  Segment information is not presented sinceprincipally all of the Company’s revenues are attributable to one reportablesegment.  The accounting and reportingpolicies of the Company conform to accounting principles generally accepted inthe United States of America and general practices within the banking industry.

 

**NOTE 2 – BASIS OF PRESENTATION**

 

***Principles of Consolidation and Basis ofPresentation***

 

On July 9, 2003, the stockholders of Nevada Security Bank approved theexchange of their common stock in Nevada Security Bank for common stock in thenewly formed holding company, The Bank Holdings.  This transaction was consummated on August29, 2003 and was accounted for at historical cost. The consolidated financialstatements include the accounts of The Bank Holdings and its wholly-ownedsubsidiary, Nevada Security Bank.  NevadaSecurity Bank was organized on February 26, 2001 and opened for business onDecember 27, 2001.  All significantinter-company balances and transactions have been eliminated in consolidation.

 

***Use of Estimates***

 

The accompanying unaudited consolidated financial statements have beenprepared in a condensed format, and therefore do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Theinformation furnished in these interim statements reflects all adjustmentswhich are, in the opinion of management, necessary for a fair statement of theresults for each respective period presented. Such adjustments are of a normal recurring nature, unless otherwisedisclosed in this Form 10-QSB.  Theresults of operations in the interim statements are not necessarily indicativeof the results that may be expected for any other quarter or for the full year.The interim financial information should be read in conjunction with theCompany’s Annual Report on Form 10-KSB.

 

Analysis of certain interim financial information has been presentedfor both end-of-period and reporting period average balances.  It is anticipated that for historical review,average balances may be more pertinent to eliminate seasonality, quarter-end growthanomalies, and computational rounding.

 

In preparing consolidated financial statements in conformity withgenerally accepted accounting principles in the United States of America andgeneral practices within the banking industry, management is required to makeestimates and assumptions that affect the reported amount of assets andliabilities as of the date of the balance sheet and reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Material estimates that areparticularly

 

6

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susceptible to significant change in the near term relate to thedetermination of the allowance for loan losses.

 

***Cash and Cash Equivalents***

 

For purposes of the consolidated statements of cash flows, cash andcash equivalents include cash on hand, demand amounts due from banks (includingcash items in the process of collection), liquid money market funds and federalfunds sold.  Cash flows from loans,deposits, and proceeds from issuance of common stock are reported net.

 

The Company maintains funds on account with other institutions which,at times, may exceed federally insured limits. A significant concentration exists with relation to deposits held atPacific Coast Bankers’ Bank, the Bank’s primary correspondent bank.  The Company has not experienced any losses onsuch accounts.

 

The Company is required to maintain average balances on hand or withthe Federal Reserve Bank.  At June 30,2005 and December 31, 2004 these reserve balances required amounted toapproximately $830,000 and $855,000, respectively.

 

***Securities***

 

Debt securities that management has the positive intent and ability tohold to maturity are classified as “held to maturity” and recorded at amortizedcost.  Securities not classified as heldto maturity including equity securities with readily determinable fair values,are classified as “available for sale” and are recorded at fair value, withunrealized gains and losses excluded from earnings and reported in othercomprehensive income.  Gains and losseson the sale of securities are recorded on the trade date and are determinedusing the specific identification method.

 

Management determines the appropriate classification of its investmentsat the time of purchase and may only change the classification under certainlimited circumstances. Any transfers between categories would be accounted forat fair value.  There were none duringall periods under review.

 

Purchase premiums and discounts are recognized in interest income usingthe interest method over the estimated life of the securities.  Declines in the fair value ofheld-to-maturity and available-for-sale securities below their cost that aredeemed to be other than temporary are reflected in earnings as realizedlosses.  In estimatingother-than-temporary impairment losses, management considers (1) the length oftime and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, and (3) the abilityand intent of the Company to retain its investment in the issuer for a periodof time sufficient to allow for any anticipated recovery in fair value.

 

***Trading Account & Derivative FinancialInstruments***

 

The Company’s “trading account” consists of specific equity investmentsthat are carried at market value and are separately reported in Table 4, “Securities.”  Unrealized gains and losses are included inearnings as non-interest income.

 

The Company has a policy that provides for the use of derivativefinancial instruments held or issued for “trading account” purposes.  These instruments are utilized for riskmanagement purposes, and are measured at market value with gains or lossesrepresented in earnings.  Equityinvestments comprise the major portion of “trading account” assets. “Derivativefinancial instruments” are exchange traded covered call options written onsome, but not all, of such equity investments. These options are carried at market value and are recorded in otherliabilities.

 

***Loans***

 

The Company grants real estate, commercial and consumer loans tocustomers.  A substantial portion of theloan portfolio is represented by real estate loans throughout northern Nevadaand northern California.

 

7

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The ability of the Company’sborrowers to honor their contracts is dependent upon the real estate andgeneral economic conditions in these areas.

 

Loans are reported at their outstanding unpaid principal balancesreduced by the allowance for loan losses, and any deferred fees or costs onoriginated loans.  Interest income isaccrued on the unpaid principal balance.

 

***Allowance for Loan Losses***

 

The allowance for loan losses is established through a provision forloan losses charged to expense.  Loanlosses are charged against the allowance when management believes thecollection of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis bymanagement and is based upon management’s periodic review of the collectibilityof the loans in light of historical peer bank experience, the nature and volumeof the loan portfolio, adverse situations that may affect the borrower’sability to repay, estimated value of any underlying collateral and prevailingeconomic conditions.  This evaluation isinherently subjective as it requires estimates that may be susceptible tosignificant revision as more information becomes available.

 

The allowance consists of specific and general components.  The specific component relates to loans thatare classified as doubtful, substandard or special mention.  The general component covers non-classified loansand is based on historical peer bank loss experience adjusted for qualitativefactors.

 

A classified loan is considered impaired when, based on currentinformation and events, it is probable that the Company will be unable tocollect the scheduled payments of principal or interest when due according tothe contractual terms of the loan agreement.

 

Management determines the significance of payment delays and paymentshortfalls on a case-by-case basis, taking into consideration all of thecircumstances surrounding the loan and the borrower, including the length ofthe delay, the reasons for the delay, the borrower’s prior payment record, andthe amount of the shortfall in relation to the principal and interestowed.  Impairment is measured on a loanby loan basis for commercial and construction loans by either the present valueof expected future cash flows discounted at the loan’s effective interest rate,the loan’s obtainable market price, or the fair value of the collateral if theloan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectively evaluatedfor impairment.  Accordingly, the Companydoes not separately identify individual consumer and residential loans forimpairment disclosures, unless such loans are the subject of a restructuringagreement.

 

***Interest and fees on loans***

 

***Interest on loansis recognized over the terms of the loans and is calculated under the effectiveinterest method.  The Company determinesa loan to be delinquent when payments have not been made according tocontractual terms, typically evidenced by nonpayment of a monthly installmentby the due date.***

 

***The accrual ofinterest on loans is discontinued at the time the loan is 90 days delinquentdate or sooner if management determines the loan is impaired.  Personal loans would be typically charged offwhen they are 180 days delinquent.***

 

All interest accrued but not collected for loans that are placed onnon-accrual is reversed against interest income unless the credit is wellsecured and in the process of collection. The interest on these loans is accounted for on the cash-basis orcost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when allthe principal and interest amounts contractually due are brought current andfuture payments are reasonably assured.

 

8

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Loan origination and commitment fees and certain direct loanorigination costs are deferred and the net amount amortized as an adjustment tothe related loan’s yield.  The Bank isgenerally amortizing these amounts over the contractual life of the loan.  Commitment fees, based upon a percentage of acustomer’s unused line of credit, and fees related to standby letters of creditare recognized over the commitment period.

 

# ***Transfers of Financial Assets***

 

Transfers of financial assets are accounted for as sales, when controlover the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) theassets have been isolated from the Company, (2) the transferee obtains theright (free of conditions that constrain it from taking advantage of thatright) to pledge or exchange the transferred assets, and (3) the Company doesnot maintain effective control over the transferred assets through an agreementthat both entitles and obligates the Company to repurchase them before theirmaturity.

 

***Premises and Equipment***

 

Premises and equipment are carried at cost, less accumulateddepreciation computed on the straight-line method over the following estimatedlives of the assets.

 
| Furniture and Equipment |   | 3 – 20 years |
|-------------------------|--------|-------------------|
| Automobiles             |   | 3 years           |

 

Amortization of leasehold improvements is computed principally by thestraight line method over the term of the lease or the estimated useful life ofthe assets, whichever is shorter. Amortization expense on assets acquired under capital leases, which arebeing amortized over the lease terms, is included with depreciation expense onowned assets.

 

# ***Other Equity Securities***

 

The Company, as a member of the Federal Home Loan Bank (FHLB) system,is required to maintain an investment in capital stock of the FHLB in an amountequal to the greater of 1% of our outstanding home loans or 5% of advances fromthe FHLB.  The recorded amount of theFHLB stock equals its fair value because the shares can only be redeemed by theFHLB at the $100 per share par value. The Company also has an investment in Pacific Coast Bankers’ Bancshares(PCBB) the parent of its correspondent bank, to facilitate transactions betweenthe two companies.

 

***Pre-underwriting fees***

 

The Company has agreements with third parties under which the Companyperforms certain pre-underwriting activities on SBA loans which are funded bythe third party. These activities are conducted by Silverado Bank, located inthe Roseville, California branch office. The Company would be required to refund any fee paid, in the event ofdelinquency, default, or early payoff during the first six months of the loanterm.  Management records a liabilityequal to 100% of the fee at the date the fee is received, less any commissions,fees or incentives paid to individuals involved in the transaction.  This liability is reduced ratably over thesix month contingency period.

 

***Income Taxes***

 

Deferred income tax assets and liabilities are determined using theliability (or balance sheet) method.  Underthis method, the net deferred tax asset or liability is determined based on thetax effects of the temporary differences between the book and tax bases of thevarious balance sheet assets and liabilities and gives current recognition tochanges in tax rates and laws.  Deferredtax assets are reduced by a valuation allowance when, in the opinion ofmanagement, it is more likely than not that some portion or all of the deferredtax assets may not be realized.  Deferredtaxes and liabilities are adjusted for the effect of changes in tax laws andrates on the date of enactment.

 

9

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***Salary Continuation Plan***

 

The Company has initiated action to provide certain key executives, ortheir designated beneficiaries, with annual benefits after retirement, untildeath.  These benefits would besubstantially equivalent to those available under split-dollar life insurancepolicies purchased by the Company on the lives of such key executives.  The Company has not completed the final planor agreements, and has not accrued for these future benefits from anyprospective date of the plan or agreements which may be drawn.

 

***Reclassification***

 

Various reclassifications have been made in the prior periods in orderto be consistent with the presentation as of June 30, 2005.  Further, certain captions have had minorrevisions to more accurately reflect activities of the Company.  There was no change to previously reportedstockholders’ equity or net income.

 

**NOTE 3 – SHAREHOLDERS’ EQUITY**

 

Duringthe three months ended June 30, 2005, the Company issued 1,000 shares of its$.01 par value common stock under a founder’s stock option agreement.  Gross proceeds amounted to $10 thousand;there were no incremental costs of issuance.

 

**NOTE 4 – STOCK COMPENSATION PLAN**

 

***Stock Compensation Plan***

 

At December 31, 2004, the Company had a stock-based employeecompensation plan, which is more fully described in NOTE 12 of The Company’sAnnual Report on Form 10KSB.  The Companyaccounts for the plan using the recognition and measurement principles of APBOpinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations. Accordingly, prior to the third quarter of 2004, no stock-based employeecompensation cost had been reflected in the statement of operations, as alloptions granted under the plan had an exercise price equal to the fair marketvalue of the underlying common stock on the grant date.  During 2004, the Company granted options tocertain individuals under the Amended 2002 Stock Option Plan (the “Plan”) whichwas approved at the 2004 Annual Meeting of Shareholders.  Such Plan provides for stock option grants atfair market value determined by a number of methods.  Due to the lack of an active trading marketin the Company’s common stock, its limited number of shares exchanged daily, aswell as substantial price volatility, it was determined that using a thirty(30) day average market closing price would be the most representative of thecommon stock’s fair market value. Accordingly, the Company has recognized the difference between themarket price on the date of the grant and the average lower closing marketprice for the thirty (30) days preceding the grant date as compensation whichhas been reflected in the statement of operations.  For certain of the options granted during2004, the thirty day average closing market price was greater than the marketprice on that day.

 

Pro forma adjustments to the Company’s consolidated net earnings andearnings per share are disclosed during the years in which the options becomevested.  The following table illustratesthe effect on net income and earnings per common share if the Company hadapplied the fair value recognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*, to such outstandingand unvested awards granted.

 

10

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| ** **                                                                                                       | ** ** | **For the Quarter Ending** | ** ** | **For the Six Months  Ending** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **                                                                                                       | ** ** | **June 30,**               | ** ** | **June 30,**                   | ** ** |
| ** **                                                                                                       | ** ** | **2005**                   | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                       | ** ** | **(Dollars in thousands)** | ** ** |
| Net Income:                                                                                                      |       |                       |       |                           |       |   |   |   |   |
| As reported                                                                                                      |       | $                          | 275        |                           | $          | 86 |   | $ | 452 |   | $ | 91 |   |
| Add: Stock-based employee compensation  expense included in reported net income                                  |       | 14                         |       | —                         |       | 28 |   | — |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards |       | 124                        |       | 34                             |       | 248 |   | 59 |   |
|                                                                                                             |       |                       |       |                           |       |   |   |   |   |
| Pro-forma net income                                                                                             |       | $                          | 165        |                           | $          | 52 |   | $ | 232 |   | $ | 32 |   |
|                                                                                                             |       |                       |       |                           |       |   |   |   |   |
| Earnings per share                                                                                               |       |                       |       |                           |       |   |   |   |   |
| As reported                                                                                                      |       |                       |       |                           |       |   |   |   |   |
| Basic                                                                                                            |       | $                          | 0.09       |                           | $          | 0.03 |   | $ | 0.15 |   | $ | 0.04 |   |
| Diluted                                                                                                          |       | $                          | 0.09       |                           | $          | 0.03 |   | $ | 0.14 |   | $ | 0.04 |   |
| Pro forma                                                                                                        |       |                       |       |                           |       |   |   |   |   |
| Basic                                                                                                            |       | $                          | 0.06       |                           | $          | 0.02 |   | $ | 0.08 |   | $ | 0.01 |   |
| Diluted                                                                                                          |       | $                          | 0.05       |                           | $          | 0.02 |   | $ | 0.07 |   | $ | 0.01 |   |

 

**NOTE 5 – COMPREHENSIVE INCOME/(LOSS)**

 

Accounting principles generally require that recognized revenue,expenses, gains and losses be included in net income.  Although certain changes in assets andliabilities, such as unrealized gains and losses on available-for-salesecurities, are reported as a separate component of the equity section of thebalance sheet, such items, along with net income, are components ofcomprehensive income.  Comprehensiveincome includes net income or loss and other comprehensive income or loss.  The Company’s only source of othercomprehensive income/(loss) is derived from unrealized gains and losses oninvestment securities available for sale. Reclassification adjustments, resulting from gains or losses oninvestment securities that were realized and included in the net income of thecurrent period that also had been included in other comprehensive income orloss as unrealized holding gains or losses in the period in which they arose,are excluded from comprehensive income of the current period.  The following table presents thereconciliation of transactions affecting Accumulated Other Comprehensive Income(Loss) included in shareholders’ equity for the periods indicated.

 

11

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The components of other comprehensive income/(loss) are as follows:

 
| ** **                                                                   | ** ** | **For the Quarter Ended  June 30,** | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                            | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in thousands)**          | ** ** |
| Net Income                                                                   |       | $                                   | 275        |                                   | $          | 86 |   | $ | 452 |   | $ | 91 |   |
| Unrealized holding gains/(losses) on  available-for-sale securities          |       | 264                                 |       | (1,433                                 | )          | 77 |   | (981 | ) |
| Less: reclassification adjustment for  losses/(gains) realized in net income |       | 2                                   |       | 24                                     |       | (36 | ) | (9 | ) |
| Net unrealized holding gains/(losses)                                        |       | 266                                 |       | (1,409                                 | )          | 41 |   | (990 | ) |
| Comprehensive income/(loss)                                                  |       | $                                   | 541        |                                   | $          | (1,323 | ) | $ | 493 |   | $ | (899 | ) |

 

**NOTE 6 – EARNINGS  PER SHARE**

 

Income per share for all periods presented in the unauditedConsolidated Statements of Operations and Comprehensive Income (Loss) arecomputed based on the weighted average number of shares outstanding during eachperiod.  Options outstanding as of June30, 2005 totaled 455,800 and there were 310,500 warrants outstanding on thesame date. Warrants will only be exercisable during the sixty day periodbeginning March 23, 2006.  At theconclusion of that exercise period, unexercised warrants will expire.  The computation of basic and diluted earningsper weighted average share outstanding is as follows:

 
| ** **                                                                                       | ** ** | **Quarter Ending** | ** ** | **For the Six Months Ending** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------------|------------|
| ** **                                                                                       | ** ** | **June 30,**       | ** ** | **June 30,**                  | ** ** |
| ** **                                                                                       | ** ** | **2005**           | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                             |       |               |       |                          |       |   |   |   |   |
| Average number of common shares outstanding                                                      |       | 2,972,484          |       | 2,959,815                     |       | 2,972,407 |   | 2,268,175 |   |
| Effect of dilutive options                                                                       |       | 117,141            |       | 77,537                        |       | 132,317 |   | 48,881 |   |
| Effect of dilutive warrants                                                                      |       | 119,119            |       | —                        |       | 127,694 |   | — |   |
| Average number of common shares outstanding  used to calculate diluted earnings per common share |       | 3,208,744          |       | 3,037,352                     |       | 3,232,418 |   | 2,317,056 |   |
|                                                                                             |       |               |       |                          |       |   |   |   |   |
| Net income                                                                                       |       | $                  | 275        |                          | $          | 86 |   | $ | 452 |   | $ | 91 |   |
| Basic net income per share                                                                       |       | $                  | 0.09       |                          | $          | 0.03 |   | $ | 0.15 |   | $ | 0.04 |   |
| Diluted net income per share                                                                     |       | $                  | 0.09       |                          | $          | 0.03 |   | $ | 0.14 |   | $ | 0.04 |   |

 

**NOTE 7 – OTHER BORROWED FUNDS**

 

The Company has entered into two agreements with correspondent banksunder which it can purchase federal funds up to $5.2 million.  The interest charged on borrowings isdetermined by the lending institution at the time of the borrowing.  These lines of credit are for short-term use,are unsecured and are renewed on an annual basis.  There were no balances outstanding underthese agreements at June 30, 2005, and December 31, 2004.

 

12

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The Company also has an agreement with the Federal Home Loan Bank ofSan Francisco (FHLB) to borrow funds. Advances are collateralized by qualifying assets pursuant to collateralagreements with FHLB.  There were overnightadvances of $28 million and $30.5 million outstanding as of June 30, 2005, andDecember 31, 2004, respectively.

 

**NOTE 8 – COMMITMENTS AND CONTINGENCIES**

 

***Financial Instruments with Off-balance SheetRisk***

 

The Company is party to financial instruments with off-balance sheetrisk made in the normal course of business to meet the financing needs of itscustomers.  These financial instrumentsmay include commitments to extend credit, and standby letters of credit.  Such commitments involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized inthe consolidated balance sheets.

 

The Company’s exposure to credit loss, in the event of nonperformanceby the other parties to the financial instrument, is represented by thecontractual amount of these instruments. The Company follows the same credit policies in making commitments as itdoes for on-balance sheet instruments.  Asummary of the contracted amount of the Company’s exposure to off-balance sheetrisk as of June 30, 2005 and December 31, 2004 is as follows:

 
| ** **                                                                                        | ** ** | **Contract Amount**        | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                        | ** ** | **June 30,**               | ** ** | **December 31,** | ** ** |
| ** **                                                                                        | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                                                                        | ** ** | **(Dollars in thousands)** | ** ** |
|                                                                                              |       |                       |       |   |   |
| Commitments to extend credit, including  unsecured commitments of $15.0 million and $13.3 million |       | $                          | 66,762     |   | $ | 49,580 |   |
| Unsecured consumer lines of credit                                                                |       | 1,509                      |       | 1,632 |   |
| Standby letters of credit                                                                         |       | 460                        |       | 310 |   |
|                                                                                              |       | $                          | 68,731     |   | $ | 51,522 |   |

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Since many of the commitments areexpected to expire without ever being drawn upon, the total commitment amountsdo not necessarily represent future cash requirements.  The Company evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained, ifdeemed necessary by the Company, is based on management’s credit evaluation ofthe customer.  Collateral held varies,but may include accounts receivable, inventory, property and equipment,residential real estate and income producing commercial properties.

 

Unfunded commitments under commercial lines-of-credit, revolving creditlines and overdraft protection agreements are commitments for possibleextension of credit to existing customers. These lines-of-credit may be uncollateralized, and may not contain aspecified maturity date and may not be drawn upon to the total extent to whichthe Company is committed.

 

Standby letters-of-credit are conditional lending commitments issued bythe Company to guarantee the performance of a customer to a third party.  These letters-of-credit are primarily issuedto support public and private borrowing arrangements.  Essentially all letters of credit haveexpiration dates within one year.  Thecredit risk involved in issuing letters-of-credit is essentially the same asthat involved in extending loan facilities to customers.

 

13

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In connection with standby letters of credit, the Bank recognizes therelated commitment fee received from the third party as a liability at theinception of the guarantee pursuant to FASB Interpretation 45 (FIN 45) *Initial Recognition andMeasurement of the Liability for a Guarantor’s Obligations*.Commitment fees where the likelihood of exercise of the commitment isremote, are generally recognized as service fee income over the commitmentperiod.

 

As of June 30, 2005 there were commitment fee obligations of less than$1,000, for the $460,000 Standby Letters of Credit. The credit risk involved inissuing letters of credit is essentially the same as that involved in extendingfacilities to customers, and management believes that no undue credit orservice fee income exposure exists as a result of such transaction.

 

***Concentrations***

 

The Company makes commercial, commercial real estate, and residentialreal estate loans in northern Nevada and northern California.  The Company makes consumer loans to customersprimarily in northern Nevada.  At June30, 2005 and December 31, 2004, real estate loans accounted for approximately75% and 70%, respectively, of total loans. Substantially all of these loans are secured by first liens with aninitial loan to value ratio of generally not more than 75%.  The Company’s policy for requiring collateralis to obtain collateral whenever it is available or desirable; depending uponthe degree of risk the Company is willing to take.  In addition, approximately 4% of total loansare unsecured.  The Company’s loans areexpected to be repaid from cash flow or from proceeds from the sale of selectedassets of the borrowers.

 

A substantial portion of the Company’s customers’ ability to honortheir contracts is dependent on the economy in the areas the Companyserves.  The Company’s goal is to maintaina high quality diversified loan portfolio which presupposes that a great numberof loans will be well collateralized and supported by cash flows.

 

**NOTE 9 – RECENT ACCOUNTING PRONOUNCEMENTS**

 

OnNovember 25, 2003, FASB’s Emerging Issues Task Force (EITF) ratified aconsensus decision on new disclosure requirements related to unrealized losseson investment securities applicable to fiscal years ending after December 15,2003 requiring institutions covered by FAS 115 to include said disclosure in2003 annual reports.  Unrealized losseson investment securities must be summarized in table format, distinguishingbetween securities in a continuous unrealized loss position for 12 months ormore and securities in a continuous unrealized loss position for 12 months orless, including aggregate unrealized losses of securities whose fair values arebelow book values as of the reporting date and the aggregate fair value ofsecurities whose fair values are below book values as of the reporting date.  Additional information recommended forinclusion in narrative form includes the nature of the investment, the cause(s)of impairment(s), the number of investment positions that are in an unrealizedloss position, and the severity and duration of impairment(s).  Subsequently the March 17-18, 2004 EITFmeeting provided further guidance for evaluating whether an investment isother-than-temporarily impaired and was effective for other-than-temporaryimpairment evaluations made in reporting periods after June 15, 2004.  However, the guidance contained in paragraphs10 – 20 has been delayed by FSP EITF Issue 03-1-1, “Effective Date ofParagraphs 10 – 20 of EITF Issue No. 03-1, *The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments,”*posted September 30, 2004.  The delay ofthe effective date for paragraphs 10 – 20 will be superseded concurrent withthe final issuance of proposed FSP EITF Issue 03-1-a, *“ImplicationGuidance for the Application of Paragraph 16 of EITF Issue No. 03-1, TheMeaning of Other-than-Temporary Impairment and its Application to CertainInvestments.”*  The disclosurescontinue to be effective in annual financial statements for fiscal years endingafter December 31, 2003, for investments accounted for under Statements 115 and124.

 

OnJune 29, 2005 the FASB decided not to provide additional guidance on themeaning of other-than-temporary impairment, but directed its staff to issueproposed FSP EITF 03-1a as final (the FASB plans

 

14

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toretitle this FASB Staff Position as FSP FAS 115-1 “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments”).  The final FSP will supersede EITF Issue No.03-1 and EITF Topic D-44, “Recognition of Other-Than-Temporary Impairment uponthe Planned Sale of a Security Whose Cost Exceeds Fair Value.”  The FASB decided that FASB FAS 115-1 would beeffective for other-than-temporary impairment analysis conducted in periodsbeginning after September 15, 2005.

 

InMay 2005, FASB published FASB Statement No. 154 *AccountingChanges and Error Corrections*, FAS 154.  This statement replaces APB Opinion No. 20 *Accounting Changes*and FASB statement No. 3*Reporting Accounting Changes in Interim Financial Statements.*  This statement applies to all voluntarychanges in accounting principle and to all changes required by an accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions.  Thisstatement requires retrospective application to prior periods’ financialstatements of changes in accounting principle, unless it is impracticable todetermine either the period-specific effects or the cumulative effect of thechange.  The statement requires thatretrospective application of a change in accounting principle be limited to thedirect effects of the change.  Indirecteffects of the change in accounting principle should be recognized in theperiod of the accounting change.  Changesin depreciation, amortization, or depletion methods for long-lived,non-financial assets must be accounted for as a change in accounting estimateeffected by a change in accounting principle.

 

In December 2004, FASB published FASB Statement No.123 (Revised 2004), *Share-Based Payment,*FAS 123(R).  FAS 123 (R) requires thatthe compensation cost relating to share-based payment transactions, includinggrants of employee stock options, be recognized in financial statements.  That cost will be measured based on the fairvalue of the equity or liability instruments issued.  FAS 123 (R) permits entities to use anyoption-pricing model that meets the fair value objective in the Statement.

 

The Statement is effective in the beginning of thefirst quarter of 2006.  As of theeffective date, the Company will apply the Statement using a modified versionof prospective application.  Under thattransition method, compensation cost is recognized for (1) all awards grantedafter the required effective date and to awards modified, cancelled, orrepurchased after that date and (2) the portion of prior awards for which therequisite service has not been rendered, based on the grant-date fair value ofthose awards calculated for pro forma disclosures under FAS 123.

 

The impact of this Statement on the Company in 2006and beyond will depend upon various factors, among them, our futurecompensation strategy.   The pro formacompensation costs presented in this document and in prior filings for theCompany have been calculated using a Black-Scholes option pricing model and maynot be indicative of amounts which should be expected in future periods.

 

In 2004, the Securities and Exchange Commission Staffupdated Staff Accounting Bulletin No. 74 topic M (“SAB 74”), *Disclosure of the Impact That Recently Issued Accounting Standards WillHave on the Financial Statements of the Registrant When Adopted in a FuturePeriod*, which provided guidance on disclosure of the potentialeffects of proposed accounting standards issued, but which do not requireadoption until some future date. The guidance clarifies that disclosure shouldbe adopted when the accounting standard is expected to have a material impacton the financial position, and/or results of operations.

 

On March 2, 2005, the Securities and ExchangeCommission (SEC) further extended the compliance dates for non-acceleratedfilers, regarding amendments to its rules under the Securities Exchange Act of1934 that were adopted on June 5, 2003, pursuant to Section 404 of theSarbanes-Oxley Act.  The amendmentsrequire a company to include in its annual reports a report by management onthe company’s internal control over financial reporting and an accompanyingauditors report.

 

15

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The Commission extended the original Section 404compliance dates for all issuers in February 2004.  Under the latest extension,  a company that is not required to file itsannual and quarterly reports on an accelerated basis must begin to comply withthe internal control over financial reporting requirements for its secondfiscal year ending on or after July 15, 2006. This is a one-year extension from the previously established July 15,2005 compliance date for non-accelerated filers.  The Commission similarly has extended thecompliance date for these companies relating to requirements regardingevaluation of internal control over financial reporting and managementcertification requirements.

 

The list of recent accounting pronouncements notedabove, while not an exhaustive list, includes those which we believe will, ormay, have the greatest likelihood of application to the Company’s consolidatedbalance sheets and/or consolidated statements of operations.  We believe that adoption of these standardswill not have a material impact on our financial condition, results ofoperations, earnings per share or cash flow, however, no absolute assurance canbe given that this in fact will occur.

 

**NOTE 10 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**

 

During the six months ended June 30, 2005 and 2004, cash paid forinterest expense on interest bearing liabilities was $2.6 million and $1.6million, respectively.  The Company paid$1,600 in state taxes during the period ending June 30, 2005 due to multi-stateoperations, while there was no cash paid for income taxes during the sameperiod ended June 30, 2004.  There was noreal estate acquired in the settlement of loans for the six month periodsending June 30, 2005 or 2004.

 

16

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**Summary Selected Unaudited Consolidated Financial Data**

 
| ** **                            | ** ** | **YTD Period Ending June 30,**                     | ** ** | **Year Ended** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|----------------|------------|
| ** **                            | ** ** | **2005**                                           | ** ** | **2004**       | ** ** | **December 31, 2004** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands, except per share data )** | ** ** |
| **Condensed Income Statement**        | ** ** | ** **                                         | ** ** |
| Interest Income                       |       | 7,230                                              |       | 4,597          |       | 10,536 |   |
| Interest Expense                      |       | 2,749                                              |       | 1,642          |       | 3,669 |   |
| Net Interest Income                   |       | 4,481                                              |       | 2,955          |       | 6,867 |   |
| Provision for Loan Losses             |       | 400                                                |       | 390            |       | 764 |   |
| Non-interest income                   |       | 243                                                |       | 277            |       | 420 |   |
| Non-interest expense                  |       | 3,872                                              |       | 2,751          |       | 6,242 |   |
| Provision for income taxes (1)        |       | —                                             |       | —         |       | — |   |
| Net Income (Loss)                     |       | 452                                                |       | 91             |       | 281 |   |
|                                  |       |                                               |       |           |       |   |   |
| **Period End Data**                   |       |                                               |       |           |       |   |   |
| Assets                                |       | 284,544                                            |       | 239,742        |       | 246,842 |   |
| Loans, gross                          |       | 201,850                                            |       | 119,656        |       | 160,708 |   |
| Securities                            |       | 62,623                                             |       | 104,857        |       | 69,128 |   |
| Deposits                              |       | 227,767                                            |       | 196,165        |       | 188,341 |   |
| Other borrowed funds                  |       | 28,000                                             |       | 17,000         |       | 30,500 |   |
| Shareholders’ Equity             |       | 27,907                                             |       | 26,096         |       | 27,376 |   |
|                                  |       |                                               |       |           |       |   |   |
| **Average Balance Sheet**             |       |                                               |       |           |       |   |   |
| Assets                                |       | 263,197                                            |       | 216,505        |       | 233,439 |   |
| Loans, gross                          |       | 176,424                                            |       | 104,563        |       | 122,454 |   |
| Securities                            |       | 65,742                                             |       | 93,565         |       | 90,242 |   |
| Deposits                              |       | 216,196                                            |       | 189,168        |       | 199,305 |   |
| Shareholders’ Equity             |       | 27,494                                             |       | 19,144         |       | 23,090 |   |
|                                  |       |                                               |       |           |       |   |   |
| **Asset Quality**                     |       |                                               |       |           |       |   |   |
| Non-performing assets (2)             |       | —                                             |       | —         |       | — |   |
| Allowance for loan loss               |       | 1,986                                              |       | 1,212          |       | 1,586 |   |
| Net charge-offs                       |       | —                                             |       | —         |       | — |   |
| Non-performing assets to total assets |       | —                                             |       | —         |       | — |   |
| Allowance for loan losses to loans    |       | 0.98                                               | %          | 1.01           | %          | 0.99 | % |
| Net Charge-offs to average loans      |       | —                                             |       | —         |       | — |   |
|                                  |       |                                               |       |           |       |   |   |
| **Per Common Share (4)**              |       |                                               |       |           |       |   |   |
| Basic income per share                |       | 0.15                                               |       | 0.04           |       | 0.11 |   |
| Diluted income per share              |       | 0.14                                               |       | 0.04           |       | 0.10 |   |
| Book value per share                  |       | 9.39                                               |       | 8.81           |       | 9.21 |   |
| Period end common shares outstanding  |       | 2,973,330                                          |       | 2,960,430      |       | 2,972,330 |   |
| Average shares outstanding - basic    |       | 2,972,407                                          |       | 2,268,175      |       | 2,615,991 |   |
| Average shares outstanding - diluted  |       | 3,232,418                                          |       | 2,317,056      |       | 2,703,798 |   |
| **Financial Ratios (4)**              |       |                                               |       |           |       |   |   |
| Return on average assets              |       | 0.35                                               | %          | 0.08           | %          | 0.12 | % |
| Return on average equity              |       | 3.32                                               | %          | 0.96           | %          | 1.22 | % |
| Net interest margin (3)               |       | 3.60                                               | %          | 2.86           | %          | 3.12 | % |
| Tier 1 leverage capital ratio         |       | 10.14                                              | %          | 11.38          | %          | 11.01 | % |

 

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(1)   The Company does not record a provision forincome taxes as a result of net operating losses.

(2)          Non-performing assets consists of loans 90days or more delinquent and still accruing interest, investments or loansplaced on non-accrual status, and other real estate owned. For all periodsthere are none.

(3)   Net interest income calculated on afully-taxable equivalent basis divided by average interest-earning assets.

(4)   Calculations are annualized, except per sharedata.

 

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**THE BANK HOLDINGS AND SUBSIDIARY**

**Item 2**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD LOOKING STATEMENTS**

 

Certainstatements contained herein are not based on historical facts and are “forward-lookingstatements” within the meaning of Section 21A of the Securities Exchange Act of1934.  Forward-looking statements, whichare based on various assumptions, may be identified by reference to a futureperiod or periods, or by the use of forward-looking terminology, such as “may,”“will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or similarterms or variations on those terms or the negative of those terms.  Forward-looking statements are subject tovarious factors (some of which are beyond our control), which could causeactual results to differ materially from these estimates.  These factors include, but are not limitedto, changes in general economic conditions, interest rates, deposit flows, loandemand, competition, legislation or regulation and accounting principles,policies or guidelines, as well as other economic, competitive, governmental,regulatory and technological factors affecting the Company’s operations.  We do not undertake, and specificallydisclaim any obligation, to publicly release the result of any revisions whichmay be made to any forward-looking statements to reflect the occurrence ofevents or circumstances after the date of such statements.

 

**CRITICAL ACCOUNTING POLICIES**

 

TheCompany’s financial statements are prepared in accordance with accountingprinciples generally accepted in the United States.  The financial information contained withinthese statements is, to a significant extent, based on approximate measures ofthe financial effects of transactions and events that have alreadyoccurred.  Critical accounting policiesare those that involve the most complex and subjective decision andassessments, and have the greatest potential impact on the Company’s statedresults of operations.  We consider thefollowing to be our critical accounting policies due to the potential impact onour results of operations and the carrying value of certain of our assets basedon any changes in judgments and assumptions required to be made by us in theapplication of these policies.  The Companyhas made no significant changes in its critical accounting policies andassumptions compared to the disclosures made in The Bank Holdings Annual Reporton Form 10-KSB for the year ended December 31, 2004.

 

***Allowance for Loan Losses***

 

Wemaintain an allowance for loan losses at a level which we believe is sufficientto cover probable charge-offs on loans deemed to be uncollectible based oncontinuous review of a variety of factors. These factors consist of the character and size of the loan portfolio,business and economic conditions, loan growth, delinquency trends,nonperforming loan trends, portfolio migration data (when appropriate),historical charge-offs, peer data, and other asset quality factors.  The primary means of adjusting the level ofthis allowance is through the provision for loan losses, which is establishedand charged to income on a monthly basis. Although we use available information to establish the appropriate levelof the allowance for loan losses, future additions to the allowance may benecessary because our estimates of the potential losses in our loan portfolioare susceptible to change as a result of changes in the factors notedabove.  Any such increase would adverselyaffect our results of operations.  Ourallowance for loan losses was $2.0 million and $1.2 million at June 30, 2005and 2004, respectively. The provision for loan losses amounted to $400,000 and$390,000 for the six months ending June 30, 2005 and 2004, respectively.

 

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Forthe commercial, real estate, and consumer loan portfolios, we evaluate specificloan status reports on all loans, including certain loans which may have beenclassified as impaired.  On an ongoingbasis an independent loan review function reviews all new loans as well as “watch”and any classified loans to ensure the accuracy of the loanclassifications.  Estimated reserves foreach of these credits are determined by reviewing current collateral value,financial information, cash flow, payment history and trends and other relevantfacts surrounding the particular credit. Provisions for losses on any remaining loans are based on pools ofsimilar loans using a combination of historical loss experience from the Bankand its peers.

 

Thegovernment guaranteed SBA/USDA loan portfolio which was purchased during late2003 and early 2004 to enhance the Bank’s yield on earning assets and to assistin asset liability planning, has no inherent credit quality issues, however,the Company has set aside a nominal allowance for these loans in an abundanceof caution.  This portfolio does haveprepayment risk, however, and early write-off of the premiums paid would beadjusted into interest income as appropriate under GAAP, should prepayments onthese loans occur.

 

Duringthe first six months of 2005, the Company further refined its selection andanalysis of peer data, and more extensively evaluated local and regionaleconomic conditions.  These analyses havefound a very low incidence of problem credits within strengthening northernNevada and northern California economies, supported by significant gains inpopulation, employment, and personal income. This has allowed the Company to be more precise in its calculation ofthe loan loss provision for the periods under review.  Table 8 sets forth the allocation of theallowance for loan losses as of June 30, 2005, and December 31, 2004.

 

**OVERVIEW**

 

TheCompany earns income from two primary sources; net interest income generated bythe successful employment of earning assets less the costs of interest-bearingliabilities, and net non-interest income, which is generated by service chargesand fees charged for services provided, less the operating costs of providingthe full range of banking services to our customers.  Pre-underwriting loan fees, gains on sale ofsecurities and unrealized gains or losses on the Company’s trading accountcomprise another area of non-interest income.

 

Atthe current time, the Company has a tax loss carry forward on a consolidatedbasis, and therefore no federal tax accrual or expense has been recorded forany of the periods reported within the body of this report, and the taxequivalent information is not pertinent. California Franchise Taxes of $1,600 were paid during 2005 for 2004operations and this amount is not anticipated to increase during the balance ofthe year.

 

**SUMMARY**

 

***Quarterly Analysis***

 

Annualizedsecond quarter asset growth was 44% and loan growth for the quarter ending June30, 2005 was 65% on an annualized basis. The Company earned $275,000 or $0.09 per share, for the quarter endingJune 30, 2005, as compared to $86,000 and $0.03 per share for the same periodduring 2004.

 

Annualizedreturn on average equity (“ROE”) and return on average assets (“ROA”) were4.00% and 0.40%, respectively, for the quarter ended June 30, 2005 and were1.29% and 0.15%, respectively, for the comparable period of the previous year.

 

Thestrong improvement in results of operations for the quarterly period ended June30, 2005 when compared to the results of the comparable 2004 period, are due toincreases in leverage that the Company continues to experience, exhibited involumes held of interest earning assets, primarily loans, and interest

 

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bearingliabilities.  Second quarter averagegross loans increased approximately $73.2 million or 63.9% when comparing June30, 2005 to the same period in 2004. Average total assets for the second quarter increased approximately$38.1 million or 16.1% when comparing June 30, 2005 to June 30, 2004.

 

Netinterest income before provision for loan losses increased by $698,000 or 42.7%over the second quarter of last year and was attributable to the volumeincrease in earning assets and an increase of 1.64% in the Company’s grossyield on earning assets.

 

Non-interestincome (excluding security gains and losses) was $99,000 and $146,000 for thequarters ended June 30, 2005 and 2004, respectively, a 32.2% decrease.  This decrease was primarily attributable tothe reduction in SBA pre-underwriting income to $8,000 for the quarter endingJune 30, 2005, versus $83,000 during the second quarter of 2004.  During this year the Company has not been asactive in the SBA loan production market as it was during prior periods.  Non-interest expenses totaled $1.967 millionand $1.499 million for the quarters ended June 30, 2005 and 2004, respectively,an increase of 31.2%.

 

Theefficiency ratio was 81.0% in the second quarter of 2005 as compared to 84.3%in the comparable quarter last year.  Asthe Company continues to grow and increase its non-interest income it isexpected that this ratio will continue to decrease, however, as the Bank hasadded two additional full service branch offices over the past year, it isunlikely that such a ratio will be greatly reduced in the near term.  Generally speaking, costs outpace assetgrowth during the early period of branch expansion activity, reflecting branchstart-up costs which are absorbed later by branch growth.  For a description of the methodology used tocalculate the efficiency ratio, please see Note (a) to Table 3.

 

Averagebalances and rates are provided in Table 1.

 

***YTD Analysis***

 

Annualizedfirst half asset growth was 31%.  Grossloan growth for the YTD period ending June 30, 2005 was 51% on an annualizedbasis.  The Company earned $452,000 or$0.15 per basic share, for the six month period ending June 30, 2005, ascompared to $91,000 and $0.04 per basic share for the same period during 2004.

 

Annualizedreturn on average equity (“ROE”) and return on average assets (“ROA”) were3.32% and 0.35%, respectively, for the six months ended June 30, 2005 and were0.96% and 0.08%, respectively, for the comparable period last year.

 

Thestrong improvement in results of operations for the six months ended June 30,2005 when compared to the results of the comparable 2004 period, are due toincreased leverage comprised of increases in volumes held of interest earningassets, primarily loans, and interest bearing liabilities.  Gross loans increased approximately $82.2million or 68.7% when comparing the six months ended on June 30, 2005 to thesame period in 2004.  Asset growth forthe year increased approximately $44.8 million or 18.7% when comparing June 30,2005 to June 30, 2004.

 

YTDnet interest income before provision for loan losses increased by $1.5 millionor 51.6% over the same period of last year and was attributable to the volumeincrease in earning assets and an seventy-four basis point increase in theCompany’s net interest margin.

 

YTDnon-interest income (excluding realized security gains and losses) was $207,000and $268,000 for the six months ended June 30, 2005 and 2004,respectively, a 22.8% decrease.  Thisdecrease was primarily attributable to the SBA pre-underwriting income of$25,000 for the six month period ending June 30, 2005, versus $139,000 duringthe same period of 2004.  During thisyear the Company has not been as active in the SBA loan market as it was duringprior periods.  Non-interest expensestotaled $3.9 million

 

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and$2.8 million for the six month period ended June 30, 2005 and 2004,respectively, an increase of 40.7%.

 

Theefficiency ratio was 82.6% in the first six month period of 2005 as compared to85.4% in the comparable period last year. As the Company continues to grow and increase its non-interest income itis expected that this ratio will continue to decrease, however, as the Bank hasadded two additional full service branch offices over the past year, it isunlikely that such a ratio will be greatly reduced in the near term.  Generally speaking, costs outpace assetgrowth during the early period of branch expansion activity, reflecting branchstart-up costs which are absorbed later by branch growth.  For a description of the methodology used tocalculate the efficiency ratio, please see Note (a) to Table 3.

 

**RESULTS OFOPERATIONS**

 

**Net Interest Income**

 

Netinterest income is the difference between interest income on earning assetssuch as loans and securities, and interest expense paid on liabilities such asdeposits and borrowings, and continues to be our largest source of income.  Net interest income for the six months endedJune 30, 2005 was approximately 62% of gross interest income, as compared withapproximately 64% for the same period in 2004. Net interest income is affected by the level of interest rates, changesin interest rates and by changes in the amount and composition ofinterest-earning assets and interest-bearing liabilities.

 

***Quarterly Analysis***

 

Netinterest income for the second quarter of 2005 was $2.331 million, an increaseof $698,000 or 42.7% compared to the second quarter of 2004.  This increase was primarily due to theincreases in the volume of interest earning assets and interest bearing liabilities.  Average earning assets increased $34.8million or 15.5% for the three months ended June 30, 2005 compared to the sameperiod in the prior year, while average gross loans increased by $73.2 millionor 63.9% over the same period. Average gross loans comprised 72.2% and 50.9%percent of average earning assets for the quarters ended June 30, 2005 and2004, respectively.

 

Continuedquality loan growth has been the mantra of the Bank over the past year.  Although we have seen substantial gains inloan volumes over prior periods, we have had few delinquencies and no loanlosses to date.  These increased loanvolumes have been supported by investment portfolio payments, additionaldeposit growth, and borrowed funds including brokered certificates of deposit.  Based on the relative volumes of each ofthese funding sources, it is anticipated that the Company’s net interest marginwill continue to be enhanced as we move through the rest of 2005.

 

Table1 sets forth, for the periods indicated, information regarding, (i) the totaldollar amount of interest income from interest earning assets and the resultantaverage yields; (ii) the total dollar amount of interest expense on interestbearing liabilities and the resultant average cost; (iii) net interest income;(iv) interest rate spread; and (v) net interest margin (net interest incomedivided by average interest-earning assets). Average balances are based on average daily balances during theindicated periods and rates are annualized based on the number of days in theperiod subject to review, and the number of days in the year.

 

TheCompany’s net interest margin, which represents net interest income as apercentage of average interest earning assets, increased to 3.64% from 2.92%during the three months ended June 30, 2005 as compared to the same period in2004, respectively, an increase of 72 basis points or 24.7%.

 

Thesubstantial increase in the Company’s net interest margin is as a result of twoprimary factors. Of lesser importance is the rate variance between periods,which is noted in Table 2, “Changes in Net Interest Income.”  Of far greater importance is the positivevariance in loan volumes over prior periods. The magnitude of the $73 million change in average loan volumes betweenthe quarters ended June 30,

 

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2005and 2004 resulted in a positive $698,000 change in the Company’s net interestincome, as noted in Table 2.

 

***YTD Analysis***

 

Netinterest income for the first half of 2005 was $4.481 million, an increase of$1.526 million or 51.6% compared to the same period of 2004.  This increase was primarily due to theincreases in the volume of interest earning assets and interest bearingliabilities.  Average earning assetsincreased $42.8 million or 20.6% for the six months ended June 30, 2005compared to the same period in the prior year. Average loans increased by $71.9million or 68.7% compared to the same period in 2004 primarily due to internalgrowth. Average gross loans as a percent of average earning assets was 70.4%and 50.3% for the year to date period ended June 30, 2005 and 2004,respectively.

 

Table1 sets forth, for the periods indicated, information regarding, (i) the totaldollar amount of interest income from interest earning assets and the resultantaverage yields; (ii) the total dollar amount of interest expense on interestbearing liabilities and the resultant average cost; (iii) net interest income;(iv) interest rate spread; and (v) net interest margin (net interest incomedivided by average interest-earning assets). Average balances are based on average daily balances during theindicated periods and rates are annualized based on the number of days in theperiod subject to review, and the number of days in the year.

 

TheCompany’s net interest margin, which represents net interest income as apercentage of average interest earning assets, increased to 3.60% from 2.86%during the six months ended June 30, 2005 as compared to the same period in2004, respectively, an increase of 74 basis points or 25.9%.

 

Thesubstantial increase in the Company’s net interest margin is as a result of twoprimary factors. Of lesser importance is the rate variance between periods,which is noted in Table 2, “Changes in Net Interest Income.”  Of far greater importance is the positivevariance in loan volumes over prior periods. The magnitude of the approximate $72 million change in average loanvolumes over the six month periods reported resulted in a positive variance of$1.5 million in the Company’s net interest income, as noted in Table 2.

 

**Provisionand Allowance for Loan Losses**

 

Theallowance for loan losses is maintained at a level determined to be adequate bymanagement to absorb losses inherent in the loan portfolio.  This allowance is increased by the provisioncharged to income and by recoveries on loans previously charged off.  Arriving at an appropriate level of allowancefor loan losses necessarily involves a high degree of judgment and isdetermined based on management’s ongoing evaluation.  As discussed under “Critical AccountingPolicies,” we believe that the methods we utilize to determine the allowancefor loan losses constitute a critical accounting policy.  Although we utilize judgment in providing forlosses, for the reasons discussed under “Critical Accounting Policies” and “CreditRisk Management” there can be no assurance that we will not have to increasethe amount of our provision for loan losses in future periods.  Please see Table 7.

 

***Quarterly Analysis***

 

Weprovided $186,000 and $170,000 for probable loan losses in the quarters endedJune 30, 2005, and 2004, respectively. The Company had no non-accrual loans, nor charged-off loans, at June 30,2005 or 2004.  The Company had two 30 daypast due loans as of June 30, 2005, and none during the same period for2004.  The Company also estimates anallowance for potential losses associated with off-balance sheet commitmentsand standby letters of credit.  Theallowance is included with other liabilities on the Company’s balance sheet andany related increases or decreases in the allowance are included in otherexpense.  The Company’s reserve foroff-balance sheet commitments amounted to $197,000 and $131,000 at June 30,2005 and 2004, respectively.  Theprovision for the off-balance sheet reserve was partially recaptured during thequarter ended June 30, 2005 as compared to the $32,000 provision for thequarter ending June 30, 2004.  TheCompany continues to believe that although loan quality remains high,

 

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atsome point we may experience delinquencies and potential loan charge-offs.  For that reason, we believe that maintainingan adequate loan loss reserve and provision is essential to the proactivemanagement of the Company’s loan portfolio.

 

***YTD Analysis***

 

Weprovided $400,000 and $390,000 for probable loan losses during the six monthsended June 30, 2005, and 2004, respectively. The Company had no non-accrual loans, nor charged-off loans, at June 30,2005 or 2004.  The Company had two 30 daypast due loans as of June 30, 2005, and none during the same period for2004.  The Company also estimates anallowance for potential losses associated with off-balance sheet commitmentsand standby letters of credit.  Theallowance is included with other liabilities on the Company’s balance sheet andany related increases or decreases in the allowance are included in otherexpense.  The Company’s reserve foroff-balance sheet commitments amounted to $197,000 and $131,000 at June 30,2005 and 2004, respectively.  Theprovision for the off-balance sheet reserve was $36,000 and $56,000 for the sixmonths ending June 30, 2005 and 2004, respectively.  The Company continues to believe thatalthough loan quality remains high, at some point we may experience delinquenciesand potential loan charge-offs.  For thatreason, we believe that maintaining an adequate loan loss reserve and provisionis essential to the proactive management of the Company’s loan portfolio.

 

**Non-interest Income**

 

***Quarterly Analysis***

 

Secondquarter non-interest income (excluding realized securities gains and losses)totaled $99,000, a decrease of $47,000 from the second quarter of 2004.  This decrease was primarily due to a decreaseof $75,000 in pre-underwriting fees which amounted to $8,000 at June 30, 2005versus $83,000 in the same period in 2004. This was due to the decline in the number of underwritten SBA loans,previously discussed.  Service chargeincome and other service charges and fees increased to $101,000 an approximateincrease of $38,000 or 60.3% over the same period in 2004.  During the second quarter of 2005 we sold$17,000 in trading equities, recognizing $2,000 in net losses.  Gains and losses from the sale of investmentsare subject to market and economic conditions and, as a result, there can be noassurance that gains reported in any period will be achievable in thefuture.  Such gains or losses are not afactor in the computation of the Company’s efficiency ratio.

 

***YTD Analysis***

 

YTDnon-interest income (excluding realized securities gains and losses) totaled$207,000, a decrease of $61,000 from the same period of 2004.  This decrease was due to a decrease of$114,000 of pre-underwriting fees which amounted to $25,000 for the six monthsending at June 30, 2005 versus $139,000 for the same period in 2004.  Service charge income and other servicecharges and fees increased to $185,000 an approximate increase of $56,000 or43.4% over the same period in 2004. During the first six months of 2005 we sold $181,000 in equities,recognizing $36,000 in net gains.  Gainsand losses from the sale of investments are subject to market and economicconditions and, as a result, there can be no assurance that gains reported inany period will be achievable in the future. Such gains or losses are not a factor in the computation of the Company’sefficiency ratio.

 

**Non-interest Expense**

 

***Quarterly Analysis***

 

Non-interestexpense was $1.967 million and $1.499 million for the quarters ended June 30,2005 and 2004, respectively, which represented an increase of $468,000 or31.2%.  Expense categories that increasedthe most include data processing, legal and accounting, and other expenses.

 

Increasesin non-interest expense were driven by additional staffing, the expansion ofexisting facilities, the addition of new facilities (primarily the Bank’sfourth branch office), and further implementation of holding company activitiesas well as those activities specifically referred to in data processing, andlegal and accounting discussions.  Theefficiency ratio was 81.0% and 84.3% for the quarters ended June 30,

 

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2005and 2004, respectively.  For adescription of the methodology we used to calculate the efficiency ratio,please see Note (a) to Table 3.

 

Salaryand employee benefit expense for the quarter ended June 30, 2005 was $797,000an increase of $131,000 or 19.7% from the same quarter 2004.  The increase was primarily due to additionalemployees, with a full time equivalent (FTE) staffing level of 53 and 39 as ofJune 30, 2005 and 2004, respectively.  Ofthis increase, personnel added to support the new branch offices totaledthirteen FTE’s.  For the quarter endedJune 30, 2005, such annualized costs approximated 1.23% of average earningassets, as compared to 1.19% for the same period in 2004.

 

Occupancyand equipment expense amounted to $368,000 for the quarter ended June 30, 2005,an increase of $78,000 or 26.9% from the same quarter in 2004, primarily due tothe increase in new facilities housing the administrative and holding companyoffices, the closing of the loan production office, the addition of two newbranch offices, and the temporary location costs associated with maintainingthe CNA office in Costa Mesa, California. For the quarter ended June 30, 2005, such annualized costs approximated0.57% of average earning assets, as compared to 0.53% for the same period in2004.

 

Dataprocessing expenses amounted to $214,000 and $76,000 at June 30, 2005 and 2004,a $138,000 increase or 181.6% over the second quarter 2004.  This represented an increase of approximately136% on a quarter to quarter basis as a percentage of average earningassets.  The Company has found that tokeep current with best practices for service provider and LAN/WAN security, ithas been necessary to devote more resources to the reconfiguration of the Bank’sIT platform and related activities.  Webpages have been replaced, systems access requirements have been strengthened,and integrated banking application releases have been managed and controlled toa greater extent than previously required. These upgrades to operating procedures have been brought about bycontinuing regulatory guidance in the IT arena, Sarbanes-Oxley reviewscurrently underway, and the implementation of certain risk management practicesby the Company’s IT professionals.  Theincrease was also due to the growth of staff and facilities of the Company, andthe Company’s reliance on technology to achieve greater availability ofcustomer access to banking products on a 24/7 basis.  The increases also reflect the addition of ITinfrastructure required to open the new branch to handle anticipated fullservice branch activities and prepare for an approved but unopened branch inthe Spanish Springs area of Nevada. Costs associated with implementing web-sites, upgradedtelecommunications and the implementation of an Intranet added to theadditional costs during the quarter versus the same period in 2004.  In addition, the Bank’s data processor(Fidelity Information Services) released a major upgrade of the ITI softwarewhich also contributed greatly to the additional data processing costs versusthose of the same period in 2004. Annualized data processing expenses for the quarter ended June 30, 2005represents 0.33% of average earning assets as compared to 0.14% for the sameperiod in 2004.

 

Legal,accounting and tax expenses totaled $139,000 and $78,000 for the quarter endedJune 30, 2005 and 2004, an increase of $61,000 or 78.2%.  This category increased by approximately 50%on a quarter to quarter basis as a percentage of average earning assets, suchincrease which was precipitated by the initiation of Sarbanes-Oxley Section 404reviews, primarily at the entity and IT implementation levels.  Legal and accounting costs annualizedrepresent 0.21% of average earning assets as of June 30, 2004 compared with0.14% for the same period in 2004.

 

Otherexpenses amounted to $449,000 and $389,000, a $60,000 increase or 15.4% duringthe quarter ended June 30, 2005 as compared to 2004.  These increases are primarily due to growthof the Company, and represented a constant annualized 0.69% of average earningassets, for both quarterly periods.

 

Table3 sets forth the various non-interest income and expense items for the periodsindicated.

 

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***YTD Analysis***

 

Non-interestexpense was $3.872 million and $2.751 million for the six months ended June 30,2005 and 2004, respectively, which represented an increase of $1.121 million or40.8%.  Expense categories that increasedthe most on a percentage of total non-interest expense basis, include dataprocessing expenses, accounting and legal, and other expenses.  Most of the Company’s other non-interestexpense categories actually declined as a percentage of total non-interestexpense over the six month periods reported. The increases were driven by additional staffing, the expansion ofexisting facilities, the addition of new facilities (primarily the Bank’s thirdand fourth branch offices), and further implementation of holding companyactivities.  The efficiency ratio was82.59% and 85.36% for the six months ended June 30, 2005 and 2004,respectively.  For a description of themethodology we used to calculate the efficiency ratio, please see Note (a) toTable 3.

 

Salaryand employee benefit expense for the quarter ended June 30, 2005 was $1.592million an increase of $322,000 or 25.4% from the same period of 2004.  The increase was primarily due to additionalemployees, with a full time equivalent (FTE) staffing level of 53 and 39 as ofJune 30, 2005 and 2004, respectively.  Ofthis increase, personnel added to support the new branch offices totaledthirteen FTE’s.  For the six months endedJune 30, 2005, such annualized costs approximated 1.28% of average earningassets, as compared to 1.23% for the same period in 2004.

 

Occupancyand equipment expense amounted to $753,000 for the six months ended June 30,2005, an increase of $209,000 or 38.4% from the same quarter in 2004, primarilydue to the increase in new facilities housing the administrative and holdingcompany offices, the closing of the loan production office, the addition of twonew branch offices, and the temporary location costs associated withmaintaining the CNA office in Costa Mesa, California.  For the six months ended June 30, 2005, suchannualized costs approximated 0.61% of average earning assets, as compared to0.53% for the corresponding period in 2004.

 

Dataprocessing expenses amounted to $444,000 and $158,000 for the six month periodsending at June 30, 2005 and 2004, a $286,000 increase or 181.0%.  The Company has found that to keep currentwith best practices for service provider and LAN/WAN security, it has beennecessary to devote more resources to the reconfiguration of the Bank’s ITplatform and related activities.  Webpages have been replaced, systems access requirements have been strengthened,and integrated banking application releases have been managed and controlled toa greater extent than previously required. These upgrades to operating procedures have been brought about bycontinuing regulatory guidance in the IT arena, Sarbanes-Oxley reviewscurrently underway, and the implementation of certain risk management practicesby the Company’s IT professionals. The increase was also due to the growth ofstaff and facilities of the Company, and the Company’s reliance on technologyto achieve greater availability of customer access to banking products on a24/7 basis.  The increases also reflectthe addition of IT infrastructure required to open the new branch in northwestReno, and add infrastructure to the new California branch location to handleanticipated full service branch activities and prepare for an approved butunopened branch in the Spanish Springs area of Nevada.  Costs associated with implementing web-sites,upgraded telecommunications and the implementation of an Intranet added to theadditional costs during the period versus the same period in 2004.  In addition, the Bank’s data processor (ITI)released a major upgrade of their software which also contributed greatly tothe additional data processing costs versus those of the same period in2004.  Annualized data processingexpenses for the six months ended June 30, 2005 represents 0.36% of averageearning assets as compared to 0.15% for the same period in 2004.

 

Legal,accounting and tax expenses totaled $223,000 and $186,000 at June 30, 2005 and2004, an increase of $37,000 or 19.9%. Legal and accounting annualized costs represented a constant 0.18% ofaverage earning assets for the six month periods ended June 30, 2005 and 2004.

 

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Otherexpenses amounted to $860,000 and $593,000, a $267,000 increase or 45.0% duringthe six months ended June 30, 2005 as compared to 2004.  These increases are primarily due to growthof the Company, and for this six month period ended June 30, 2005 suchannualized costs represented 0.69% of average earning assets, as compared to0.57% for the same period of 2004.

 

Table3 sets forth the various non-interest income and expense items for the periodsindicated.

 

**Provision for Income Taxes**

 

Atthe current time, the Company has a tax loss carry-forward on a consolidatedbasis, and therefore no tax accrual has been recorded for any of the periodsreported within the body of this report, and the tax equivalent information isnot pertinent.  The Company has expensed$1,600 for an estimated tax payment to the State of California Franchise TaxBoard based on the results of operations for its California activities.

 

**ComprehensiveIncome/(Loss)**

 

***Quarterly Analysis***

 

Ouravailable for sale investment portfolio had net unrealized losses of $322,000at June 30, 2005 and $588,000 at March 31, 2005.  At June 30, 2005 the net unrealized lossrepresented 2.1% of securities available for sale.  Comprehensive income differs from our netincome during the respective periods as a result of changes in the amount ofunrealized gains and losses on our portfolio of securities available forsale.  However, the change in value ofour liabilities, which tend to fall in rising interest rate environments andrise in falling interest rate environments, is not included in “othercomprehensive income”.  We quantify,monitor, and actively manage the interest rate risk of interest earning assetswith interest bearing liabilities based on budgetary assumptions, anticipatedbalance sheet modifications and changes in rates earned and rates paid.  The Company believes that the comprehensiveincome/(loss) reported in the financial statements is due to changes ininterest rates and does not reflect an impairment in the quality of thesecurities contained in the investment portfolio.

 

TheCompany’s other comprehensive income was $266,000 during the three months endedJune 30, 2005 as compared to the other comprehensive loss of $1.4 millionduring the quarter ended June 30, 2004. The positive change represents both a reduction of AFS investments overthe two periods under review, as well as substantial temporary changes in moneymarket conditions.  As financial ratesincrease over the long term based on expectations of Federal Open MarketCommittee (FOMC) actions, it is entirely possible that the AFS investment portfolio will depreciate in value over the remainder of theyear.

 

***YTD Analysis***

 

Ouravailable for sale investment portfolio had net unrealized losses of $322,000at June 30, 2005 and $363,000 at December 31, 2004.  At June 30, 2005 the net unrealized lossrepresented 2.1% of securities available for sale.  Comprehensive income differs from our netincome during the respective periods as a result of changes in the amount ofunrealized gains and losses on our portfolio of securities available forsale.  However, the change in value ofour liabilities, which tend to fall in rising interest rate environments andrise in falling interest rate environments, is not included in “othercomprehensive income”.  We quantify,monitor, and actively manage the interest rate risk of interest earning assetswith interest bearing liabilities based on budgetary assumptions, anticipatedbalance sheet modifications and changes in rates earned and rates paid.  The Company believes that the othercomprehensive income/(loss) reported in the financial statements is due tochanges in interest rates and does not reflect an impairment in the quality ofthe securities contained in the investment portfolio.

 

TheCompany’s other comprehensive income was $41,000 during the six months endedJune 30, 2005 as compared to the other comprehensive loss of $990,000 duringthe comparable period in 2004.  Asfinancial rates increase over the term based on expectations of Federal OpenMarket Committee (FOMC) actions, it is entirely possible that the AFS investment portfolio will depreciate in value over the remainder of theyear.

 

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**FINANCIALCONDITION**

 

Ourconsolidated total assets were $285 million and $247 million at June 30, 2005and December 31, 2004, respectively. Total average assets were $263 million and $217 million for the sixmonths ended June 30, 2005 and 2004, respectively.  The 21.2% change in average assets for thesix month periods under review reflects the continuing growth of the Company.

 

**Securitiesand Other Earning Assets**

 

***Quarterly Analysis***

 

Thesecurities portfolio was $62.6 million at June 30, 2005 and averaged $64.2million during the second quarter of 2005 as compared to $104.9 million and anaverage of $106.6 million in the second quarter of 2004.  The securities portfolio consists primarilyof mortgage-backed securities that have monthly cash flows and U.S. Governmentagency securities.  The average yield oninvestments was 3.44% for the quarter ended June 30, 2005 and 2.93% for thequarter ended June 30, 2004.  Securitiesavailable for sale had a net unrealized loss of $322,000 at June 30, 2005 ascompared to the net unrealized loss of $363,000 at December 31, 2004.  These unrealized gains and losses do notimpact net income or regulatory capital but are recorded as adjustments toshareholders’ equity.  Unrealized gainsand losses are a component of “Comprehensive Income,”  Please refer to Note 5 of the Notes toConsolidated Financial Statements for more information.  The Company has $1.1 million in an equitytrading portfolio which is being accounted for as trading securities.  The Company adjusts the value of thisportfolio monthly through the Consolidated Statement of Operations.  For the quarter ending June 30, 2005 theCompany had unrealized losses of $10,000 from these trading equities.

 

***YTD Analysis***

 

Thesecurities portfolio was $62.6 million at June 30, 2005 and averaged $65.7million during the first six months of 2005 as compared to $104.9 million andan average of $93.6 million in the same period of 2004.  The securities portfolio consists primarilyof mortgage-backed securities with monthly payment streams and U.S. Governmentagency securities.  The average yield oninvestments was 3.38% for the six months ended June 30, 2005 and 3.03% for thesame period ended June 30, 2004. Securities available for sale had a net unrealized loss of $322,000 atJune 30, 2005 as compared to the net unrealized loss of $363,000 at December31, 2004.  These unrealized gains andlosses do not impact net income or regulatory capital but are recorded asadjustments to shareholders’ equity. Unrealized gains and losses are a component of “Comprehensive Income.”  Please refer to Note 5 of the Notes toConsolidated Financial Statements for more information.  The Company has $1.1 million in an equitytrading portfolio which is being accounted for as trading securities.  The Company adjusts the value of thisportfolio monthly through the Consolidated Statement of Operations.  For the six months ending June 30, 2005 theCompany had unrealized losses of $3,000 from these trading equities.

 

Effectiveduration is a measure of duration which considers changes in cash flows and isbased on the expected price volatility of a security.  Generally the greater the duration of thesecurity, the greater will be its percentage price volatility.  The effective duration is presented in yearsand is equal to the approximate percentage change in price per 100 basis pointchange in rates.  The effective duration ofthe Company’s investment portfolio at June 30, 2005 was 2.03, as compared to2.83 as of June 30, 2004.   At December31, 2004 the portfolio’s effective duration was 2.12.

 

Managementevaluates securities for other-than-temporary impairment on a quarterly basis,or more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length oftime and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, and (3) the intentand ability of the Company to retain its investment in the issuer for a periodof time sufficient to allow for any anticipated recovery in fair value.

 

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AtJune 30, 2005 all debt securities have an aggregate depreciation of about 0.9%from the Company’s amortized cost basis as compared to 1.0% at December 31,2004 and 2.1% as of June 30, 2004.  Inthe available for sale portfolio fourteen securities have an unrealized loss asof June 30, 2005.  In all of thosesecurities the unrealized loss has exceeded one year.  There are fifty nine securities in the heldto maturity portfolio that have an unrealized loss as of June 30, 2005.  For forty three of those securities, the losshas exceeded one year.  In analyzing anissuer’s financial condition, management considers whether the securities areissued by the federal government or its agencies, whether downgrades by bondrating agencies have occurred, and industry analysts’ reports.  As management has the ability and intent tohold debt securities until maturity, or for the foreseeable future ifclassified as available for sale, no declines are deemed to be other thantemporary, and there are no declines in value that are not related to thecurrent interest rate environment.

 

Theratio of average total investments to average total assets was 28.2%, 41.8% and47.7% for the six months ended at June 30, 2005, December 31, 2004 and June 30,2004, respectively.  This reflects thecontinuing reduction of the investment portfolio as a major portion of theinterest earning asset base of the Company, over the periods under review.

 

**Loans**

 

***Quarterly Analysis***

 

Totalgross loans amounted to $201.9 million, at June 30, 2005, $160.7 million atDecember 31, 2004, and $119.7 million at June 30, 2005, respectively.  Gross loans averaged $187.7 million for thesecond quarter of 2004, an increase of about $73.2 million or approximately 64%from the average amount of such loans during the second quarter of 2004.

 

Realestate secured credits are the predominant category of gross loans within allperiods under review.  The local andregional economies within which we have operating branches are characterized byrapid population and employment growth. Such growth is facilitated by the development of commercial, retail, andhousing infrastructure, generally placed into service as the expectations offurther growth are exhibited in the economy. This self fulfilling prophecy has been enhanced by the unusually longperiods of low rates of interest for long term funds as has been seen in recentmoney market conditions.  While theseconditions will change over time, the likelihood of continued real estatedevelopment is a certainty in our markets.

 

Asnoted in Table 6 “Composition of the Loan Portfolio,” commercial real estateloans amounted to $89.3 million and $34.7 million at June 30, 2005 and 2004,respectively.  This loan categoryincreased $54.6 million or about 157% from the amount of such loans at June 30,2004.  Residential real estate loans andconstruction and land development loans increased $24.3 million to $62.4million or 44.1% over June 30, 2004 balances.

 

Commercialand industrial loans approximated $15.3 million and $19.1 million at June 30,2005 and 2004, respectively.  Commercialloans decreased about $3.8 million or 19.9% over the balances at June 30,2004.  At June 30, 2005 the Company had$21.3 million outstanding of purchased USDA/SBA loans, as compared to $24.3million at June 30, 2004.  The differencerelates to payments received during the intervening period.  These loans were acquired during the latterhalf of 2003 and the early part of 2004 to enhance the yield of the earningassets portfolio held by the Bank, and to assist in asset/liability planningactivities.

 

Consumerloans amounted to $13.6 million and $3.5 million at June 30, 2005 and 2004,respectively.  Consumer loans increased$10.1 million or 288.6% from the balances outstanding as of June 30, 2004.

 

Theratio of average gross loans to average total assets was 68.5% and 48.5% forthe quarters ended June 30, 2005 and June 30, 2004, respectively, reflectingthe continued growth of the loan portfolio as a

 

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percentageof average assets and average earning assets, which enhances the Company’s netinterest margin both in the current period and over time.

 

***YTD Analysis***

 

Totalgross loans amounted to $201.9 million, at June 30, 2005, $160.7 million atDecember 31, 2004, and $119.7 million at June 30, 2004, respectively.  Gross loans averaged $176.4 million for thefirst six months of 2005, an increase of $71.9 million or 68.7% from theaverage amount of gross loans during the same period of 2004.

 

Asnoted in Table 6 “Composition of the Loan Portfolio,” commercial real estateloans amounted to $89.3 million and $69.2 million at June 30, 2005 and December31, 2004, respectively.  These loansincreased $20.1 million or 29.1% from the amount of such loans since year endDecember 31, 2004.  Residential realestate loans and construction and land development increased $19.1 million or44.1% over December 31, 2004 balances.

 

Commercialand industrial loans approximated $15.3 million and $14.7 million at June 30,2005 and December 31, 2004, respectively. Commercial loans increased about $600,000 or 4.1% over the balances atDecember 31, 2004.  At June 30, 2005 theCompany had $21.3 million outstanding of purchased USDA/SBA loans as comparedto $21.8 million as of December 31, 2004. The difference relates to payments received during the interveningperiod.  These loans were acquired duringthe latter half of 2003 and the early part of 2004 to enhance the yield of theearning assets portfolio held by the Bank, and to assist in asset/liabilityplanning activities.

 

Consumerloans amounted to $13.7 million and $11.6 million at June 30, 2005 and December31, 2004, respectively.  Consumer loansincreased $2.1 million or 18.1% from the balances outstanding as of December31, 2004.

 

Theratio of average gross loans to average total assets was 67.03%, 52.5% and48.3% for the six month period ending June 30, 2005, the twelve month periodending December 31, 2004 and the six month period ending June 30, 2004,respectively.

 

**Deposits**

 

Totaldeposits were $228 million and $188 million as of June 30, 2005 and December31, 2004 respectively, an increase of $40 million or 21.3%.  Core deposits (deposits, excludingcertificates of deposit greater than $100,000), have increased about $32.2 millionor 19.7% since December 31, 2004.  TheCompany acquired from various brokers, approximately $30 million of 60 and 120day time certificates of deposit under $100,000 which represented approximately93% of the core deposit increase for the six month period since the end of theyear.  The ratio of deposits to totalliabilities was 88.8%, 85.8% and 91.8% at June 30, 2005, December 31, 2004, andJune 30, 2004, respectively.

 

***Quarterly Analysis***

 

Non-interestbearing deposits amounted to approximately $34.3 million at June 30, 2005 and$33.9 million at June 30, 2004, respectively. Average non-interest bearing deposits totaled $32.0 million during thesecond quarter of 2005, which represented 14.2% of average total deposits and$30.1 million or 15.2% during the second quarter of 2004.  This is an increase of about $2 million or 6%during the 12 month period ending June 30, 2005.  The increase in non-interest bearing depositsreflected growth in commercial and personal accounts.

 

Interestbearing deposits amounted to approximately $193.4 million and $162.2 million atJune 30, 2005 and June 30, 2004, respectively. Second quarter average interest-bearing deposits were $193.0 million, anincrease of approximately $25.3 million or 15.1% during the quarter ended June30, 2005, as compared to the average of $167.7 million in interest-bearingdeposits during quarter ended June 30, 2004. About

 

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48%of the quarterly increase in interest bearing deposits was represented by anincrease of $12 million in brokered time certificates of deposit.

 

***YTD Analysis***

 

Non-interestbearing deposits amounted to approximately $34.3 million, $33.4 million and$33.9 million, at June 30, 2005, December 31, 2004, and June 30, 2004,respectively.  Since year end 2004non-interest deposits have increased $960,000 or 2.9%.  Average non-interest bearing deposits totaled$31.6 million during the first six months of 2005, which represented 14.6% ofaverage total deposits.  During the firstsix months of 2004, these amounts were $27.4 million and 14.4% respectively.

 

Interestbearing deposits amounted to approximately $193.4 million, $155.0 million, and$162.2 million at June 30, 2005, December 2004, and June 30, 2004,respectively.  Interest bearing depositshave increased $38.4 million since December 31, 2004 or about 25%.  Of this increase $30 million or approximately78% is represented by brokered certificates of deposits.  Average interest-bearing deposits were $184.6million, an increase of approximately $22.8 million for the six months endedJune 30, 2005, as compared to the same time period in 2004.

 

Includedin the deposit categories above are public deposits, which averaged $2.1million as of June 30, 2005 and $2.7 million as of December 31, 2004.  Public deposits include deposits receivedfrom state and local governments, school districts, and other public entitiesin our market area.  Many of thesedeposits exceed the FDIC insurance coverage amounts and require us to pledgespecific collateral or maintain private insurance to support such depositaccounts.

 

**Other Funding Sources**

 

Weuse short-term and long-term borrowings to fund the growth of earning assets inexcess of deposit growth.  Short-termborrowings, which include federal funds purchased, other short term borrowings,and lease obligations, amounted to $28.0 million, $30.5 million and $17.0million at June 30, 2005, December 31, 2004, and June 30, 2004,respectively.  The Company has accessedthe national brokered certificate of deposit market.  As of June 30, 2005 the Company had $30million of these deposits outstanding as compared to a lack of utilization ofsuch a funding source at December 31, 2004 and June 30, 2004.  The Company has an available federal fundsborrowing capacity amounting to $5.2 million as of June 30, 2005.  The Company has a Federal Home Loan Bank(FHLB) advance line of credit in the amount of $56 million as of June 30, 2005.

 

Longterm other borrowed funds would normally include FHLB advances, capital leaseobligations and other debt with terms greater than one year, should they beutilized.

 

**Off-Balance Sheet Arrangements**

 

Inthe usual course of business, the Company makes commitments to extend credit aslong as there are no violations of any conditions established in theoutstanding contractual arrangement. Commitments to extend credit were $68.7 million at June 30, 2005 ascompared to $51.5 at December 31, 2004. These commitments represented about 34% and 32% of outstanding grossloans at each of the periods noted, respectively.  The Company’s stand-by letters of credittotaled $460,000 as of June 30, 2005 and $310,000 at December 31, 2004.

 

Theimportance to and effect on the Company’s revenues, expenses, cash flows,liquidity, capital resources and market risk support from the unused portion ofthe commitments to provide credit cannot be reasonably predicted because thereis no guarantee that the lines of credit will ever be used.  For more information please refer to Note 8of the financial statements.

 

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**RISKMANAGEMENT**

 

Theprimary goal of our risk management program is to determine how certainexisting or emerging issues in the financial services industry affect thenature and extent of the risks faced by the Company.  Based on a periodic self-evaluation, wedetermine key issues and develop plans and/or objectives to address risk.  Our board of directors and management believethat the nine applicable “risk categories” consist of compliance, credit,foreign exchange, interest rate, liquidity, price, strategic, reputation andtransaction risk.  Each risk category isviewed from a quantity of risk perspective (high, medium or low) coupled with aquality of risk perspective review.  Inaddition, an aggregate level of risk is assigned as a whole, and the directionof risk (stable, increasing or decreasing) is determined.  Each risk category and the overall risk levelis compared to regulatory views, and internal criteria, on a regular basis andthen reported to the board with an accompanying explanation as to the existenceof any differences.   The risk programincludes risk identification, measurement, control and monitoring.

 

Ourboard of directors has established the overall strategic direction of theCompany.  It approves our overall riskpolicies and oversees our overall risk management process.  The board has established an asset/liabilitymanagement committee which has been charged with overseeing certain keyinterest rate risks.  In addition, thereis a management risk committee comprised of senior officers who identify and monitorkey operational risks.

 

**Credit Risk Management**

 

Ourstrategy for credit risk management includes stringent, centralized policiesand uniform underwriting criteria for all loans, based on certaincategorizations.  The strategy alsoincludes diversification on a geographic, (to the extent possible), industryand customer level, regular credit examinations and quarterly management reviewof large loans and loans with a deterioration of credit quality.  We maintain an internal rating system thatprovides a mechanism to regularly monitor the credit quality of our loanportfolio.  The rating system is intendedto identify and measure the credit quality of lending relationships.  For consumer loans, we utilize standard creditscoring systems to access consumer credit risks and to price consumer productsaccordingly.  Although we have few pastdue and no non-accrual loans at the current time, we strive to identifypotential problem loans early, take any necessary charge-offs promptly andmaintain adequate reserve levels.

 

Ourreal estate loan portfolio accounted for 75.1% of the total loan portfolio asof June 30, 2005 and 70.0% at December 31, 2004.  This portfolio consists primarily of loanssecured by commercial property and construction and land development loans.

 

Commercialbusiness loans accounted for 7.6% of the total loan portfolio as of June 30,2005.  Commercial loams were 9.2% of theportfolio at December 31, 2004. Commercial business loans are generally made to small and medium sizebusinesses located within our market areas. These loans are not concentrated in any particular industry, but reflectthe economy of our market area. Commercial loans consist primarily of loans secured by variousequipment, machinery and other corporate assets.  SBA and USDA/SBA purchased loans outstandingwere about $21.3 million and $21.8 million respectively, as of June 30, 2005and December 31, 2004.

 

Consumerloans accounted for 6.8% of our total loan portfolio as of June 30, 2005 ascompared to 7.2% at December 31, 2004. While such loans are a smaller percentage at June 30, 2005, the absolutedollar volume actually increased by almost $2 million over the period.

 

**Nonperforming Assets**

 

Nonperformingassets consists of nonperforming loans, (which does not include accruing loans90 days or more overdue), other real estate owned, repossessed assets andcertain securities available for sale. The Company did not have any nonperforming assets at June 30, 2005,December 31, 2004 or June 30, 2004, respectively.

 

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**ASSETLIABILITY MANAGEMENT**

 

Thegoal of asset liability management is the prudent control of market risk,liquidity and capital.  Asset-liabilitymanagement is governed by policies reviewed and approved annually by our boardof directors and monitored periodically by the board committee.  The board delegates responsibility forasset-liability management to the Asset Liability Management Committee (“ALCO”),which sets strategic directives that guide the day-to-day asset-liabilitymanagement of our activities.  The ALCOalso reviews and approves all major interest rate risk, liquidity and capitalmanagement programs.

 

**Market Risk**

 

Marketrisk is the sensitivity of income to changes in interest rates, commodityprices and other market driven rates or prices. We have a small equity trading portfolio, and therefore we are primarilyexposed to non-trading market risk in our investment and loan portfolios.

 

**Interest Rate Risk**

 

Interestrate risk, including mortgage prepayment risk, is by far the most significant non-creditrisk to which we are exposed.  Interestrate risk is the sensitivity of income to changes in interest rates.  Changes in interest rates as well asfluctuations in the level and duration of assets and liabilities, affect netinterest income, our primary source of revenue. This risk arises directly from our core banking activities – lending anddeposit gathering.  In addition todirectly impacting net interest income, changes in the level of interest ratescan also affect (i) the amount of loans originated and sold by us, (ii) theability of borrowers to repay adjustable or variable rate loans, (iii) theaverage maturity of loans, (iv) the rate of amortization of premiums paidon securities, (v) the fair value of our saleable assets, (vi) theamount of unrealized gains and losses on securities available for sale underthe requirements of SFAS 115, and (vii) the early withdrawal likelihood ofcustomer originated certificates of deposit.

 

Theprimary objective of interest-rate risk management is to control our exposureto interest-rate risk both within limits approved by our board and guidelinesestablished by the ALCO.  These limitsand guidelines reflect our tolerance for interest-rate risk over bothshort-term and long-term horizons.  Weattempt to control interest-rate risk by identifying, quantifying and, whereappropriate, changing our exposure.

 

Wequantify and measure interest-rate exposure using two models to dynamicallysimulate net interest income under various interest rate scenarios over a 12and 24 month period.  Simulated scenariosinclude, deliberately extreme interest rate “shocks” and more gradual interestrate “ramps.”  Key assumptions in thesesimulation analyses relate to behavior of interest rates and spreads, increasesor decreases of product balances and the behavior of our deposit and loancustomers.  The most material assumptionsrelate to the prepayment of mortgage assets (including mortgage loans andmortgage-backed securities).  The risk ofprepayment tends to increase when interest rates fall.  Since future prepayment behavior of loancustomers is uncertain, the resultant interest rate sensitivity of loan assetscannot be precisely determined.  Complicatingour efforts to measure interest rate risk is the uncertainty of the maturity,repricing and/or runoff of some of our assets and liabilities.

 

Tocope with these uncertainties, we give careful attention to ourassumptions.  For example, in the case ofprepayment of mortgage assets, the majority of assumptions are derived from vendorsupported models that are periodically tested using observed loan prepaymentbehavior.

 

Ourpolicy on interest-rate risk simulation specifies that if interest rates wereto shift gradually up or down 100 basis points and 200 basis points, estimated netinterest income for the subsequent 12 months should decline by less than 7% and14% respectively.  Table 9 sets forth theestimated effects on our net interest income over a 12 month period followingthe indicated dates in the event of the indicated increases or decreases inmarket interest rates.

 

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Theresults presented in Table 9 reflect estimated changes in simulated netinterest income for the subsequent 12 months assuming a shift up or down in marketrates of 100 and 200 basis points across the entire yield curve.  It should be emphasized, however, that theresults are dependent on material assumptions. For instance, asymmetrical rate behavior can have a material impact onthe simulation results.

 

**LIQUIDITY**

 

Liquidityrepresents the ability to fund asset growth and accommodate deposit withdrawalsand meet other funding requirements. Liquidity risk is the danger that the Company cannot meet anticipated orunexpected funding requirements or can meet them only at excessive cost.  Liquidity is measured by the ability to raisecash when needed at a reasonable cost. Many factors affect a company’s ability to meet liquidity needs,including variations in the markets served, its asset-liability mix, itsreputation and credit standing in the market and general economic conditions.

 

Inaddition to traditional retail deposits, the Company has various otherliquidity sources, including proceeds from maturities of securities and loans,the use of borrowed funds such as FHLB advances and brokered deposits.  The sale of Available-for-Sale investmentsecurities previously available as a source of liquidity may have beensubstantially eliminated by SFAS 115 andEITF 03-1, depending on the final interpretations and rules regardingOTTI.  We continually monitor andforecast our liquidity position.  Thereare several methods we use for this purpose, including daily review of cash anddue from balances,  federal funds sold orborrowed positions, monthly review of balance sheet changes, liquidity ratios,periodic liquidity forecasts and review of contingent funding plans.

 

Asof June 30, 2005 the Company had about $58 million of immediatelyaccessible liquidity, defined as cash that could be raised within 1-3 daysthrough available cash and due from balances, sale of AFS securities, the useof unsecured fed funds lines of credit, and collateralized borrowings.  This represented approximately 25% ofdeposits.  We believe that the level ofour liquidity is sufficient to meet current and future fundingrequirements.  Further, should loangrowth outstrip local deposit acquisition activities, out-of-area depositscould be acquired from external sources.

 

**CAPITALRESOURCES**

 

AtJune 30, 2005, shareholders’ equity amounted to $27.9 million orapproximately 10% of total assets. Capital guidelines issued by the FDIC and Federal Reserve Board requireus and our banking subsidiary to maintain certain ratios, as set forth in Table10.  As indicated in such table, wecurrently exceed all regulatory capital requirements.

 

TheFederal Deposit Insurance Corporation (FDIC) has promulgated risk-based capitalguidelines for all state non-member banks such as the Bank.  These guidelines establish a risk-adjustedratio relating capital to different categories of assets and off-balance sheetexposures.  There are two categories ofcapital under the guidelines.  The firstis Tier 1 Capital which includes common stockholders’ equity and qualifyingminority interest in consolidated subsidiaries, less goodwill and certain otherdeductions, notably the unrealized net gains or losses (after tax adjustments)on available for sale investment securities carried at fair market value.  The second is Tier 2 Capital which includespreferred stock, certain types of debt equity, and the allowance for loanlosses, subject to certain limitations.

 

TheCompany uses a variety of measures to evaluate its capital adequacy, withrisk-based capital ratios calculated separately for the Company and theBank.  Management reviews these capitalmeasurements on a quarterly basis and takes appropriate action to ensure thatthey are within established internal and external guidelines.  We believe that the Company has an adequatelevel of capital in relation to its balance sheet size, business mix and levelsof risk and, as a result, we do not presently anticipate that the

 

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capitalratios will materially change from their present levels.  The Company’s current capital position exceedsminimum thresholds established by industry regulators.  Based on current regulatory definitions, theBank is well capitalized, which is the highest rating of the categories definedunder Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991.

 

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**THE BANK HOLDINGS AND SUBSIDIARY**

**Item 3.**

**CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

TheCompany’s Chief Executive Officer and its Chief Financial Officer, after evaluatingthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the endof the period covered by this report have concluded that, the Company’sdisclosure controls and procedures were adequate and effective to ensure thatmaterial information relating to the Company and its consolidated subsidiarywould be made known to them by others within those entities, particularlyduring the period in which this quarterly report was being prepared.

 

Toensure that financial information is reliable and assets are safeguarded,management maintains an effective system of internal controls and procedures,important elements of which include: careful selection, training and development of operating and financialmanagers; an organization that provides appropriate division of responsibility;and communications aimed at ensuring that Company policies and procedures areunderstood throughout the organization. In establishing internal controls, management weighs the costs of suchsystems against the benefits it believes such systems will provide.

 

Itshould be noted that in designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.  TheCompany has designed its disclosure controls and procedures to reach a level ofreasonable assurance of achieving desired control objectives and, based on theevaluation described above, the Company’s Chief Executive Officer and ChiefFinancial Officer (Principal Accounting Officer) concluded that the Company’sdisclosure controls and procedures were effective at reaching that level ofreasonable assurance.

 

Disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.

 

Whilethe Company’s assessment of the effectiveness of its internal control overfinancial reporting is not complete, a material weakness, as defined instandards established by the Public Company Accounting Oversight Board, wasidentified during 2004.  The identifiedmaterial weakness consisted of IT system administration wherein the CFO servedas the IT administrator.  In general thisfunction should be segregated from other tasks involving financial recordingand other financial responsibilities.  Atthe current time all system administration functions are performed bycontracted IT professionals under the guidance of the CFO.  As a result, the Company believes that anadequate segregation of duties prevents material misstatements of annual orinterim financial statements. Regardless, the Company will hire an internal IT professional during thethird quarter of 2005 and has removed the IT responsibility from the CFO, andnow believes that the weakness has been remediated.

 

**Changes in Internal Controls**

 

Therewere no substantive changes in the Company’s internal controls or in otherfactors that could significantly affect the Company’s internal controlssubsequent to the end of the period covered by this

 

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report.  While the Company believes the present designof its disclosure controls and procedures are effective to achieve its goal,future events affecting its business may cause the Company to modify itsdisclosure controls and procedures.

 

TheCompany does not expect that its disclosure controls and procedures andinternal control over financial reporting will prevent all error andfraud.  A control procedure, no matterhow well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control procedure are met.  Because of the inherent limitations in allcontrol procedures, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected.  These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns in controls or procedures can occur because ofsimple error or mistake.  Additionally,controls can be circumvented by the individual acts of some persons, bycollusion of two or more people, or by management override of the control.  The design of any control procedure is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions; over time, controls becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective controlprocedure, misstatements due to error of fraud may occur and not be detected.

 

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**NEVADA SECURITY BANK**

 

**FINANCIAL TABLES**

 

**Table 1 - QUARTERLY Average Balances and Rates**

 

The following table sets forth, for the periods indicated, informationregarding (i) the total dollar amount of interest income onand the interest-earningassets resultant average yields; (ii) the total dollar amount of interestexpense on interest-bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest rate spread; and (v) net interest margin.

 
| ** **                                          | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Quarter Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2005 (a,b,f)**                        | ** ** | **2004 (a,b,f)**                        | ** ** |
| ** **                                          | ** ** | **Average**                             | ** ** | ** **                              | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                             | ** ** | **Interest**                            | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**              | ** ** |
| **Assets**                                          |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits   |       | $                                       | 5,311      |                                    | $          | 36 |   | 2.75 | % | $ | 3,119 |   | $ | 11 |   | 1.42 | % |
| Securities                                          |       | 64,166                                  |       | 542                                     |       | 3.43 | % | 106,594 |   | 791 |   | 2.98 | % |
| Equity                                              |       | 2,839                                   |       | 35                                      |       | 5.00 | % | 926 |   | 4 |   | 1.74 | % |
| Total Investments                                   |       | 72,316                                  |       | 613                                     |       | 3.44 | % | 110,639 |   | 806 |   | 2.93 | % |
|                                                |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 15,351                                  |       | 246                                     |       | 6.50 | % | 14,103 |   | 183 |   | 5.22 | % |
| Real Estate                                         |       | 139,849                                 |       | 2,522                                   |       | 7.31 | % | 68,203 |   | 1,150 |   | 6.78 | % |
| Consumer                                            |       | 1,044                                   |       | 20                                      |       | 7.77 | % | 1,077 |   | 16 |   | 5.98 | % |
| Security Lines                                      |       | 10,053                                  |       | 186                                     |       | 7.50 | % | 7,122 |   | 87 |   | 4.91 | % |
| SBA Loans Purchased                                 |       | 21,363                                  |       | 277                                     |       | 5.26 | % | 23,989 |   | 216 |   | 3.62 | % |
| Other                                               |       | 23                                      |       | —                                  |       | 0.00 | % | 32 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 187,683                                 |       | 3,251                                   |       | 7.02 | % | 114,526 |   | 1,652 |   | 5.80 | % |
| Total Earning Assets (e)                            |       | 259,999                                 |       | 3,864                                   |       | 6.03 | % | 225,165 |   | 2,458 |   | 4.39 | % |
| Non-Earning Assets                                  |       | 13,992                                  |       |                                    |       |   |   | 10,776 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                       | 273,991    |                                    |       |   |   |   | $ | 235,941 |   |   |   |   |   |
| **Liabilities and Shareholders’ Equity**       |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                       | 6,860      |                                    | $          | 4 |   | 0.24 | % | $ | 5,670 |   | $ | 2 |   | 0.14 | % |
| Savings Accounts                                    |       | 2,405                                   |       | 3                                       |       | 0.51 | % | 2,141 |   | 3 |   | 0.56 | % |
| Money Market                                        |       | 119,119                                 |       | 866                                     |       | 2.95 | % | 125,527 |   | 620 |   | 1.99 | % |
| IRA’s                                          |       | 1,042                                   |       | 6                                       |       | 2.34 | % | 866 |   | 4 |   | 1.86 | % |
| Certificates of Deposit<$100,000                 |       | 32,824                                  |       | 251                                     |       | 3.10 | % | 5,096 |   | 21 |   | 1.66 | % |
| Certificates of Deposit>$100,000                 |       | 30,770                                  |       | 247                                     |       | 3.26 | % | 28,425 |   | 143 |   | 2.02 | % |
| Total Interest Bearing Deposits                     |       | 193,020                                 |       | 1,377                                   |       | 2.89 | % | 167,725 |   | 793 |   | 1.90 | % |
| Borrowed Funds:                                     |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Total Borrowed Funds                                |       | 20,437                                  |       | 156                                     |       | 3.10 | % | 10,738 |   | 32 |   | 1.20 | % |
| Total Interest Bearing Liabilities                  |       | 213,457                                 |       | 1,533                                   |       | 2.91 | % | 178,463 |   | 825 |   | 1.86 | % |
| Demand Deposits                                     |       | 31,967                                  |       |                                    |       |   |   | 30,149 |   |   |   |   |   |
| Other Liabilities                                   |       | 1,003                                   |       |                                    |       |   |   | 671 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 27,564                                  |       |                                    |       |   |   | 26,658 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                       | 273,991    |                                    |       |   |   |   | $ | 235,941 |   |   |   |   |   |
|                                                |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                        |       |                                    |       |                                    |       | 3.12 | % |   |   |   |   | 2.53 | % |
|                                                |       |                                    |       |                                    |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                    |       |                                    |       | 6.03 | % |   |   |   |   | 4.39 | % |
| Interest Expense/Earning Assets                     |       |                                    |       |                                    |       | 2.39 | % |   |   |   |   | 1.47 | % |
| **Net Interest Income and Margin (g)**              |       |                                    |       | $                                       | 2,331      |   | 3.64 | % |   |   | $ | 1,633 |   | 2.92 | % |

 

----

(a)  Average balancesare obtained from the best available daily or monthly data.

(b) Yields are reflected on a tax equivalent basis.

(c)  Loans are gross of the allowance forpossible loan losses, deferred fees and related direct costs.

(d)  Represents the difference between the yield oninterest-earning assets and the cost of interest-bearing liabilities.

(e) There are no non-accrual loans during the periods.

(f) Annualized.

(g)  Net interest margin represents net interest income as apercentage of average interest-earning assets.

 

37

----

 

**Table 1a - YTD Average Balances and Rates**

 

The following table sets forth, for the periods indicated, informationregarding (i) the total dollar amount of interest income onand the interest-earningassets resultant average yields; (ii) the total dollar amount of interestexpense on interest-bearing liabilities and the resultant average cost; (iii) netinterest income; (iv) interest rate spread; and (v) net interestmargin.

 
| ** **                                          | ** ** | **For the Six Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **2005 (a,b,f)**                           | ** ** | **2004 (a,b,f)**                           | ** ** |
| ** **                                          | ** ** | **Average**                                | ** ** | ** **                                 | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                          | ** ** | **Balance**                                | ** ** | **Interest**                               | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)**                 | ** ** |
| **Assets**                                          |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Investments:                                        |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Federal Funds Sold and Interest Bearing  Deposits   |       | $                                          | 5,637      |                                       | $          | 72 |   | 2.58 | % | $ | 9,042 |   | $ | 55 |   | 1.22 | % |
| Securities                                          |       | 65,742                                     |       | 1,132                                      |       | 3.47 | % | 93,565 |   | 1,492 |   | 3.21 | % |
| Equity                                              |       | 2,804                                      |       | 40                                         |       | 2.88 | % | 639 |   | 7 |   | 2.20 | % |
| Total Investments                                   |       | 74,183                                     |       | 1,244                                      |       | 3.38 | % | 103,246 |   | 1,554 |   | 3.03 | % |
|                                                |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Loans: (c)                                          |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Commercial                                          |       | 15,006                                     |       | 470                                        |       | 6.32 | % | 13,816 |   | 360 |   | 5.24 | % |
| Real Estate                                         |       | 128,296                                    |       | 4,550                                      |       | 7.15 | % | 63,428 |   | 2,115 |   | 6.71 | % |
| Consumer                                            |       | 2,556                                      |       | 85                                         |       | 6.71 | % | 1,505 |   | 43 |   | 5.75 | % |
| Security Lines                                      |       | 9,012                                      |       | 321                                        |       | 7.18 | % | 5,997 |   | 148 |   | 4.96 | % |
| SBA Loans Purchased                                 |       | 21,529                                     |       | 560                                        |       | 5.25 | % | 19,775 |   | 377 |   | 3.83 | % |
| Other                                               |       | 25                                         |       | —                                     |       | 0.00 | % | 42 |   | — |   | 0.00 | % |
| Total Loans                                         |       | 176,424                                    |       | 5,986                                      |       | 6.84 | % | 104,563 |   | 3,043 |   | 5.84 | % |
| Total Earning Assets (e)                            |       | 250,607                                    |       | 7,230                                      |       | 5.82 | % | 207,809 |   | 4,597 |   | 4.45 | % |
| Non-Earning Assets                                  |       | 12,590                                     |       |                                       |       |   |   | 8,696 |   |   |   |   |   |
| **Total Assets**                                    |       | $                                          | 263,197    |                                       |       |   |   |   | $ | 216,505 |   |   |   |   |   |
| **Liabilities  and Shareholders’ Equity**      |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                          |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| NOW                                                 |       | $                                          | 6,464      |                                       | $          | 6 |   | 0.19 | % | $ | 6,225 |   | $ | 5 |   | 0.16 | % |
| Savings Accounts                                    |       | 2,458                                      |       | 6                                          |       | 0.49 | % | 2,006 |   | 5 |   | 0.50 | % |
| Money Market                                        |       | 120,034                                    |       | 1,641                                      |       | 2.76 | % | 121,085 |   | 1,214 |   | 2.02 | % |
| IRA’s                                          |       | 993                                        |       | 11                                         |       | 2.23 | % | 855 |   | 7 |   | 1.65 | % |
| Certificates of Deposit<$100,000                 |       | 26,105                                     |       | 398                                        |       | 3.07 | % | 5,289 |   | 45 |   | 1.71 | % |
| Certificates of Deposit>$100,000                 |       | 28,515                                     |       | 426                                        |       | 3.01 | % | 26,315 |   | 271 |   | 2.07 | % |
| Total Interest Bearing Deposits                     |       | 184,569                                    |       | 2,488                                      |       | 2.72 | % | 161,775 |   | 1,547 |   | 1.92 | % |
| Borrowed Funds:                                     |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Total Borrowed Funds                                |       | 18,620                                     |       | 261                                        |       | 2.83 | % | 7,576 |   | 95 |   | 2.52 | % |
| Total Interest Bearing Liabilities                  |       | 203,189                                    |       | 2,749                                      |       | 2.73 | % | 169,351 |   | 1,642 |   | 1.95 | % |
| Demand Deposits                                     |       | 31,627                                     |       |                                       |       |   |   | 27,393 |   |   |   |   |   |
| Other Liabilities                                   |       | 887                                        |       |                                       |       |   |   | 617 |   |   |   |   |   |
| Shareholders’ Equity                           |       | 27,494                                     |       |                                       |       |   |   | 19,144 |   |   |   |   |   |
| **Total Liabilities and Shareholders’ Equity** |       | $                                          | 263,197    |                                       |       |   |   |   | $ | 216,505 |   |   |   |   |   |
| ** **                                          |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| **Interest Rate Spread (d)**                        |       |                                       |       |                                       |       | 3.09 | % |   |   |   |   | 2.50 | % |
|                                                |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Interest Income/Earning Assets                      |       |                                       |       |                                       |       | 5.82 | % |   |   |   |   | 4.45 | % |
| Interest Expense/Earning Assets                     |       |                                       |       |                                       |       | 2.22 | % |   |   |   |   | 1.59 | % |
| **Net Interest Income and Margin (g)**              |       |                                       |       | $                                          | 4,481      |   | 3.60 | % |   |   | $ | 2,955 |   | 2.86 | % |

 

----

(a)  Average balancesare obtained from the best available daily or monthly data.

(b) Yields are reflected on a tax equivalent basis.

(c)  Loans are gross of the allowance forpossible loan losses, deferred fees and related direct costs.

(d)  Represents the difference between the yield oninterest-earning assets and the cost of interest-bearing liabilities.

(e)  There are nonon-accrual loans during the periods.

(f) Annualized.

(g)  Net interest margin represents net interestincome as a percentage of average interest-earning assets.

 

38

----

 

**Table 2 - Changes in Net Interest Income**

 

Thefollowing table presents certain information regarding changes in our interestincome and interest expense for the periods indicated. For each category ofinterest-earning assets and interest-bearing liabilities, information isprovided with respect to changes attributable to (i) changes in volume(change in volume multiplied by prior year rate), (ii) changes in rate(change in rate multiplied by prior year volume) and (iii) changes in rate/volume(Change in rate multiplied by change in volume).

 
| ** **                                           | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2005 vs. 2004**                       | ** ** | **2005 vs. 2004**                          | ** ** |
| ** **                                           | ** ** | **Increase (Decrease) Due to**          | ** ** | **Increase (Decrease) Due to**             | ** ** |
| ** **                                           | ** ** | ** **                              | ** ** | ** **                                 | ** ** | **Rate and** | ** ** | **Total** | ** ** | ** ** | ** ** | ** ** | ** ** | **Rate and** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **Volume**                              | ** ** | **Rate**                                   | ** ** | **Volume (1)** | ** ** | **Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Volume (1)** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**              | ** ** | **(Dollars in thousands)**                 | ** ** |
| **Interest  Income**                                 |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments:                                         |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold and other short term  investments |       | $                                       | 9          |                                       | $          | 10 |   | $ | 6 |   | $ | 25 |   | $ | (21 | ) | $ | 61 |   | $ | (23 | ) | $ | 17 |   |
| Securities                                           |       | (315                                    | )          | 120                                        |       | (54 | ) | (249 | ) | (443 | ) | 121 |   | (38 | ) | (360 | ) |
| Equity                                               |       | 8                                       |       | 8                                          |       | 15 |   | 31 |   | 24 |   | 2 |   | 7 |   | 33 |   |
| Total Investment Income                              |       | (298                                    | )          | 138                                        |       | (33 | ) | (193 | ) | (440 | ) | 184 |   | (54 | ) | (310 | ) |
|                                                 |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans:                                               |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commerical                                           |       | 16                                      |       | 45                                         |       | 2 |   | 63 |   | 31 |   | 74 |   | 5 |   | 110 |   |
| Real Estate                                          |       | 1,211                                   |       | 90                                         |       | 71 |   | 1,372 |   | 2,158 |   | 138 |   | 139 |   | 2,435 |   |
| Consumer                                             |       | —                                  |       | 5                                          |       | (1 | ) | 4 |   | 30 |   | 7 |   | 5 |   | 42 |   |
| Security Lines                                       |       | 36                                      |       | 46                                         |       | 17 |   | 99 |   | 74 |   | 66 |   | 33 |   | 173 |   |
| SBA Loans Purchased                                  |       | (24                                     | )          | 98                                         |       | (13 | ) | 61 |   | 33 |   | 139 |   | 11 |   | 183 |   |
| Other                                                |       | —                                  |       | —                                     |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total Loan Income                                    |       | 1,239                                   |       | 284                                        |       | 76 |   | 1,599 |   | 2,326 |   | 424 |   | 193 |   | 2,943 |   |
|                                                 |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Interest Income**                            |       | 941                                     |       | 422                                        |       | 43 |   | 1,406 |   | 1,886 |   | 608 |   | 139 |   | 2,633 |   |
|                                                 |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest  Expense**                                |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits:                           |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Now Accounts                                         |       | —                                  |       | 1                                          |       | 1 |   | 2 |   | — |   | 1 |   | — |   | 1 |   |
| Savings                                              |       | —                                  |       | —                                     |       | — |   | — |   | 1 |   | — |   | — |   | 1 |   |
| Money market                                         |       | (32                                     | )          | 300                                        |       | (22 | ) | 246 |   | (11 | ) | 444 |   | (6 | ) | 427 |   |
| IRA’s                                           |       | 1                                       |       | 1                                          |       | — |   | 2 |   | 1 |   | 2 |   | 1 |   | 4 |   |
| Certificates of deposit<$100,000                  |       | 115                                     |       | 18                                         |       | 97 |   | 230 |   | 177 |   | 36 |   | 140 |   | 353 |   |
| Certificates of deposit>$100,000                  |       | 12                                      |       | 88                                         |       | 4 |   | 104 |   | 23 |   | 123 |   | 9 |   | 155 |   |
| Total interest-bearing deposits                      |       | 96                                      |       | 408                                        |       | 80 |   | 584 |   | 191 |   | 606 |   | 144 |   | 941 |   |
|                                                 |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed Funds                                       |       | 29                                      |       | 51                                         |       | 44 |   | 124 |   | 138 |   | 12 |   | 16 |   | 166 |   |
|                                                 |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total interest expense**                           |       | 125                                     |       | 459                                        |       | 124 |   | 708 |   | 329 |   | 618 |   | 160 |   | 1,107 |   |
|                                                 |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Income**                              |       | $                                       | 816        |                                       | $          | (37 | ) | $ | (81 | ) | $ | 698 |   | $ | 1,557 |   | $ | (10 | ) | $ | (21 | ) | $ | 1,526 |   |

 

----

(1) Includes changes in interest income andexpense not due solely to volume or rate changes.

 

39

----

 

**Table 3 -****Non-Interest Income and Non-Interest Expense**

 

The followingtable sets forth the various components of the Company’s non-interest incomeand expense forthe periods indicated.

 
| ** **                                                                 | ** ** | **For the Quarter Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                                | ** ** | **% of Total**                             | ** ** | **2004** | ** ** | **% of Total** | ** ** | **2005** | ** ** | **% of Total** | ** ** | **2004** | ** ** | **% of Total** | ** ** |
| ** **                                                                 | ** ** | **(Dollars in thousands)**              | ** ** | **(Dollars in thousands)**                 | ** ** |
| **Other Operating Income**                                                 |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service charges on deposit accounts                                        |       | $                                       | 53         |                                       | 54.64      | % | $ | 33 |   | 27.05 | % | $ | 99 |   | 40.74 | % | $ | 61 |   | 22.02 | % |
| Other service charges, commissions and fees                                |       | 48                                      |       | 49.48                                      | %          | 30 |   | 24.59 | % | 86 |   | 35.39 | % | 68 |   | 24.55 | % |
| Pre-underwriting fees                                                      |       | 8                                       |       | 8.25                                       | %          | 83 |   | 68.03 | % | 25 |   | 10.29 | % | 139 |   | 50.18 | % |
| Unrealized gains on trading securities                                     |       | (10                                     | )          | -10.31                                     | %          | — |   | 0.00 | % | (3 | ) | -1.23 | % | — |   | 0.00 | % |
| Gain/(loss) on sale of investments                                         |       | (2                                      | )          | -2.06                                      | %          | (24 | ) | -19.67 | % | 36 |   | 14.81 | % | 9 |   | 3.25 | % |
| Total non-interest income                                                  |       | 97                                      |       | 100.00                                     | %          | 122 |   | 100.00 | % | 243 |   | 100.00 | % | 277 |   | 100.00 | % |
|                                                                       |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                    |       | 0.15                                       | %          |   |   | 0.22 | % |   |   | 0.20 | % |   |   | 0.27 | % |
|                                                                       |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other Operating Expense:**                                               |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                                             |       | 797                                     |       | 40.51                                      | %          | 666 |   | 44.43 | % | 1,592 |   | 41.12 | % | 1,270 |   | 46.17 | % |
| Occupancy costs                                                            |       | 368                                     |       | 18.71                                      | %          | 290 |   | 19.35 | % | 753 |   | 19.45 | % | 544 |   | 19.77 | % |
| Advertising and marketing costs                                            |       | 101                                     |       | 5.13                                       | %          | 45 |   | 3.00 | % | 173 |   | 4.47 | % | 92 |   | 3.34 | % |
| Data processing costs                                                      |       | 214                                     |       | 10.88                                      | %          | 76 |   | 5.07 | % | 444 |   | 11.47 | % | 158 |   | 5.74 | % |
| Deposit services costs                                                     |       | 66                                      |       | 3.35                                       | %          | 49 |   | 3.27 | % | 121 |   | 3.13 | % | 92 |   | 3.34 | % |
| Loan servicing costs                                                       |       | 1                                       |       | 0.07                                       | %          | (2 | ) | -0.13 | % | 2 |   | 0.05 | % | 2 |   | 0.07 | % |
| Provision for undisbursed loan commitments                                 |       | (21                                     | )          | -1.07                                      | %          | 32 |   | 2.13 | % | 36 |   | 0.93 | % | 56 |   | 2.04 | % |
| Telephone and data communications                                          |       | 40                                      |       | 2.03                                       | %          | 31 |   | 2.07 | % | 72 |   | 1.86 | % | 65 |   | 2.36 | % |
| Postage                                                                    |       | 12                                      |       | 0.61                                       | %          | 9 |   | 0.60 | % | 22 |   | 0.57 | % | 24 |   | 0.87 | % |
| Legal and accounting and tax                                               |       | 139                                     |       | 7.07                                       | %          | 78 |   | 5.20 | % | 223 |   | 5.76 | % | 186 |   | 6.76 | % |
| Other professional services                                                |       | 89                                      |       | 4.52                                       | %          | 103 |   | 6.87 | % | 178 |   | 4.60 | % | 121 |   | 4.40 | % |
| Stationery and supplies                                                    |       | 32                                      |       | 1.63                                       | %          | 38 |   | 2.54 | % | 58 |   | 1.50 | % | 54 |   | 1.96 | % |
| Other                                                                      |       | 129                                     |       | 6.56                                       | %          | 84 |   | 5.60 | % | 198 |   | 5.11 | % | 87 |   | 3.16 | % |
| Total non-interest expense                                                 |       | $                                       | 1,967      |                                       | 100.00     | % | $ | 1,499 |   | 100.00 | % | $ | 3,872 |   | 100.00 | % | $ | 2,751 |   | 100.00 | % |
|                                                                       |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| As a percentage of average earning assets                                  |       |                                    |       | 3.03                                       | %          |   |   | 2.68 | % |   |   | 3.12 | % |   |   | 2.66 | % |
| Net non-interest income/expense as a  percentage of average earning assets |       |                                    |       | 2.88                                       | %          |   |   | 2.46 | % |   |   | 2.92 | % |   |   | 2.39 | % |
|                                                                       |       |                                    |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Efficiency ratio (a)                                                       |       |                                    |       | 80.96                                      | %          |   |   | 84.26 | % |   |   | 82.59 | % |   |   | 85.36 | % |

 

----

(a) Represents non-interest expense as a percentage of net interest income andnon-interest income excluding realized securities gains and losses.

 

40

----

 

**Table 4 - SecuritiesAvailable for Sale,  Held to Maturity andTrading**

 

The following table sets forth our investmentsecurities as of the dates indicated.

 
| ** **                                                          | ** ** | **June 30,**          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2005**                   | ** ** | **2004**          | ** ** | **2004**              | ** ** |
| ** **                                                          | ** ** | **Amortized**              | ** ** | **Fair Market**   | ** ** | **Amortized**         | ** ** | **Fair Market** | ** ** | **Amortized** | ** ** | **Fair Market** | ** ** |
| ** **                                                          | ** ** | **Cost**                   | ** ** | **Value**         | ** ** | **Cost**              | ** ** | **Value** | ** ** | **Cost** | ** ** | **Value** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** |
| Available for Sale                                                  |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
|                                                                |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| US Gov’t agencies                                              |       | $                          | 14,485     |              | $          | 14,194                |       | $ | 38,887 |   | $ | 37,821 |   | $ | 14,493 |   | $ | 14,151 |   |
| SBA Loan Pools                                                      |       | —                     |       | —            |       | 5,954                 |       | 5,901 |   | — |   | — |   |
| Mortgage-backed securities                                          |       | 339                        |       | 335               |       | —                |       | — |   | — |   | — |   |
| Corporate bonds                                                     |       | 662                        |       | 648               |       | 5,571                 |       | 5,457 |   | 909 |   | 902 |   |
| State & political subdivisions                             |       | 500                        |       | 487               |       | 627                   |       | 609 |   | 500 |   | 487 |   |
| Subtotal, Available for Sale                                        |       | $                          | 15,986     |              | $          | 15,664                |       | $ | 51,039 |   | $ | 49,788 |   | $ | 15,902 |   | $ | 15,540 |   |
|                                                                |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Held to Maturity                                                    |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
|                                                                |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| US Treasury and Government Agency  Securities                       |       | $                          | 7,226      |              | $          | 7,133                 |       | $ | 2,970 |   | $ | 2,938 |   | $ | 7,984 |   | $ | 7,917 |   |
| Mortgage-backed securities                                          |       | 38,230                     |       | 37,675            |       | 50,583                |       | 49,540 |   | 44,095 |   | 43,680 |   |
| Corporate bonds                                                     |       | 1,282                      |       | 1,343             |       | 1,277                 |       | 1,362 |   | 1,279 |   | 1,365 |   |
| State & political subdivisions                             |       | 221                        |       | 252               |       | 239                   |       | 266 |   | 230 |   | 265 |   |
| Subtotal, Held to Maturity                                          |       | $                          | 46,959     |              | $          | 46,403                |       | $ | 55,069 |   | $ | 54,106 |   | $ | 53,588 |   | $ | 53,227 |   |
|                                                                |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Fair value as a % of amortized cost of Held  to Maturity Securities |       |                       |       | 98.8              | %          |                  |       | 98.3 | % |   |   | 99.3 | % |
|                                                                |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Trading Securities Equity Investments                               |       | 1,012                      |       | 1,128             |       | —                |       | — |   | 970 |   | 1,088 |   |
|                                                                |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Total Securities                                                    |       | $                          | 63,957     |              | $          | 63,195                |       | $ | 106,108 |   | $ | 103,894 |   | $ | 70,460 |   | $ | 69,855 |   |

 

41

----

 

**Table 5 - Maturities of Securities**

 

The following table sets forth thecontractual maturities and tax equivalent weighted average yields of our debtsecurities as of June 30, 2005. Actual maturities will differ from contractual maturities becauseborrowers may have the right to call or prepay obligations with or without callor prepayment penalties.

 
| ** **                               | ** ** | **Carrying  Value Maturing in** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **More  Than 5** | ** ** | **More  Than** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Less  than 1 Year**           | ** ** | **1 to 5  Years** | ** ** | **to 10  Years** | ** ** | **10 years** | ** ** | **Total** | ** ** |
| ** **                               | ** ** | **Amount**                      | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| ** **                               | ** ** | **(Dollars  in thousands)**     | ** ** |
| Available for  Sale Securities           |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government  Agencies                  |       | $                               | 2,970      |   | 2.24 | % | $ | 7,406 |   | 2.88 | % | $ | 3,818 |   | 4.55 | % | $ | — |   | — |   | $ | 14,194 |   | 3.19 | % |
| Mortgage-backed  Securities              |       | —                          |       | — |   | 56 |   | 5.45 | % | 32 |   | 6.31 | % | 247 |   | 5.34 | % | 335 |   | 5.45 | % |
| State &  Political subdivisions |       | —                          |       | — |   | 487 |   | 2.57 | % | — |   | — |   | — |   | — |   | 487 |   | 2.57 | % |
| Corporate Bonds                          |       | —                          |       | — |   | 99 |   | 6.40 | % | 27 |   | 7.92 | % | 522 |   | 7.68 | % | 648 |   | 7.51 | % |
| Total Available  for Sale Securities     |       | $                               | 2,970      |   |   |   | $ | 8,048 |   |   |   | $ | 3,877 |   |   |   | $ | 769 |   |   |   | $ | 15,664 |   | 3.40 | % |
|                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held to Maturity  Securities             |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| US Government  Agencies                  |       | $                               | —     |   | — |   | $ | 7,226 |   | 3.05 | % | $ | — |   | — |   | $ | — |   | — |   | $ | 7,226 |   | 3.05 | % |
| Mortgage-backed  Securities              |       | —                          |       | — |   | 3,538 |   | 3.41 | % | 14,931 |   | 3.60 | % | 19,761 |   | 3.32 | % | 38,230 |   | 3.44 | % |
| State &  Political subdivisions |       | —                          |       | — |   | — |   | — |   | 221 |   | 6.00 | % | — |   | — |   | 221 |   | 6.00 | % |
| Corporate Bonds                          |       | 250                             |       | 6.65 | % | 1,032 |   | 6.39 | % | — |   | — |   | — |   | — |   | 1,282 |   | 6.44 | % |
| Total Held to  Maturity Securities       |       | $                               | 250        |   |   |   | $ | 11,796 |   |   |   | $ | 15,152 |   |   |   | $ | 19,761 |   |   |   | $ | 46,959 |   | 3.47 | % |
|                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Investment  Securities             |       | $                               | 3,220      |   |   |   | $ | 19,844 |   |   |   | $ | 19,029 |   |   |   | $ | 20,530 |   |   |   | $ | 62,623 |   | 3.45 | % |

 

42

----

 

**Table 6 - Composition of Loan Portfolio**

 

The following table sets forth the composition of our loan portfolio atthe dates indicated.

 
| ** **                        | ** ** | **As of**                  | ** ** | **As of**         | ** ** | **As of**             | ** ** |
|-----------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **June 30,**          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2005**                   | ** ** | **2004**          | ** ** | **2004**              | ** ** |
| ** **                        | ** ** | ** **                 | ** ** | **% of**          | ** ** | ** **            | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                        | ** ** | **Amount**                 | ** ** | **Loans**         | ** ** | **Amount**            | ** ** | **Loans** | ** ** | **Amount** | ** ** | **Loans** | ** ** |
| ** **                        | ** ** | **(Dollars in thousands)** | ** ** |
|                              |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Commercial and Industrial         |       | $                          | 15,296     |              | 7.58       | %                     | $          | 19,084 |   | 15.95 | % | $ | 14,732 |   | 9.17 | % |
| Real Estate:                      |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Commercial                        |       | 89,251                     |       | 44.22             | %          | 34,660                |       | 28.97 | % | 69,228 |   | 43.08 | % |
| Residential                       |       | 9,830                      |       | 4.87              | %          | 11,082                |       | 9.26 | % | 9,877 |   | 6.15 | % |
| Construction and Land Development |       | 52,538                     |       | 26.03             | %          | 27,006                |       | 22.57 | % | 33,407 |   | 20.79 | % |
| Total Real Estate                 |       | 151,619                    |       | 75.11             | %          | 72,748                |       | 60.80 | % | 112,512 |   | 70.01 | % |
|                              |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| SBA / USDA Loans                  |       | 21,275                     |       | 10.54             | %          | 24,331                |       | 20.33 | % | 21,831 |   | 13.58 | % |
| Consumer loans                    |       | 13,660                     |       | 6.77              | %          | 3,493                 |       | 2.92 | % | 11,633 |   | 7.24 | % |
| Gross Loans                       |       | 201,850                    |       | 100.00            | %          | 119,656               |       | 100.00 | % | 160,708 |   | 100.00 | % |
|                              |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Less:                             |       |                       |       |              |       |                  |       |   |   |   |   |   |   |
| Allowance for Loan Losses         |       | 1,986                      |       |              |       | 1,212                 |       |   |   | 1,586 |   |   |   |
| Net Unearned Loan Fees/Costs      |       | 985                        |       |              |       | 407                   |       |   |   | 597 |   |   |   |
| Net Loans                         |       | $                          | 198,879    |              |       |                  | $          | 118,037 |   |   |   | $ | 158,525 |   |   |   |

 

43

----

 

**Table 7 - Tableof Activity in the Allowance for Loan Losses**

 

The following table sets forth information concerning the activity inour allowance for loan losses during the periods indicated.

 
| ** **                                                          | ** ** | **For the Quarters Ended** | ** ** | **For the YTD Periods Ending,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **June 30,**          | ** ** | **June 30,**               | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                          | ** ** | **2005**                   | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)** | ** ** | ** **                      | ** ** | ** ** | ** ** |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **Allowance at the beginning of the period**                        |       | $                          | 1,800      |                            | $          | 1,042 |   | $ | 1,586 |   | $ | 822 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **Charge-offs:**                                                    |       |                       |       |                            |       |   |   |   |   |
| Agricultural                                                        |       | —                     |       | —                          |       | — |   | — |   |
| Commercial & industrial loans                              |       | —                     |       | —                          |       | — |   | — |   |
| SBA/USDA                                                            |       | —                     |       | —                          |       | — |   | — |   |
| Real estate loans                                                   |       | —                     |       | —                          |       | — |   | — |   |
| Consumer loans                                                      |       | —                     |       | —                          |       | — |   | — |   |
| Total Loans Charged-Off                                             |       | —                     |       | —                          |       | — |   | — |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **Recoveries:**                                                     |       |                       |       |                            |       |   |   |   |   |
| Agricultural                                                        |       | —                     |       | —                          |       | — |   | — |   |
| Commercial & industrial loans                              |       | —                     |       | —                          |       | — |   | — |   |
| SBA/USDA                                                            |       | —                     |       | —                          |       | — |   | — |   |
| Real estate loans                                                   |       | —                     |       | —                          |       | — |   | — |   |
| Consumer loans                                                      |       | —                     |       | —                          |       | — |   | — |   |
| Total Loans Recovered                                               |       | —                     |       | —                          |       | — |   | — |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Net loan charge offs                                                |       | —                     |       | —                          |       | — |   | — |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Provision charged to expense                                        |       | 186                        |       | 170                             |       | 400 |   | 390 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Balance                                                             |       | $                          | 1,986      |                            | $          | 1,212 |   | $ | 1,986 |   | $ | 1,212 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| Average gross loans outstanding during  period                      |       | $                          | 187,683    |                            | $          | 114,526 |   | $ | 176,424 |   | $ | 104,563 |   |
| Gross loans outstanding at end of period                            |       | $                          | 201,850    |                            | $          | 119,656 |   | $ | 201,850 |   | $ | 119,656 |   |
|                                                                |       |                       |       |                            |       |   |   |   |   |
| **RATIOS**                                                          |       |                       |       |                            |       |   |   |   |   |
| Net Charge-offs to Average Loans  (annualized)                      |       | n/a                        |       | n/a                             |       | n/a |   | n/a |   |
| Allowance for Loan Losses to Gross Loans at  End of Period          |       | 0.98                       | %          | 1.01                            | %          | 0.98 | % | 1.01 | % |
| Net Loan Charge-offs to Allowance for Loan  Losses at End of Period |       | n/a                        |       | n/a                             |       | n/a |   | n/a |   |
| Net Loan Charge-offs to Provision for Loan  Losses                  |       | n/a                        |       | n/a                             |       | n/a |   | n/a |   |

 

44

----

 

**Table 8 - Allocation of the Allowance for Loan Losses**

 

The following table setsforth information concerning the allocation of our allowance for loan losses byloan categories at the dates indicated. The allowance for loan losses isavailable for offsetting credit losses in connection with any loan, but isinternally allocated to various loan categories as part of our process forevaluating the adequacy of the allowance for loan losses.

 
| ** **                        | ** ** | **As of June 30,**    | ** ** | **As of June 30,** | ** ** | **As of December 31,** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **2005**                   | ** ** | **2004**                | ** ** | **2004**                    | ** ** |
| ** **                        | ** ** | ** **                 | ** ** | **% Total**             | ** ** | ** **                  | ** ** | **% Total** | ** ** | ** ** | ** ** | **% Total** | ** ** |
| ** **                        | ** ** | **Amount**                 | ** ** | **Loans(1)**            | ** ** | **Amount**                  | ** ** | **Loans(1)** | ** ** | **Amount** | ** ** | **Loans(1)** | ** ** |
| ** **                        | ** ** | **(Dollars in thousands)** | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                              |       |                       |       |                    |       |                        |       |   |   |   |   |   |   |
| Commercial and Industrial         |       | $                          | 296        |                    | 7.58       | %                           | $          | 228 |   | 15.95 | % | $ | 266 |   | 9.17 | % |
| Real Estate:                      |       |                       |       |                    |       |                        |       |   |   |   |   |   |   |
| Commercial                        |       | 841                        |       | 44.22                   | %          | 466                         |       | 28.97 | % | 654 |   | 43.08 | % |
| Residential                       |       | 73                         |       | 4.87                    | %          | 46                          |       | 9.26 | % | 74 |   | 6.15 | % |
| Construction and Land Development |       | 594                        |       | 26.03                   | %          | 362                         |       | 22.57 | % | 391 |   | 20.79 | % |
| Total Real Estate                 |       | 1,508                      |       | 75.11                   | %          | 874                         |       | 60.80 | % | 1,119 |   | 70.01 | % |
|                              |       |                       |       |                    |       |                        |       |   |   |   |   |   |   |
| SBA / USDA/ Govt Gtd Loans        |       | 21                         |       | 10.54                   | %          | 4                           |       | 20.33 | % | 6 |   | 13.58 | % |
| Consumer loans                    |       | 159                        |       | 6.77                    | %          | 87                          |       | 2.92 | % | 191 |   | 7.24 | % |
| Unallocated                       |       | 2                          |       | 0.00                    | %          | 19                          |       | 0.00 | % | 4 |   | 0.00 | % |
|                              |       | $                          | 1,986      |                    | 100.00     | %                           | $          | 1,212 |   | 100.00 | % | $ | 1,586 |   | 100.00 | % |

 

----

(1) Representspercentage of loans in category to total loans.

 

45

----

 

**Table 9 - Estimated Net Interest Income SensitivityProfile**

 

The following table setsforth the estimated effects on our net interest income over a 12 month periodfollowing June 30, 2005 in the event of a ramping up or down in theindicated market interest rates.

 
| ** **                 | ** ** | **Change in**    | ** ** | ** **     | ** ** |
|----------------------------|------------|------------------|------------|----------------|------------|
| ** **                 | ** ** | **Net Interest** | ** ** | **Percentage** | ** ** |
| **(Dollars in thousands)** | ** ** | **Income**       | ** ** | **Change**     | ** ** |
| Scenario                   |       |             |       |           |       |
|                       |       |             |       |           |       |
| Up 200 basis points        |       | $                | 541        |           | 0.19       | % |
| Up 100 basis points        |       | $                | 287        |           | 0.10       | % |
| Down 100 basis points      |       | $                | (447       | )              | -0.16      | % |
| Down 200 basis points      |       | $                | (1,230     | )              | -0.44      | % |

 

46

----

 

**Table 10 - Capital Adequacy - Risk-based Ratios**

 
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                  | ** ** | **Minimum to** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------|------------|-----------------------|------------|-----------------------------|------------|----------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Minimum**           | ** ** | **be Well Capitalized**     | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **      | ** ** | **Capital**           | ** ** | **Under Prompt Corrective** | ** ** |
| ** **                             | ** ** | **Actual** | ** ** | **Requirement** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**             | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**            | ** ** | **Ratio**                   | ** ** | **Amount**     | ** ** | **Ratio** | ** ** |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **June 30, 2005**                 |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 29,912     |            | 14.30      | %                     | $          | 16,731                      |       | 8.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 27,115     |            | 13.11      | %                     | $          | 16,546                      |       | 8.00           | %          | $ | 20,683 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 27,729     |            | 13.26      | %                     | $          | 8,366                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,932     |            | 12.05      | %                     | $          | 8,273                       |       | 4.00           | %          | 12,410 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 27,729     |            | 10.14      | %                     | $          | 10,940                      |       | 4.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,932     |            | 9.21       | %                     | $          | 10,826                      |       | 4.00           | %          | $ | 13,533 |   | 5.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **March 31, 2005**                |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 29,448     |            | 16.13      | %                     | $          | 14,605                      |       | 8.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 26,473     |            | 14.68      | %                     | $          | 14,427                      |       | 8.00           | %          | $ | 18,034 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 27,430     |            | 15.03      | %                     | $          | 7,303                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,455     |            | 13.56      | %                     | $          | 7,213                       |       | 4.00           | %          | 10,820 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 27,430     |            | 9.93       | %                     | $          | 11,055                      |       | 4.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,455     |            | 9.82       | %                     | $          | 9,957                       |       | 4.00           | %          | $ | 12,446 |   | 5.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| **December 31, 2004**             |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Total Capital to Risk Weighted Assets  |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 28,978     |            | 17.26      | %                     | $          | 13,434                      |       | 8.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 25,940     |            | 15.60      | %                     | $          | 13,303                      |       | 8.00           | %          | $ | 16,629 |   | 10.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Risk Weighted Assets |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 27,321     |            | 16.22      | %                     | $          | 6,717                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,193     |            | 14.55      | %                     | $          | 6,652                       |       | 4.00           | %          | 9,978 |   | 6.00 | % |
|                                   |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| Tier 1 Capital to Average Assets       |       |       |       |            |       |                  |       |                        |       |           |       |   |   |
| The Bank Holdings                      |       | $          | 27,321     |            | 11.01      | %                     | $          | 9,893                       |       | 4.00           | %          | NA |   | NA |   |
| Nevada Security Bank                   |       | $          | 24,193     |            | 9.91       | %                     | $          | 9,768                       |       | 4.00           | %          | $ | 12,211 |   | 5.00 | % |

 

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**Table 11 - QUARTERLY DATA (UNAUDITED)**

 
| ** **                                                                                   | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                   | ** ** | **Second**  | ** ** | **First**   | ** ** | **Fourth**  | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| ** **                                                                                   | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Income                                                                              |       | $           | 3,864      |        | $          | 3,366       |       | $ | 3,256 |   | $ | 2,683 |   | $ | 2,458 |   | $ | 2,139 |   | $ | 1,735 |   | $ | 1,396 |   | $ | 1,143 |   | $ | 976 |   |
| Interest Expense                                                                             |       | 1,533       |       | 1,216       |       | 1,080       |       | 947 |   | 825 |   | 817 |   | 598 |   | 533 |   | 413 |   | 349 |   |
| Net interest  income                                                                         |       | 2,331       |       | 2,150       |       | 2,176       |       | 1,736 |   | 1,633 |   | 1,322 |   | 1,137 |   | 863 |   | 730 |   | 627 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for  Loan Losses                                                                   |       | 186         |       | 214         |       | 167         |       | 207 |   | 170 |   | 220 |   | 55 |   | 95 |   | 362 |   | 90 |   |
| Net interest  income after Provision for Loan Losses                                         |       | 2,145       |       | 1,936       |       | 2,009       |       | 1,529 |   | 1,463 |   | 1,102 |   | 1,082 |   | 768 |   | 368 |   | 537 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest income                                                                          |       | 97          |       | 146         |       | 98          |       | 45 |   | 122 |   | 155 |   | 195 |   | 126 |   | 243 |   | 329 |   |
| Non-interest  expenses                                                                       |       | 1,967       |       | 1,905       |       | 1,775       |       | 1,716 |   | 1,499 |   | 1,252 |   | 1,187 |   | 1,110 |   | 993 |   | 923 |   |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income (Loss)                                                                            |       | $           | 275        |        | $          | 177         |       | $ | 332 |   | $ | (142 | ) | $ | 86 |   | $ | 5 |   | $ | 90 |   | $ | (216 | ) | $ | (382 | ) | $ | (57 | ) |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  Comprehensive income (loss), unrealized gains/losses on securities available-for-sale |       | 266         |       | (225        | )          | (117        | )          | 1,005 |   | (1,409 | ) | 419 |   | 68 |   | (352 | ) | 113 |   | (406 | ) |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive  Income (Loss)                                                                 |       | $           | 541        |        | $          | (48         | )          | $ | 215 |   | $ | 863 |   | $ | (1,323 | ) | $ | 424 |   | $ | 158 |   | $ | (568 | ) | $ | (269 | ) | $ | (463 | ) |
|                                                                                         |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per  common share:                                                                  |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                        |       | $           | 0.09       |        | $          | 0.06        |       | $ | 0.11 |   | $ | (0.05 | ) | $ | 0.03 |   | $ | 0.00 |   | $ | 0.06 |   | $ | (0.15 | ) | $ | (0.27 | ) | $ | (0.04 | ) |
| Diluted                                                                                      |       | $           | 0.09       |        | $          | 0.06        |       | $ | 0.11 |   | $ | (0.05 | ) | $ | 0.03 |   | $ | 0.00 |   | $ | 0.06 |   | $ | (0.15 | ) | $ | (0.27 | ) | $ | (0.04 | ) |

 

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**Part II – OtherInformation**

 

**Item 1.  Legal Proceedings**

 

Withthe exception of the matters disclosed below, in the normal course of business,the Company is involved in various legal proceedings.  In the opinion of management, any liabilityresulting from such proceedings would not have a material adverse effect on theCompany’s financial condition or results of operation.

 

InNovember, 2004, Dot1Web, Inc., Thomas R. Creal, court appointed receiverfor Dot1Web, Inc. and Robert DeMaio filed an action against NevadaSecurity Bank, the Company’s sole subsidiary. The Bank Holdings is not a party to this lawsuit.  The central allegation against the Bank isthe alleged wrongful dishonor of certain checks drawn on the account ofPlaintiff.  The Plaintiffs alleged that,as a result of the dishonor, they lost potential investors who were planning onassisting them with $20,000,000 in capital investment and Mr. Demaio alsopersonally lost nearly $80,000,000 in the value of stock he held in Dot1Web, Inc.  To date, the Bank has filed its Answer to theComplaint, in which it denies all material allegations therein, and the partiesare engaging in discovery.  Managementbelieves the action is without merit and intends to vigorously defend thelitigation.  Given the early stage of thematter, though, it is not currently possible to predict the outcome or make anestimation of the likelihood of success by the Bank or the material impact, ifany, on it.

 

**Item 2. Unregistered Salesof Equity Securities and Use of Proceeds**

 

**•****   None**

 

**Item 3.  Defaults Upon Senior Securities**

 

**•****   None**

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

•      On June 8, 2005 the Annual Meeting ofShareholders was held.  Proxies weresolicited by the Company’s management pursuant to Regulation 14 under theSecurities Exchange Act of 1934.  Therewas no solicitation in opposition to management’s nominees for directorship aslisted in the proxy statement, and all such nominees were duly elected pursuantto the vote of

 

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shareholders. The directors noted below were electedto serve a one year term.  The votestabulated were:

 
| ** **      | ** ** | **Authority Given** | ** ** | **Authority Withheld** | ** ** |
|-----------------|------------|---------------------|------------|------------------------|------------|
|            |       |                |       |                   |       |
| Edward Allison  |       | 2,343,585           |       | 3,572                  |       |
| Marybel Batjer  |       | 2,327,438           |       | 19,719                 |       |
| Joseph Bourdeau |       | 2,322,922           |       | 24,165                 |       |
| Edward Coppin   |       | 2,327,488           |       | 19,669                 |       |
| David A. Funk   |       | 2,327,683           |       | 19,474                 |       |
| Jesse Haw       |       | 2,343,390           |       | 3,767                  |       |
| Harold Giomi    |       | 2,321,765           |       | 25,392                 |       |
| Kelvin Moss     |       | 2,343,585           |       | 3,572                  |       |

 

•      The second item was the proposed amendment tothe Bank Holdings 2002 Stock Option Plan which would make two changes in theplan.  The first was to set a specificnumber of shares for issuance as incentive stock options in order to complywith IRS regulations, and the second was to provide for an automatic increasein the number of shares allocated to the plan upon certain changes in thenumber of share of the Company issued and outstanding.

 

The votes tabulated were:

 
| ** **                              | ** ** | **Authority Given** | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------|------------|-------------|------------|
| Amendment to the 2002 Stock Option Plan |       | 1,118,584           |       | 124,367     |       | 39,257      |       |

 

**Item 5.  Other Information**

 

•      **None**

 

**Item 6.****   ****Exhibits**

 

(a)   The following exhibits are filed as part ofthis report.

 
| **Exhibit Number**  | ** ** | **Description**                                                            |
|--------------------------|------------|----------------------------------------------------------------------------|
|                     |       |                                                                       |
| Exhibit No.31.1     |       | Certification of Chief Executive Officer Under 18 U.S.C. § 1350. |
| Exhibit No.31.2     |       | Certification of Chief Financial Officer Under 18 U.S.C. § 1350. |
| Exhibit No. 32 |       | Certification of Periodic Financial Report.                                |

 

50

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   | THE BANK HOLDINGS   |
|--------|---------------------|
|   |                |   |
| Date:  | August 5, 2005 |   | by: | /s/ Harold G. Giomi |   |
|   |                |   |
|   |                | Harold G. Giomi |
|   |                | Chief Executive Officer |
|   |                |   |
| Date:  | August 5, 2005 |   | by: | /s/ Jack B. Buchold |   |
|   |                |   |
|   |                | Jack B. Buchold |
|   |                | Chief Financial Officer |
|   |                | (principal financial and |
|   |                | accounting officer) |
|        |                     |  |  |  |  |  |  |  |

 

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